-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RBCzOmx+VEN9GVv+6JaVDbDLYW7Z8mToLmu5+52XL6Wbpf9oIjUCUdaq3i2NI6OK uKwVEc0YgLX2uEOZXYpasQ== 0000914233-97-000134.txt : 19970827 0000914233-97-000134.hdr.sgml : 19970827 ACCESSION NUMBER: 0000914233-97-000134 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970611 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970826 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EUROGAS INC CENTRAL INDEX KEY: 0000783209 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 870427676 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-01381 FILM NUMBER: 97669999 BUSINESS ADDRESS: STREET 1: 942 EAST 7145 SOUTH STREET 2: #101A CITY: MIDVALE STATE: UT ZIP: 84047 BUSINESS PHONE: (801) 255-0862 MAIL ADDRESS: STREET 1: 942 EAST 7145 SOUTH STREET 2: #101A CITY: MIDVALE STATE: UT ZIP: 84047 FORMER COMPANY: FORMER CONFORMED NAME: NORTHAMPTON INC DATE OF NAME CHANGE: 19920703 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): June 11, 1997 EuroGas, Inc. (Exact Name of Registrant as Specified in its Charter) Utah 33-1381-D 87-0427676 (State or other jurisdiction of (Commission (IRS Employer incorporation or organization) File Number) Identification No.) 942 East 7145 South, #101A, Midvale, Utah 84047 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (801) 255-0862 N/A (Former name, former address, and formal fiscal year, if changed since last report) ITEM 2. ACQUISITION AND DISPOSITION OF ASSETS The Company hereby amends its report on Form 8-K dated June 11, 1997, to read in its entirety as set forth below. On June 11, 1997, EuroGas, Inc. (the "Company"), acquired all of the issued and outstanding stock of OMV (Jakutien) Exploration GmbH ("OMVJ") from OMV Inc., Austria's largest industrial concern, in exchange for $6,107,908 (U.S.), an option to acquire up to 2,000,000 shares of the Company's common stock, a 5% interest in OMVJ's net profits from identified preliminary oil and gas licenses, and 1% of gross production of the TAKT Joint Venture outside such licenses. OMVJ's primary asset is a 50% interest in the joint venture (known as "TAKT") with Sakhaneftegas, the national oil and gas company of the Sakha Republic. TAKT was formed to appraise, explore, and develop, and, when appropriate, export oil and gas reserves in two large areas of interest located in Yakutia (officially known as the Sakha Republic and often referred to as "Jakutien" in German and "Yakutia" or "Yakut" in English). Yakutia has the largest land area of the members of the Russian Federation and is located in the far eastern portion of what was formerly the Soviet Union. TAKT has negotiated a detailed agreement with the Sakha Republic and the Russian Federation for the exploration, production, and development of hydrocarbons located in the areas of interest. This agreement is subject to execution and approval by the legislative bodies of the Sakha Republic and the Russian Federation, which approval is currently being sought. Yakutia is thinly populated (just over 1,000,000 people) and covers approximately 3,100,000 square kilometers which the United States Geological Service has rated as extremely rich in natural resources. There has been limited commercial exploitation of hydrocarbons in Yakutia and current production is generally limited to providing fuel for heat and energy to local urban and industrial complexes, partly because of the general remoteness of the area and the poor transportation network currently in existence. Since 1991, the Yakutian government has put in place an economic and legal system which is designed to encourage foreign investment and the export of hydrocarbons. The Company's interest in acquiring OMVJ is based in large part on the Company's belief that TAKT is well-positioned to participate in the perceived international gas export project which has been envisioned pursuant to feasibility studies conducted by Korean, Chinese, and Japanese consortiums. TAKT currently holds two exploration blocks located near the city Lensk, which cover approximately 21,300 square kilometers (approximately 8,225 square miles) located in the southeast of the East Siberian platform or East Siberian Basin. TAKT also holds first right refusal on adjoining exploration blocks. TAKT has been conducting activities within the two blocks for the past six years, employing modern seismic and exploration techniques with encouraging results. The exploration for and, if justified, the production of, hydrocarbons in Yakutia is made more difficult by the climatic conditions, the general remoteness of the area, and the lack of infrastructure. The area is subject to extreme arctic conditions and does not have any facilities for transporting hydrocarbons to existing markets. The Company's ability to exploit any potential benefit from this project will rely in part on the activities of other independent entities in constructing the necessary infrastructure and establishing markets for hydrocarbons. Under the terms of the proposed Exploration and Production Sharing Contract, the exploration phase, which is expected to last for another three to five years, is estimated to cost in its entirety approximately $28,000,000 (U.S.) of which OMVJ's share would be $14,000,000 (U.S.). Under the proposed agreement, TAKT has also agreed with the Yakutian government to spend 2.5% of its budget in the exploration phase for environmental and social concern obligations and another 2.0% of the development stage expenditures, but in no event will these collective commitments exceed $30,000,000 (U.S.). Such expenses are recoverable against royalties and profits payable. The production carries with it an 8% royalty and a 40% net profits interest payable to the Yakutian and Russian Federation governments. OMVJ and Sakhaneftegas each appoint two members to the board of directors of TAKT with OMVJ having the right to nominate the chairman who holds the tie- breaking vote. Unanimous votes are required for any amendments of the joint venture itself, the admission of new partners, any buying or selling of shares, reappointment or dismissal of the director general and certain other specified actions. EuroGas has selected Wolfgang Rauball to act as the Managing Director of OMVJ and Wolfgang Rauball and another person to be selected by EuroGas are to be nominated as directors of TAKT with Wolfgang Rauball to hold the position of Chairman of the Board. ITEM 7. FINANCIAL STATEMENT AND EXHIBITS The Company hereby amends and supplements its report on Form 8-K dated June 11, 1997, by filing financial statements in connection with its acquisition of OMV (Jakutien) Exploration Gesellschaft m.b.H. ("OMVJ"), a development stage enterprise. The following financial statements are included as part of this report: Pro Forma Financial Statements: Pro Forma Unaudited Condensed Consolidated Statements of Operations of EuroGas, Inc., and OMVJ (Jakutien) Exploration Gesellschaft m.b.H. for the year ended December 31, 1996, and the six months ended June 30, 1997. Notes to Pro Forma Unaudited Condensed Consolidated Statements of Operations. Consolidated Financial Statements: The index to the financial statements of OMV (Jakutien) Exploration Gesellschaft m.b.H. is located on page F-1. EXHIBITS The Company also amends and supplements the Exhibit List for its report on Form 8-K dated June 11, 1997, by filing the English translation of the material contractual documents relating to the acquisition of OMVJ. The original documents are in German and Russian.
SEC Exhibit Reference Number Number Title of Document Location - -------- --------- ---------------------------------------------------------- ----------- 1 2 English translation of Transfer Agreement between This Filing EuroGas and OMV Inc. for the Acquisition of OMV (Yakut) Exploration GmbH dated June 11, 1997 2 3 English translation of Articles of Organization of This Filing OMV (Yakut) Exploration GmbH dated March 7, 1991 3 10 English translation of Articles of Association of the TAKT This Filing Joint Venture dated June 7, 1991, as amended April 4, 1993 4 10 English translation of Proposed Exploration and Production This Filing Sharing Contract for Hydrocarbons between The Republic of Sakha (Yakutia) and the Russian Federation and the TAKT Joint Venture
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EUROGAS, INC. Date: August 26, 1997 By /s/ Hank Blankenstein Hank Blankenstein, Vice-President EUROGAS, INC. AND SUBSIDIARIES (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) On June 11, 1997, Eurogas, Inc. (the "Company") acquired all of the issued and outstanding capital stock of OMV (Jakutien) Exploration Gesellschaft m.b.H. ("OMVJ") in exchange for $6,107,908, a stock option for 2,000,000 shares of common stock of the Company, a 5% interest in the net profits from preliminary oil and gas licenses under the terms of a negotiated but unsigned production sharing agreement of OMVJ's 50% owned joint venture, TAKT, in the Republic of Sakha, Russia, and 1% of the gross production of the TAKT Joint Venture if it begins production from the properties under the preliminary licenses but not within the context of a production sharing agreement. Prior to the agreement of acquisition, the Company granted the stock option to the seller, OMV Group, for 2,000,000 shares of common stock exercisable at $4.00 per share until April 1, 1998, $5.00 per share until March 31, 1999, and $6.00 per share through March 31, 2000, when it will expire if not exercised. The stock option was treated as a non-refundable deposit towards obtaining an interest in properites which was completed by the acquisition of OMVJ. The amount of the deposit was approximately $1,150,000 based upon the fair value of the stock option on the date the parties agreed that it would be granted. The acquisition has been accounted for by the purchase method of accounting. The purchase price has been allocated to the net assets acquired based upon their fair value, and was primarily allocated to the unproved oil and gas properties, as reflected in the condensed consolidated balance sheet of Eurogas, Inc. and Subsidiaries at June 30, 1997 in its Form 10-Q as of that date. The accompanying pro forma condensed consolidated statements of operations present the consolidated results of operations of the Company assuming the acquisition of OMVJ had occurred on January 1, 1996. Pro forma adjustments have been included therein to conform the accounting policies of OMVJ so as to be consistent with those of the Company. The amounts presented for Eurogas are the historical consolidated results of operations of Eurogas, Inc. and Subsidiaries and were derived from the Company's interim financial statements for the six months ended June 30, 1997, and from its annual financial statements for the year ended December 31, 1996. The amounts presented for OMVJ are the historical consolidated results of operations of OMVJ and were derived from OMVJ's financial statements presented elsewhere herein. The accompanying pro forma statements of operations should be read in conjunction with those historical financial statements. Had the acquisition actually occurred on January 1, 1996, the Company and OMVJ would likely have been managed differently from historical operations and the actual results of operations would likely have differed from the amounts presented in these pro forma statements. In addition, the pro forma results of operation presented in the accompany financial statements are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. EUROGAS, INC. AND SUBSIDIARIES (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
PRO FORMA PRO FORMA EUROGAS OMVJ ADJUSTMENTS RESULTS ----------- ----------- ----------- ----------- FOR THE SIX MONTHS ENDED JUNE 30, 1997 Revenues $ -- $ 2,438 $ -- $ 2,438 Operating Expenses Exploration costs -- 252,130 (B) (252,130) -- Depreciation and valuation allowance 42,536 -- -- 42,536 General and administrative 3,058,889 128,312 -- 3,187,201 ----------- ----------- ---------- ----------- Total Operating Expenses 3,101,425 380,442 (252,130) 3,229,737 ----------- ----------- ---------- ----------- Other Income (Expenses) Interest Income 12,250 3,475 -- 15,725 Interest expense (520,508) (2,450) -- (522,958) Exchange gains (losses), net 47,157 5,131 -- 52,288 ----------- ----------- ---------- ----------- Net Other Income (Expenses) (461,101) 6,156 -- (454,945) ----------- ----------- ---------- ----------- Loss Before Income Taxes (3,562,526) (371,848) 252,130 (3,682,244) Provision for (Benefit from) income taxes -- (1,918) -- (1,918) ----------- ----------- ---------- ----------- Net Loss (3,562,526) (369,930) 252,130 (3,680,326) Dividends Applicable to Preferred Shares 174,136 -- (A) 400,000 574,136 ----------- ----------- ---------- ----------- Net Loss Applicable to Common Shares $(3,736,662) $ (369,930) $ (147,870) $(4,254,462) =========== =========== ========== =========== Loss Per Common Share $ (0.07) $ (0.09) =========== =========== Number of Common Shares Used in Per share Calculation 49,892,495 (A) 44,444 49,936,939 =========== ========== =========== FOR THE YEAR ENDED DECEMBER 31, 1996 Revenues $ -- $ 5,810 $ -- $ 5,810 ----------- ----------- ---------- ----------- Operating Expenses Impairment of mineral interests -- 286,336 (B) $ (286,336) -- Exploration costs -- 507,299 (B) (507,299) -- Depreciation and valuation allowance 132,459 -- -- 132,459 General and administrative 4,739,380 467,726 -- 5,207,106 ----------- ----------- --------- ----------- Total Operating Expenses 4,871,839 1,261,361 (793,635) 5,339,565 ----------- ----------- --------- ----------- Other Income (Expenses) Interest Income 18,588 7,769 -- 26,357 Interest expense (1,057,039) (4,670) -- (1,061,709) Exchange gains (losses), net (401,141) 19,191 -- (381,950) Other income 48,840 -- -- 48,840 ----------- ----------- --------- ----------- Net Other Income (Expenses) (1,390,752) 22,290 -- (1,368,462) ----------- ----------- --------- ----------- Loss Before Income Taxes (6,262,591) (1,233,261) 793,635 (6,702,217) Provision for (Benefit from) income taxes -- 6,252 -- 6,252 ----------- ----------- --------- ----------- Net Loss (6,262,591) (1,239,513) 793,635 (6,708,469) Dividends Applicable to Preferred Shares 150,592 -- (A) 900,000 1,050,592 ----------- ----------- --------- ----------- Net Loss Applicable to Common Shares $(6,413,183) $(1,239,513) $(106,365) $(7,759,061) =========== =========== ========= =========== Loss Per Common Share $ (0.16) $ (0.19) =========== =========== Number of Common Shares Used in Per Share Calculation 41,059,000 (A) 50,000 41,109,000 =========== ========= ===========
[FN] See the accompanying notes to pro forma condensed consolidated statements of operations. EUROGAS, INC. AND SUBSIDIARIES (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) A--On May 30, 1997, the Company issued 15,000 shares of 1997 Series A Convertible Preferred Stock for aggregate gross proceeds of $15,000,000, or $1,000 per preferred share. The Company paid commissions of $1,500,000 and issued 50,000 shares of common stock as a commission in connection with the preferred stock offering. The preferred stock requires a dividend of 6%, or $60 per preferred share, per annum. Inasmuch as a portion of the proceeds from the preferred stock offering were used to acquire OMVJ, the dividends applicable to preferred shares have been adjusted to reflect the dividends on the preferred stock as though it had been issued on January 1, 1996. In addition, an adjustment has been made to increase the number of common shares used in the per share calculation to reflect the 50,000 shares of common stock issued in connection with the preferred stock offering as though it had been outstanding from January 1, 1996. B--OMVJ has historically used the successful efforts method of accounting for operations relating to its oil and gas properties. That method requires that exploration costs be charged to operations when incurred and impairments of unproved mineral interests be charged to operations when recognized. The Company uses the full cost method of accounting for its oil and gas operations. To modify the OMVJ statements of operations to the full cost method so as to be consistent with the Company, pro forma adjustments have been made to capitalize previously expensed exploration costs and to reverse the impairment of the mineral interests. The impairments of the mineral interests were recognized because of the lack of a commercial pipeline in the vicinity of TAKT's oil and gas properties (TAKT is a 50% owned joint venture in the Republic of Sakha, Russia). Since the acquisition of OMVJ by the Company, Japan has indicated that it is considering building such a pipeline. Accordingly, impairment of the oil and gas properties does not now appear necessary. OMV (JAKUTIEN) EXPLORATION GESELLSCHAFT M.B.H. (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) TABLE OF CONTENTS PAGE Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets-June 10, 1997 (Unaudited) and December 31, 1996 F-3 Consolidated Statements of Operations for the Period from January 1, 1997 through June 10, 1997 (Unaudited), for the Year Ended December 31, 1996, and for the Cumulative Periods from March 7, 1991 (Date of Inception)through June 10, 1997 (Unaudited) and through December 31, 1996 F-4 Consolidated Statements of Shareholder's Equity for the Period from March 7, 1991 (Date of Inception) through December 31, 1995, for the Year Ended December 31, 1996, and for the Period from January 1, 1997 through June 10, 1997 (Unaudited) F-5 Consolidated Statements of Cash Flows for the Period from January 1, 1997 through June 10, 1997 (Unaudited), for the Year Ended December 31, 1996, and for the Cumulative Periods from March 7, 1991 Date of Inception)through June 10, 1997 (Unaudited) and through December 31, 1996 F-6 Notes to Consolidated Financial Statements F-7 HANSEN, BARNETT & MAXWELL A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS (801) 532-2200 MEMBER OF AICPA DIVISION OF FIRMS Fax (801) 532-7944 MEMBER OF SECPS 345 East 300 South, Suite 200 MEMBER OF SUMMIT INTERNATIONAL ASSOCIATES Salt Lake City, Utah 84111-2693 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Eurogas, Inc. We have audited the accompanying consolidated balance sheet of OMV (Jakutien) Exploration Gesellschaft m.b.H. (an Austrian limited liability corporation) and Subsidiary (collectively, an exploration enterprise in the development stage referred to herein as "the Company") as of December 31, 1996, and the related consolidated statements of operations, shareholder's equity, and cash flows for the year ended December 31, 1996, and for the cumulative period from March 7, 1991 (date of inception) through December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OMV (Jakutien) Exploration Gesellschaft m.b.H. and Subsidiary as of December 31, 1996, and the results of their operations and their cash flows for the year then ended, and for the cumulative period from March 7, 1991 (date of inception) through December 31, 1996 in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced losses since inception as a result of its exploration activities and from general and administrative expenses relating to its development stage activities. As discussed in Note 1 to the consolidated financial statements, the Company's activities have been limited to acquisition of oil and gas properties and exploration with no identified proven reserves nor any appreciable production of oil or gas to date. In addition, the future of the Company is dependent on obtaining additional financing and obtaining and complying with license agreements. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments which might result from the outcome of these uncertainties. HANSEN, BARNETT & MAXWELL /s/ Hansen, Barnett & Maxwell Salt Lake City, Utah August 15, 1997 OMV (JAKUTIEN) EXPLORATION GESELLSCHAFT M.B.H. (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) CONSOLIDATED BALANCE SHEETS
JUNE 10, DECEMBER 31, 1997 1996 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 14,017 $ 13,406 Other receivables 1,951 2,032 Other current assets 168 173 ----------- ----------- TOTAL CURRENT ASSETS 16,136 15,611 ----------- ----------- OIL AND GAS PROPERTY AND EQUIPMENT, SUCCESSFUL EFFORTS METHOD Mineral interests in unproved properties 1,204,000 1,204,000 Equipment 6,000 6,000 Less: Accumulated valuation allowance (496,893) (496,893) ----------- ----------- NET PROPERTY AND EQUIPMENT 713,107 713,107 ----------- ----------- TOTAL ASSETS $ 729,243 $ 728,718 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES Accrued liabilities $ 28,317 $ 17,466 ----------- ----------- SHAREHOLDER'S EQUITY Capital shares - $92.34 par value; 500 shares authorized; 500 shares issued and outstanding 46,168 46,168 Additional paid-in capital 6,645,188 6,288,229 Cumulative foreign currency translation adjustment (15,174) (17,819) Deficit accumulated during the development stage (5,975,256) (5,605,326) ----------- ----------- TOTAL SHAREHOLDER'S EQUITY 700,926 711,252 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 729,243 $ 728,718 =========== ===========
[FN] The accompanying notes are an integral part of these financial statements. OMV (JAKUTIEN) EXPLORATION GESELLSCHAFT M.B.H. (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Cumulative Periods For the Period For The From March 7, 1991 (Date of From January 1, Year Ended Inception) Through 1997 Through December June 10, December June 10, 1997 31, 1996 1997 31, 1996 -------------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES $ 2,438 $ 5,810 $ 218,146 $ 215,708 ----------- ----------- ----------- ----------- OPERATING EXPENSES Production costs - - 101,559 101,559 Impairment of mineral interests in unproved properties - 286,336 496,893 496,893 Exploration costs 252,130 507,299 3,783,429 3,531,299 General and administrative 128,312 467,726 1,766,352 1,638,040 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 380,442 1,261,361 6,148,233 5,767,791 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSES) Interest income 3,475 7,769 4,796 11,321 Interest expense (2,450) (4,670) (11,666) (9,216) Exchange gains (losses), net 5,131 19,191 (16,980) (22,111) ----------- ----------- ----------- ----------- NET OTHER INCOME (EXPENSES) 6,156 22,290 (13,850) (20,006) ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (371,848) (1,233,261) (5,943,937) (5,572,089) PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,918) 6,252 31,319 33,237 ----------- ----------- ----------- ----------- NET LOSS $ (369,930) $(1,239,513) $(5,975,256) $(5,605,326) =========== =========== =========== =========== NET LOSS PER CAPITAL SHARE $ (740) $ (2,479) $ (11,951) $ (11,211) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF CAPITAL SHARES USED IN PER SHARE CALCULATION 500 500 500 500 =========== =========== =========== ===========
[FN] The accompanying notes are an integral part of these financial statements. OMV (JAKUTIEN) EXPLORATION GESELLSCHAFT M.B.H. (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT)
Cumulative Deficit Foreign Accumulated Additional Currency During The Total Capital Shares Paid-In Translation Development Shareholder's Shares Amount Capital Adjustment Stage Equity ---------- ---------- ---------- ---------- ---------- ----------- Balance at March 7, 1991 (Date of Inception) - $ - $ - $ - $ - $ - Cash contributed as capital, March 7, 1991, $92.34 per share 500 46,168 - - - 46,168 Cash contributed as capital, March 7, 1991 through December 31, 1991 - - 806,400 - - 806,400 Cash contributed as capital 1992 - - 806,400 - - 806,400 Cash contributed as capital 1993 - - 806,400 - - 806,400 Cash contributed as capital 1994 - - 806,400 - - 806,400 Cash contributed as capital 1995 - - 806,400 - - 806,400 Cumulative foreign currency translation adjustment - - - (143,536) - (143,536) Cumulative loss from the period from March 7, 1991 through December 31, 1995 - - - - (4,365,813) (4,365,813) ---------- ---------- ---------- ---------- ---------- ---------- Balance December 31, 1995 500 46,168 4,032,000 (143,536) (4,365,813) (431,181) Cash contributed as capital 1996 - - 2,256,229 - - 2,256,229 Foreign currency translation adjustment - - - 125,717 - 125,717 Net loss for the year ended December 31, 1996 - - - - (1,239,513) (1,239,513) ---------- ---------- ---------- ---------- ---------- ---------- Balance December 31, 1996 500 46,168 6,288,229 (17,819) (5,605,326) 711,252 Cash contributed as capital from January 1, 1997 through June 10, 1997 (Unaudited) - - 356,959 - - 356,959 Foreign currency translation adjustment (Unaudited) - - - 2,645 - 2,645 Net loss for the period from January 1, 1997 through June 10, 1997 (Unaudited) - - - - (369,930) (369,930) ---------- ---------- ---------- --------- ----------- ---------- Balance June 10, 1997 (Unuadited) 500 $ 46,168 $6,645,188 $ (15,174) $(5,975,256) $ 700,926 ========== ========== ========== ========= =========== ==========
[FN] The accompanying notes are an integral part of these financial statements. OMV (JAKUTIEN) EXPLORATION GESELLSCHAFT M.B.H. (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Cumulative Periods For The Period For The From March 7, 1991 (Date From January 1, Year Ended of Inception) Through 1997 Through December June 10, December June 10, 1997 31, 1996 1997 31, 1996 -------------- ------------ ----------- ---------- (Unuadited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (369,940) $(1,243,232) $(5,902,821) $(5,532,881) Adjustments to reconcile net loss to cash provided by operating activities: Impairment of mineral interests in properties - 286,336 496,893 496,893 Exchange (loss) gain 3,169 129,880 (6,323) (9,492) Changes in certain operating assets and liabilities: Receivables 80 10,128 (1,481) (1,561) Accrued liabilities 10,851 14,369 26,065 15,214 Other 6 9,372 13,234 13,228 ----------- ----------- ----------- ----------- Net Cash Used In Operating Activities (355,834) (793,147) (5,374,433) (5,018,599) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of mineral interests in properties - (35,723) (1,119,375) (1,119,375) Purchases of property and equipment - - 15,578 15,578 Loans to Joint Venture partner - - (69,884) (69,884) Proceeds from loan repayment - 69,884 69,884 69,884 ----------- ----------- ----------- ----------- Net Cash Used In Investing Activities - 34,161 (1,103,797) (1,103,797) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of debt - related parties 20,959 74,073 1,605,188 1,584,229 Proceeds from capital contributions 336,000 672,000 5,062,852 4,726,852 ----------- ----------- ----------- ----------- Net Cash Provided By Financing Activities 356,959 746,073 6,668,040 6,311,081 ----------- ----------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (514) 1,210 (175,793) (175,279) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 611 (11,703) 14,017 13,406 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 13,406 25,109 - - ----------- ----------- ----------- ----------- CASH AND EQUIVALENTS AT END OF PERIOD $ 14,017 $ 13,406 $ 14,017 $ 13,406 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 2,450 $ 4,670 $ 11,666 $ 9,216 Cash paid for income taxes $ 2,615 $ 6,252 $ 35,852 $ 33,237 SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: During 1996 and 1997 the Company converted $1,584,299 and $20,959 (unaudited) respectively in loans from its parent company to equity.
[FN] The accompanying notes are an integral part of these financial statements. OMV (JAKUTIEN) EXPLORATION GESELLSCHAFT M.B.H. (AN EXPLORATION ENTERPRISE IN THE DEVELOPMENT STAGE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO JUNE 10, 1997 AND TO THE PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 10, 1997 IS UNAUDITED) NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION-OMV (Jakutien) Exploration Gesellschaft m.b.H., (the Company) was formed on March 7, 1991, in Vienna as a limited liability corporation under Austrian law. The Company was a wholly-owned subsidiary of OMV Group, an Austrian industrial concern. On June 10, 1997, the Company was sold to Eurogas, Inc. The principal purposes of the Company are exploration, production, acquisition, transportation, and distribution of petroleum and natural gas, particularly in the Sakha Republic, Russia. On June 7, 1991, the Company entered into a joint venture agreement with Lenaneftegasgeologya (now Sakhaneftegas, the national oil and gas company of the Sakha Republic), thereby establishing TAKT as a Russian Joint Venture Company with the two venturers each owning 50%. The joint venture agreement required capitalization of the joint venture of $2,000,000 (the Company's portion was $1,000,000). The Company's activities to date have been primarily related to this joint venture. TAKT holds gas exploration interests located in the Sakha Republic. TAKT was formed to appraise, explore, and if justified, develop and export oil and gas reserves that may be discovered on the areas subject to the Joint Venture. TAKT currently holds two large exploration blocks located near the city of Lensk. TAKT also holds the right of first refusal to acquire all hydro-carbon mineral interests in the Sakha Republic except for those interests already claimed. The award of the petroleum licenses for exploration in the two subject blocks had been approved by government authorities and only require final signature. Also, a production sharing agreement has been prepared but not signed. These agreements must be consummated in the near future for the Joint Venture to continue. The agreements contain significant requirements, stipulations and commitments as further discussed in Note 2. PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include accounts of the Company and the Company's pro rata share of the assets, liabilities, revenues, and expenses of its 50% interest in the TAKT joint venture. Intercompany accounts and transactions have been eliminated in consolidation. BUSINESS CONDITION--The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going concern. However, at December 31, 1996 and June 10, 1997, the Company had accumulated deficits of $5,605,326 and $5,975,256, respectively. As a development stage enterprise, the Company's activities have been limited to exploration activities with no identified proven reserves nor any production of gas to date. Realization of the amounts included in gas properties is dependent on the Company identifying and developing sufficient quantities of proven and probable reserves of oil and gas and bringing produced oil and gas to market. A significant market for oil and gas does not exist in the Sakha Republic. A major pipeline would have to be constructed to carry the production to a major population. If exploration activities prove to be unsuccessful or there is not a market for the Company's production, all or a portion of the mineral interests in unproved properties will be charged to operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In order to continue, the Company will need to obtain additional financing sufficient to meet the short and long term obligations of the Company and to fund the exploration and development of the reserves of oil and gas, if any, on blocks subject to the Joint Venture agreement. Management plans to obtain these funds from cash reserves of its new parent Eurogas, Inc. and or through equity or debt financing. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting princples requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Items particularly susceptible to changes in the near term are mineral interests in unproved oil and gas properties. EXPLORATION STAGE ACTIVITIES - Since its formation, the Company's oil and gas activities have consisted of the acquisition of unproved and undeveloped mineral interests and exploratory drilling. At June 10, 1997, the Company has not identified any proven reserves associated with its mineral interests in oil and gas properties and is therefore considered to be in the exploration stage for purposes of its oil and gas operations. However, it is considered a development stage enterprise for financial reporting purposes. MINERAL INTERESTS IN PROPERTIES - The successful efforts method of accounting is used to account for mineral interests in properties. Under this method all costs incidental to the acquisition and development of gas properties are capitalized. These costs include costs of drilling and equipping well, as well as directly related overhead costs. Costs of unproved properties are assessed periodically and any resulting provision for impairment which is required is charged to operations. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, if found, will be amortized using the units-of-production method. FINANCIAL INSTRUMENTS-The Company considers all highly-liquid debt instruments purchased with maturities of three months or less to be cash equivalents. The amounts reported as cash and cash equivalents and accrued liabilities are considered to be reasonable approximations of their fair values. The fair value estimates presented herein were based on market information available to management at the time of the preparation of the financial statements. The Company had cash in Russian banks in the amount of $13,406 at December 31, 1996 and $14,108 at June 10, 1997, for which the Company would incur costs if the cash were to be transferred out of Russia. Loss Per Capital Share-Loss per capital share is calculated using the weighted average number of capital shares outstanding during each period. Foreign Currency Translation-Foreign currency exchange gains and losses have been reflected in the results of operations. Due to the highly inflationary Russian economy in which the TAKT Joint Venture operates, its financial statements were prepared using U.S. dollars as the functional currency. The Company's financial statements have been prepared using Austrian Shillings as the functional currency. The Company's balance sheets were translated into U.S. dollars at the period end rates of exchange and the statements of operations were translated at the weighted average exchange rates during each reporting period. The effects of translating the Company's financial statements into U.S. dollars were recorded as a separate component of shareholder's equity. NOTE 2--RUSSIAN JOINT VENTURE On June 7, 1991, the Company entered into a joint venture agreement with the national oil and gas company of the Sakha Republic. The statutory charter fund was $2 million US ($1,000,000 from each venturer). The Company has satisfied this obligation by funding the drilling of a well in the amount of $840,000 and cash calls of $26,161 in 1993 and $133,839 in 1994. A production sharing agreement (the "PSA") is desirable for income tax purposes and with the PSA, the necessary licenses will be issued by the government. The terms of the PSA and licenses have been agreed to in principle by both the Government and the Joint Venture, but are not signed. The Joint Venture is reasonably confident that the Government will execute the PSA and will issue the licenses covering the properties related to the Joint Venture. After the PSA is signed an additional commitment of $28,000,000 (50% from each venturer) will commence and needs to paid over a five year period. Other significant terms of the proposed agreements are: a fund for social concerns in the amount of 2.5% of the costs of exploration and 2% of development costs up to a maximum of $30,000,000, a royalty of 8% (which is cost recoverable), cost recovery up to 90% of hydrocarbons (net of royalty), profit split of 60% to the Company and 40% to the government, profit tax rate of 24% fixed, a VAT tax of 20% (which is cost recoverable), exemption from all customs duties, a five year commitment to exploration from the date of the PSA with an optional additional five year period, a two year period for preparation of the development plan and a twenty year production period. To June 10, 1997, the activities of the Joint Venture have been to process, evaluate and interpret existing data, mapping and drilling one well. NOTE 3--MINERAL INTERESTS IN UNPROVED PROPERTIES The Company has gas properties located in the Sakha Republic. To date, one well has been drilled by the TAKT Joint Venture on that property. The cost of the well was approximately $2,408,000 ($1,204,000 cost to the Company). Upon testing the well natural gas was found in commercial quantities, but due to lack of a commercial pipeline to carry production to market, the property was not considered proved. A determination has not been made regarding the extent of any potential oil and gas reserves with respect to the properties. However, management has evaluated the unproved properties, and at December 31, 1995 and 1996, a determination was made to recognize partial impairment of those properties. Accordingly, the carrying amount of the properties, including the well, was reduced by recognizing impairment in the amount of $210,557 in 1995 and $286,336 in 1996. No impairment was deemed necessary during 1997. No appreciable production has been obtained from the property, except for amounts realized during the period the well was being tested. Consequently, amortization of the cost of the properties has not been provided beyond the impairment recognized. If and when proved reserves are determined to exist in commercial quantities and an available market comes into existence through the establishment of a commercial pipeline, amortization of capitalized costs will be recognized under the units-of- production method. Costs, both capitalized and expensed, incurred for mineral interests in gas properties consist of the following: For the Period For the Period For The From March 7, From January 1, Year Ended 1991 Through 1997 Through December December June 10, 1997 31, 1996 31, 1995 -------------- ------------ -------------- (Unaudited) Exploration costs $ 252,130 $ 507,299 $3,024,000 Development costs - - 1,204,000 --------- --------- ---------- Total $ 252,130 $ 507,299 $4,228,000 ========= ========= ========== NOTE 4--RELATED PARTY TRANSACTIONS OMV (Jakutien) Exploration Gesellschaft m.b.H. (the "Company") has operated as a wholly-owned subsidiary of OMV Group, and as such, the Company has not maintained its own treasury function apart from its parent. Accordingly, all of the cash flows presented in the accompanying financial statements were the results of allocations from the parent corporation, except for those which were paid or received by the TAKT Joint Venture and that were not eliminated in consolidation. Substantially all of the costs and expenses reflected in the accompanying financial statements resulted from amounts charged by OMV Group for its services and from its allocation of indirect exploration costs and general and administrative expenses to the Company. These costs and expenses were allocated to the Company at their cost to OMV Group, without intercompany profit. NOTE 5--INCOME TAXES The provision for (benefit from) income taxes results entirely from domestic (Austrian) and foreign (Russian) current amounts as there are no deferred income taxes from temporary differences or carry forwards. All net operating losses available to offset future taxes on income have been used by the Company's parent and the benefit therefrom was not allocated to the Company. The current amounts relate substantially to minimum taxes due in each jurisdiction because the Company has incurred losses in each period since inception. EX-2 2 File no. 12.797 Released on 17 June 1997 and recorded under B.R.P. 382061 Finance Office for Fees and Transportation Taxes in Vienna SECOND COPY AFFIDAVIT Before me, Dr. Christian Kleemann, Notary Public in Vienna with office in the Inner City of Vienna at 1010 Vienna, Riemergasse 1, the following appeared at 1210 Vienna, Gerasdorferstrasse 151, to which address I had gone in response to a request: 1. Dr. Dipl. Ing. Mag. [Master of Engineering] Helmut Langanger, 1210 Vienna, Gerasdorferstrasse 151, who is personally known to me including his birth date, and presented to me a notarized Power of Attorney dated Vienna, 10 June 997, which document is attached as Appendix ./1, which confirms his authority to represent OMV Inc., 1090 Vienna, Otto-Wagner-Platz 5; and 2.a) Dr. Reinhard Rauball, born 25 (twenty-five) December 1946 (one thousand nine hundred forty six), attorney, Herdecke, Wittbraucker Waldweg 17 A, Germany, as Chair of the Board of Directors, and b) Mr. Paul Hinterthur, born 15 (fifteen) July 1937 (one thousand nine hundred thirty seven), businessman, D-20149 Hamburg, Gisestrasse 119, as Director and President of EuroGas, Inc., with headquarters at 942 East 7145 South, Suite 101-A, Midvale, Utah 84047, and acting on its behalf-- whose identities and birth dates were proven to me through presentation of: for 2.a) German personal identity card no. 5654266538, issued 19 July 1996 in Herdecke; for 2.b) German EU passport no. 2459006062, issued by the Berlin State Census Bureau on 9 July 1993-- and having been by me duly sworn did submit the following: TRANSFER AGREEMENT Section 1 Legal Status The transferring partner, OMV Inc. (OMV) is owner of its shares of the OMV (Yakut) Exploration Gesellschaft m.b.H. (company) based in Vienna, which has a total cash paid nominal capital investment of S 500,000 (five hundred thousand shillings) and shares of the capital stock of the company equal to 100 (one hundred) percentage points. Section 2 Transfer Clause The transferring partner herewith transfers his share of the company as described under Section 1 to the transferee, EuroGas Inc. (hereafter EuroGas), and the latter declares its agreement with acceptance of the transferred business shares under the conditions set forth in this transfer agreement. Section 3 Transaction Price (1) The transaction price for the transfer under Section 2 totals S 72,408,000 (seventy two million four hundred eight thousand shillings). Of this amount S 71,090,047.39 (seventy one million ninety thousand forty seven point thirty nine shillings) is to be paid by EuroGas using a bank check, and OMV confirms receipt of this bank check with its signature on this agreement. The remainder, S 1,317,953 (one million three hundred seventeen thousand nine hundred fifty three shillings) will be paid by EuroGas within 7 (seven) days after the signing of this agreement, payment to be made to OMV's account at the Bank of Austria AG, Vienna, bank no. 20151, account no. 696 736 008. (2) In addition to the transaction price under paragraph (1), EuroGas agrees to make the following payments to OMV: (i) If the TAKT Joint Venture, in which the company holds a fifty percent share, begins production of hydrocarbons within the context of a production sharing agreement for blocks 1 and 2 in the Yakut Republic (the identification of the blocks being based upon licenses nos. 502 and 503 awarded to the TAKT Joint Venture by the Geological Committee of the Yakut Republic), then EuroGas will pay OMV, during the production period, an amount equal to 5% (five percent) of the after- tax value of the oil or gas yield which belongs to the TAKT Joint Venture under the provisions of the production sharing agreement. (ii) If the TAKT Joint Venture beings production of hydrocarbons within the context of licenses awarded by Yakut and Russian authorities for blocks 1 and 2, but not within the context of a production sharing agreement, then EuroGas will pay OMV, during the production period, an amount equal to one percent of the gross production of the TAKT Joint Venture. (iii)Payment by EuroGas under paragraph (2) for a given quarter will be made within 30 (thirty) days following the end of the quarter. Payment will be made in each case in US dollars to a bank account designated by OMV. (iv) The value of hydrocarbons under paragraph (2)(i) will be determined in accordance with provisions of the production sharing agreement applicable to the determination of taxes on profits. The value of hydrocarbons under paragraph (2)(ii) will be determined in accordance with statutory provisions governing payment of income taxes. (v) EuroGas agrees to be responsible for permitting OMV to examine business records of the TAKT Joint Venture once each calendar year to verify the accuracy and completeness of payments under paragraphs (2)(i) and (ii). (vi) EuroGas agrees that it will bind any successor in interest which assumes EuroGas' rights in the company in whole or in part, or which assumes in whole or in part any company partnership rights in the TAKT Joint Venture, to the duties set forth under paragraph (2). Section 4 Effective Date The rights and duties relating to the transferred business share shall be transferred to EuroGas effective on the date this transfer agreement is signed. Section 5 Assurances (1) OMV warrants that the statements made in Section 1, "Legal Status," are correct, that OMV can deal freely with the transferred business shares, and that these business shares are not encumbered by rights belonging to third parties. (2) OMV also warrants that the company controls 50% (fifty percent) of the business shares of the TAKT Joint Venture, a partnership based in Yakut, Russian Federation, and particularly that the agreement relating to the organization and activities of a joint venture which was entered into on 7 June 1991 between the company and PGO Lenaneftegasgeologija and the amendment and the second amendment to that agreement are legally valid. OMV declares that the related documentation has been submitted to EuroGas. (3) OMV warrants that, to the best of its knowledge, licenses numbers GD 502 and 503 for blocks 1 and 2, which were issued by the Geological Committee of the Yakut Republic on 11 January 1993 are valid, provided that the TAKT Joint Venture submits a request by 1 August 1997 to the Geological Committee of the Yakut Republic to convert the existing Yakut licenses to Russian and Yakut licenses. (4) OMV warrants that the balance which is to be determined with effective date of 10 June 1997 and transferred to EuroGas within 7 (seven) days was complete and formally and materially prepared in accordance with the principal of balance continuity, with the care of a proper and conscientious businessman and according to the principles of proper accounting and in accordance with the requirements of the law regarding preparation of accounts, and that all necessary measures were addressed to present an accurate picture of the financial status of the company. (5) OMV warrants that at the time that this transfer agreement becomes effective, no obligations exist between the company and OMV or any business connected to OMV. (6) EuroGas declares that it thoroughly understands the legal and economic conditions of the company and the TAKT Joint Venture. (7) OMV does not give any warranty which extends beyond the scope of this Section 5. Section 6 Severance Clause Should any provision of this agreement be or become void, that will not void the remainder of the agreement. The parties agree that they will replace the invalid provision with a provision that corresponds to the economic purpose of the invalid provision. Gaps in the agreement are to be filled in accordance with the economic purpose of the agreement. Section 7 Dispute Resolution Disputes arising under this agreement, including disputes concerning its validity, interpretation, or termination, shall be exclusively and finally settled by a single arbitrator under the arbitration and mediation rules of the International Arbitration Court of the Austrian Chamber of Commerce in Vienna (Viennese rules). The venue of the arbitration proceedings is Vienna. Section 8 Special General Meeting Immediately after the signing of this transfer agreement, EuroGas will call a special general meeting of the company in which, among other things, the following resolutions will be adopted: (i) Section 1 paragraph 1 of the corporation agreement will be amended to remove reference to "OMV" as a part of the business. (ii) Section 4 of the corporation agreement will be changed to include the new company owner. (iii)The resignation of the sole general manager will be acknowledged. Mr. Dipl. Ing. Mag. Helmut Langanger will be relieved of responsibility for the current fiscal year up to and including the date of his resignation. Section 9 Expense Clause Fees and costs of preparing this transfer agreement, stock market sales taxes, and costs relating to recordation in the business register, shall be borne by EuroGas. Section 10 Copy Clause Copies of this affidavit can be issued in any desired quantity to the parties, their legal successors, and to the company itself, in each case at the expense of the party seeking to obtain the copies. ********** This affidavit was received, read to the persons present, acknowledged as representing their will or, in the case of Dipl, Ing. Mag. Helmut LANGANGER as representing the will of his grantor, approved in whole and immediately signed by them and by me. The power of attorney, appendix ./1, was not read. Vienna, on the eleventh of June one thousand nine hundred ninety seven. EuroGas, Inc. (signatures) This copy intended for EuroGas Inc. corresponds with the original, held in my files under file no. 12.797 and consisting of four pages stamped with a total of three hundred sixty shillings, in both working and numbers. Vienna, on seventeen June on thousand nine hundred ninety seven. (signed) Christian Kleemann, Notary Public Appendix ./1 to GZ 12.797 OMV Incorporated SPECIAL POWER OF ATTORNEY under which the undersigned OMV Incorporated of 1090 Vienna, Otto-Wagner-Platz 5, authorizes and empowers Mr. Director Dipl. Ing. Mag. Helmut Langanger Agent to sign the transfer agreement in its name with EuroGas Inc. regarding the business shares in OMV (Yakut) Exploration Gesellschaft m.b.H. As in ./1 Vienna, 10 June 1997 OMV Inc. (signed) BRZ: 2870/1997/S. I confirm the authenticity of the signatures of Mr. Mag. Burkhard GUTH, born 7 (seven) August 1943 (one thousand nine hundred forty three) and Mag. Dr. Robert DENK, born 15 (fifteen) October 1946 (one thousand nine hundred forty six) as general agents of OMV Inc. of 1090 Vienna, Otto Wagner-Platz 5. In accordance with Section 89 a, Notarial Code, I simultaneously confirm, after having today examined the business registry of the Trade Court in Vienna at FN 93363 z, that the above noted persons were authorized to jointly represent OMV Inc. in the above-noted roles on 10 (ten ) June 1997 (one thousand nine hundred ninety seven) and today. Vienna, the eleventh of June one thousand nine hundred ninety seven. (signed) Christian Kleemann, Notary Public EX-3 3 Vienna Finance Department for Fees and Transportation Taxes Capital Transportation Taxes Section Received 12 MARCH 1991 (5) Z1. ..Beil. Item no.: 7478 First Copy Notary Acknowledgment [Notary seal and tax stamp] The following men who are personally known to me appeared before me, Dr. Christian Kleemann, Notary Public in Vienna, at my office in the Inner City at 1010 Vienna, Riemergasse 1: 1.) Dr. Arno Dettlinger, legal counsel for OMV Incorporated, 1090 Vienna, Otto- Wagner-Platz 5, and submitted the notarized special power of attorney dated Vienna, 1 March 1991 and attached as Attachment ./1 to this notarization which special power confirms his right to represent OMV Incorporated, 1090 Vienna, Otto-Wagner-Platz 5. 2.) Dr. Wolfgang Baumann, born 2 (second) March 1958 (one thousand nine hundred fifty eight), business attorney, ibid., and did before me establish and submit for acknowledgment the following: Corporation Agreement concerning the establishment of a limited liability corporation under RGB1.58, enacted 6 March 1906, in its current form, which in accordance with the representations of the Parties and after discussion of the material and legal status was acknowledged by me as follows: Section 1. Name and Domicile (1) The corporation name is: OMV (Yakut) Exploration GmbH (2) The corporation is based in Vienna. Section 2. Objective of the Undertaking The purpose of the undertaking is: a) Exploration, production, acquisition, transportation, and distribution of petroleum and natural gas, particularly in Yakut. b) Engaging in business of every kind appropriate to furthering the stated corporation objectives (with the exception of banking activities). c) Participation in other undertakings of the stated nature. Section 3. Duration of the Corporation and Fiscal Year (1) The duration of the corporation is not limited to a specific period of time. (2) The corporation's fiscal year coincides with the calendar year. The first fiscal year commences on the date that the corporation is recorded in the Handelsregister [Trade Registry] and ends on 31 (thirty-one) December of the year of recording. Section 4. Capital Stock and Capital Investment (1) The capital stock of the corporation equals oS500,000 (five hundred thousand Austrian shillings) The capital investment shares of the shareholders in this capital stock are as follows: a) OMV Incorporated oS499,000 (four hundred ninety nine thousand Austrian shillings) b) Dr. Wolfgang Baumann oS 1,000 (one thousand Austrian shillings) (2) The capital investment is to be immediately paid in full by the shareholders. Section 5. Executive Bodies The executive bodies of the corporation are: a) The general meeting (the corporation meeting) b) The managing director General meeting (1) The general meeting is held at the corporation headquarters. With the approval of all shareholders, however, the general meeting can be held at another location within the country. (2) A general meeting may be called by the managing director or by a shareholder by means of a registered letter sent at least 14 (fourteen) days prior to the date of the meeting, which letter shall include the agenda. The date of mailing and the date of the meeting do not count in the computation of the number of days required for the notice. The form of the notice and the notice period do not apply if all shareholders appear and agree to waive compliance with the formal requirements. (3) The regular general meeting is to be called each year during the first six months of the fiscal year. An extraordinary general meeting may be called at any time when it appears to be necessary in the interests of the corporation. (4) Instead of adopting motions during a general meeting, written or teletyped voting is permissible if no shareholder objects and the law does not require notarization. The administration shall fix an appropriate period for voting. The administration is to immediately notify shareholders when motions are adopted by written (teletype) means, and is to enter the adopted motion in a protocol book. (5) A protocol concerning motions adopted during a general meeting must also be prepared and signed by the meeting chair when the law does not require notarization; if no one chairs the meeting, the protocol must be signed by all present. Written decisions under Section (4) replace the protocol. Motions adopted during the general meeting are to be entered into a protocol book by the managing directors. (6) Each S 1,000 (one thousand Schillings) paid to capital entitles the payer to one vote. Each shareholder has at least one vote. (7) Decisions of the general meeting are by a simply majority of votes cast in person or by proxy, unless the corporation agreement or law requires otherwise. Approval of the following motions, however, requires a three- fourths majority of votes cast in person or by proxy: a) Establishing the annual budget of the corporation; b) Changing the corporation agreement, increasing or decreasing capital, changing the form of the company, mergers, acquisition; c) Dissolution and liquidation of the corporation, disposing of corporation assets; d) Legal transactions and actions involving the expenditure of more than S 1,000,000 (one million Schillings) over an approved annual budget. Section 7. Managing Directors (1) The corporation may have one, two, or several managing directors. The corporation is represented, in cases where only one managing director has been appointed by that person acting independently; if two or more managing directors have been appointed, then by two managing directors acting in concert or by one managing director acting in accordance with a general agent. (2) Representation by two general agents is permissible within the limitations of Section 49 HGB ["Handelsgesetzbuch" = Commercial Code.] (3) The managing directors are responsible for deciding the affairs of the corporation which are not specifically reserved to the actions of a general meeting by the GmbH Act [GmbH = Gesellschaft mit beschrankter Haftung = limited liability company] or the corporation agreement (Section 34 GmbH Act). (4) The managing directors and any designated agents are bound in their internal operations ["Innenverhaltnis"; innen = internal, "verhaltnis" = relationship, condition, situation, etc.] by the general or specific instructions given them by the shareholders or by resolution of the shareholders. (5) In their internal operations, the managing directors must act in unison. If the administration is not able to come to unity, then each managing director has the right to seek a decision from the shareholders. (6) Prior to closing one of the following legal transactions, giving one of the following declarations, or undertaking one of the following actions, the administration in its internal operations must first seek approval from the shareholders: a) Acquisition, disposal, or encumbrance of real property, buildings, or rights relating to things; b) Purchase, sale, and encumbrance of interests in other companies; c) Entering into, altering, or severing business relationships with third parties; d) Taking out loans or lines of credit; e) Assuming the role of a surety, guarantor, or similar position having potential liability; f) Guaranteeing loans or other credits; g) Entering into or making substantive changes in employment contracts; h) Establishing or closing branch offices; i) Granting or recalling agency and powers of attorney; j) The annual budget; k) Legal transactions and activities which go beyond the parameters of normal business activities this is always the case if the legal transaction or activity involves an expenditure of more than S 1,000,000 (one million Schillings) beyond that contained in an authorized budget. The shareholders may also withhold their approval for other business activities thereby affecting internal operations. Section 8. Transfer and Encumbrance of Business Shares Splitting business shares, transferring business shares, and transferring rights to business shares to shareholders or third parties or encumbering business shares with rights of other shareholders or rights of third parties requires a written but otherwise formless resolution of all shareholders. Section 9. Financial Statement During the first 5 (five) months of the fiscal year, the administration shall prepare a financial year report and profit and loss statement for the previous fiscal year and, if the general meeting appointed an auditor, shall forward the completed audit report together with the usual clarifications and a report about business operations and the status of the corporation to the shareholders. Section 10. Invalid Provisions in the Agreement Should any provision in this agreement be or become invalid, the validity of the remaining portions shall not be affected thereby. The shareholders agree to replace the invalid provisions with a valid provision which is legally and economically as close as possible to the failed provision. Section 11. Organization Costs Costs relating to the organization of the corporation will be borne by the corporation up to oS 50,000 (fifty thousand Austrian Schillings). They are to be listed as expense items in the first annual financial report. Section 12. Foreign Exchange Affidavit Dr. Wolfgang Baumann hereby states under oath that he is a foreign exchange citizen under Section 1 of the Austrian Foreign Exchange Act. It is noted that OMV Inc. is a foreign exchange citizen under the same section by virtue of the location of its headquarters in Vienna. Section 13. Announcements Corporation announcements shall be made by registered mail to the shareholders at the address last known to the corporation. Section 14. Copies Each of the parties to this agreement may unilaterally obtain as many copies of this notarized document as desired at the requester's cost. The foregoing was received, read in its entirety to the parties present, accordingly acknowledged as expressing their own will or that of those for whom they were authorized to act, and immediately signed in my presence. The attached power of attorney, Attachment 1, was not read. Vienna, on the seventh of March, one thousand nine hundred ninety one. Dr. Arno Dettlinger, by his own hand Dr. Wolfgang Baumann, born 3-2-1958, by his own hand Dr. Christian Kleemann, Notary Public, by his own hand EX-10 4 ARTICLES OF ASSOCIATION of the Joint Venture TAKT Paragraph Paragraph Title Page 1 Name and registered office 1 2 Object of the Joint Venture 2 3 Procedure 4 4 Legal principles 7 5 Participants 9 6 Principles of the economic activities of the Joint Venture 10 7 Business year 12 8 Articles of Association Fund 13 9 Financing 15 10 Disposal of shares 16 11 Inclusion of further participants 17 12 Branches 18 13 Reserve fund and further funds 19 14 Liability of the Joint Venture 20 15 Profit distribution and loss cover 21 16 Depreciation 22 17 Accounting and reporting 23 18 Chief Accountant 24 19 Annual Accounts 25 20 Auditing of the financial and economic activities 26 21 Organs of the Joint Venture 27 22 Managing Board 28 23 Board of Directors 32 24 Powers of the Managing Director of the First Deputy Managing Director 36 25 Directors and Personnel 38 26 Cancellation and termination of the Joint Venture 39 27 Arbitration Court and applicable law 41 28 Amendments and addenda to the Articles of Association 42 29 Language of the Articles of Association 43 30 Validity Clause 44 31 Adjustment of the Articles of Association 45 32 Integral components of the Articles of Association 46 33 Signing of the Articles of Association 47 Paragraph 1 Name and Registered Office of the Joint Venture 1.1. The name of the Joint Venture of the contractual participant shall be: TAKT 1.2. The Registered Office of the company shall be at: 677005 Yakutsk ul. Chalturina, 4/1 Yakut-Sacha Socialist Soviet Republic USSR Paragraph 2 Object of the Joint Venture 2.1. The participants do hereby form a Soviet-Austrian Joint Venture on the basis of the contract governing the formation and activities of a Joint Venture. The object of this Joint Venture shall be - especially thc completion of exploration works for the development of hydrocarbons deposits in the area of the Yakut-Sacha Socialist Soviet Republic on a risk basis, the development extraction and processing of hydrocarbons, their transportation and sale both in the USSR and abroad, - likewise extraction, processing, transportation and sale of other natural earth resources, - the erection and operation of industrial and transportation systems as well as the construction of communal dwellings, design, calculation, erection and installation works as well as the commissioning and erection especially of plant and equipment for the extraction and processing of hydrocarbons, - the exploitation of the timber of the Yakut-Sacha Socialist Soviet Republic, the provision of timber, the production of sawn and other timber products as well as the sale of these products both in the USSR and abroad, - the rendering of services for the economic and social development of the collectives of the Soviet participant and the areas intended for carrying on the activities. - the organisation and completion of research and development works in the area of the development, extraction and processing of raw materials in the form of hydrocarbons and other natural earth resources necessary for the fulfillment especially of the production programme and the plans of the Joint Venture, - the undertaking of publicity measures for the products produced and services offered by the Joint Venture, - the taking of measures in the field of marketing and the procurement of foreign trade policy services in connection with exports and imports, - as well as other forms of activities not excluded by the legislation of the USSR. 2.2. The Joint Venture is formed with the intention of making profits. 2.3. The Joint Venture shall conclude and undertake independently the export and import transactions necessary for the setting up and operation of its exploration, development, extraction, processing and transportation systems and plants as well as for the sale of the hydrocarbons and its production and take any other measures necessary for the object of the Joint Venture as well as undertaking on its own the legal transactions necessary for its activities. 2.4. The Joint Venture shall be entitled to exploit the deposits found and developed by it and sell the hydrocarbons and products gained therefrom on the market of the USSR or the world market at prices fused by it and competitive on the world market. The jointly extracted natural earth resources shall include amongst other things noble gases (i.e. Helium), sulphur, carbon dioxide, nitrogen, lithium and strontium. 2.5. In order to achieve an economically meaningfu1 and most comprehensive possible utilisation of the deposits found by it, the Joint Venture shall also be entitled to sell the other natural resources also extracted from these deposits when extracting hydrocarbons on the market of the USSR or on the world market at prices determined by it and competitive on the world market. 2.6. The Joint Venture shall be entitled, to sell consumer goods to the personnel employed in the Joint Venture, the family members of the personnel as well as to natives of the Yakut-Sacha Socialist Soviet Republic and render services thereto free of charge. Paragraph 3 Procedure 3.1. The Joint Venture shall materialise its object in the following three phases: 1. Exploration: The Joint Venture shall in the first instance undertake exploration works in the two spatial sections, the position and extension of which can be seen from the survey map attached to these Articles of Association in Appendix 1 and the corresponding apportionment deed of the State Organs empowered to do this, relating to these sections. Section 1 covers the main part of the Kempendjaksker basin and the adjacent areas of the Chebydinsk uplift and the Suntarsk saddle and has the form of a rectangle with a surface area of 14,400 square kilometres (map in Appendix 2). Section 2 extends over the area of the Nepsk-Botuobinsk uplift and the Predpatomsk basin in the form of a pentagon with a surface area of 6,900 square kilometres (map in Appendix 3). In section 1 the Joint Venture has to fulfill above all the following tasks in the first phase: - Processing of the seismic data - 850 km; - Valuation of the seismic information; - Simulation and preparation of the geochemical and facies maps; - Drilling of a test bore with breakdown of the subsalinary reservoir. In section 2 the Joint Venture must in the first phase catty out the following tasks: a) Verchenmurbaisk Area: - processing of the seismic data - 820 km; - valuation of the seismic information; - technical and economic valuation of the area; - in the event of proof of the economic nature of an extraction- drilling works in a scope to be appropriately stipulated. b) Otradninsk area: - Processing of the seismic data - 420 km; - Valuation of the seismic information; - Drilling of one or two test bores (including the bores already being drilled). The fulfillment of these tasks of the Exploration phase will probably extend over a period of three to five years. After conclusion of the aforementioned and where necessary any additional works and after ensuring the economic nature of any extraction taking into account the making of reasonable profits in freely convertible currency, the details of the activities of the Joint Venture shall be stipulated in the following phases by the contractual participants. 2. When the economic nature of an extraction has been ensured the Joint Venture shall within a further five years make preparations and take measures for an economic extraction of the hydrocarbons found. Further participants will where necessary also be taken up for this purpose. 3. Extraction and sale of production: This phase of economic extraction shall extend from the date of the commercial commencement of extraction over the period of time necessary for an exploitation of the deposits found in Sections 1 and 2. 3.2. In the event of economic extraction the Joint Venture may a1so take over the processing, transportation and sale of its production and in so doing if necessary also make use of the help of third parties. 3.3. In the event of the agreement of the participants and the receipt of the approvals and licenses necessary for this the Managing Board may also decide to extend the exploration, development and extraction to areas other than those marked in Appendix 2 and 3. In this case the regulations of this paragraph shall be applied appropriately as regards the procedure to be followed. Paragraph 4 Legal principles 4.1. The Joint Venture of the contractual participants shall have the legal form of a Joint Venture in accordance with Decree No. 49 of the Council of Ministers7 of the USSR of 13.01.1987, Decree No. 1074 of the ZK of the KPSU and of the Council of Ministers of the USSR of 17.09.1987,theDecree of the Council of Ministers of the USSR No. 1405 of 02.12.1988, the Decree of the Council of Ministers of the USSR No. 203 of 07.03.1989 as well as the regulation documents of the Russian Federalist Soviet Republic and the Yakut-Sacha Socialist Soviet Republic leading directly to these Decrees of the USSR. 4.2. The Joint Venture shall have the rights of a legal entity governed by Soviet Law on the date of its registration at the Ministry for Finances of the RFSFR. 4.3. The formation and activities of the Joint Venture shall be undertaken on the basis of this contract and the appendices attached to it, especially the Articles of Association of the Joint Venture (Appendix 4), whereby the Articles of Association are an integral component of this contract. If any conditions of the contract differ from the Rules of the Articles of Association, then the conditions of this contract shall take precedence over the rules of the Articles of Association. 4.4. The utilisation of the land and soil, the water, the forests, the natural earth resources and other resources claimed for its activities, especially in sections 1 and 2 sketched out in Paragraph 3 for the exploration and extraction of hydrocarbons shall be effected on the basis of the applicable deed of allocation issued by the competent Council of the Peoples Deputies of the Yakut-Sacha Socialist Soviet Republic under corresponding license for exploration and extraction as well as the approvals and licenses of the USSR, thc RSFSR and the Yakut-Sacha Socialist Soviet Republic for the exporting of hydrocarbons agreed with the Ministry for Geology of the USSR and approved by the State Committee of the RSFSR for Geology and Utilisation of energy fields and mineral oil reserves, for the duration of the economic extraction and for the purpose of the exclusive exploration, development, extraction, processing, transportation and sale of hydrocarbons from the aforementioned sections. These documents shall be attached after they have been issued to the documents relating to the formation and activities of the Joint Venture. 4.5. The Joint Venture shall have a seal with its name and a logo, which will be determined by the Managing Board. 4.6 The official languages of the Joint Venture shall be Russian and German. Managing Board and Board of Directors documents shall be drafted in both languages. Paragraph 5 Participants The participants of the Joint Venture are: 1. PGO LENANEFTEGASGEOLOGIJA Lena-Geologie-und Produktionsvereinigung fuer Erdoel-und Erdgasexploration Yakutsk-20, 67781 GSP, ul. Chalturina, 4/1 Yakutsk-Sacha Socialist Soviet Republic, Union of Socialist Soviet Republics 2. OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. A-1090 Vienna Otto Wagner-Platz 5 Austria Paragraph 6 Principles of the economic activities of the Joint Venture 6.1. The economic activities of the Joint Venture shall be effected completely on the basis of independent economic accounting, its own financial liability and - after completion of the exploration and development financed by the participants on a risk basis - on the generation of its funds in Soviet Roubles and freely convertible currency in accordance with its own operating and financing plans. 6.2. The operating and financing plans shall be prepared in advance in each case by the 30th of each September for the following business year by the Board of Directors, unless otherwise laid down by the Managing Board. The plans must be approved by the Managing Board. In the Joint Venture budget plan arising from these plans the receipts and expenditure to be expected shall be listed separately for Soviet Roubles and freely convertible currency. 6.3. The Joint Venture shall itself bear the costs incurred for the exploration, development, extractions, processing, transportation and sale of the hydrocarbons. The credit lines and loans taken up for the financing of the aforementioned activities shall be repaid from the proceeds occurring as a result of its economic and financial activities. 6.4. The Joint Venture shall have the right, within the framework of carrying out its tasks, to place orders with third parties, to use the infrastructure which exists in the USSR and especially in the Yakut-Sacha Socialist Soviet Republic and take part in the development of this infrastructure especially through the setting up of medical projects and various telecommunications systems. 6.5. The Joint Venture and the third parties instructed by it shall be entitled, to import independently and where necessary export the machines and equipment, materials, auxiliary items of equipment, food and other items intended for the personal use of the personnel carrying out this work necessary for the activities of the Joint Venture, including medical equipment, drugs, consumer goods, te1ecommunications technology and the like. 6.6. The Joint Venture shall be entitled within the framework of the licenses issued to it by the Ministry for Foreign Trade Relations of the USSR as well as any other competent State Committees, Ministries and authorities, to import the goods it requires for materialising the object of the Joint Venture and to export the raw materials and products it extracts. 6.7. Any proceeds from its economic activities, in whatever currency, shall accrue solely to the Joint Venture, which will set up and conduct in the USSR its own accounts for Soviet Roubles and freely convertible currency. The Joint Venture shall be entitled where necessary within the framework of what is permissible in accordance with Soviet legislation also to set up and conduct accounts outside the USSR. 6.8. Thc Joint Venture shall ensure within the framework of its legal obligations and what is economically tolerable: - a complete geological survey and a rational and comprehensive utilisation of the natural earth resources and the protection of these; - the carrying out of the works connected with the utilisation of the natural earth resources which will be harmless to the employees of the Joint Venture and local populations; - the protection of air, earth, forests, waterways and other environmental and natural features as well as buildings and structural facilities against the possible harmful effects of the works connected with the utilisation of the natural earth resources; - the protection of natural parts, natural, historical and artistic monuments against the possible damaging effects of the works connected with the utilisation of the natural earth resources; - the restoration of the plots of land used to a condition suitable for further economic utilisation. Paragraph 7 Business year 7.1. The business year of the Joint Venture shall be the calendar year. Paragraph 8 Fund in accordance with the Articles of Association 8.1. The Articles of Association Fund of the Joint Venture shall total US $20,000,000.00 (in words: two million United States Dollars) 8.2. The Articles of Association Fund shall be formed by the contractual participants by cash payments in the form of inpayments to the current account of the Joint Venture to be set up for Roubles and freely convertible currency as follows: 1. Austrian Participant: Cash inpayment totalling US $1,000,000.00: 2. Soviet Participant: Cash payment totalling US $1,000,000.00: payable in Soviet Roubles, converted at the official commercial rate of exchange of the State Bank of the USSR and on the date of making the payment. Total value of the inpayments US $2,000,000.00. 8.3. The participants shall have the following shares in the Joint Venture in accordance with the inpayments into the Articles of Association Fund: Austrian Participant: 50 % of the shares Soviet Participant: 50% of the shares 8.4. The cash payment shall become due thirty days after receiving the approvals and licenses necessary for the activities of the Joint Venture in accordance with Paragraph 4.4 of these Articles of Association. 8.5. The fund may be increased with the agreement of the participants in response to a unanimous decision of the Managing Board of the Joint Venture. The drawing right shal1 accrue to the participants according to their shares. The drawing right is to be exercised within a deadline to be set by the Managing Board, which must not be less than thirty days nor exceed 180 days. A drawing right not exercised within this deadline shall be offered by the Joint Venture to the other participant. If the latter accepts the offer, then the shares in the Joint Venture shall change in accordance with the new shares in the Articles of Association Fund. If the latter does not accept the offer within the deadline set in the offer, then the drawing right shall decay. 8.6. There is no obligation to put up any further capital. Paragraph 9 Financing 9.1. In addition to the payments of the contractual participants into the Articles of Association Fund the participants do hereby guarantee the Joint Venture fixed agreed private loans for the first phase (exploration) of its activities totalling US $28,000,000.00 (in words: twenty eight million United States Dollars), whereby each participant shall be responsible in accordance with the credit and loan agreements (Appendices 4 and 5) attached to these Articles of Association for US $14,000,000.00 respectively, which in the case of the Soviet participant shall be paid in Soviet Roubles, converted at the official commercial rate of exchange of the State Bank of the USSR on the date of the remittance. 9.2. Expenditure above and beyond this amount may only tee effected by agreement between the participants. For this purpose the Joint Venture may take up in the necessary scope credit lines in Soviet Roubles and in freely convertible currency. 9.3. Any investment and operating costs incurred at regular investment and operating costs for exploration, development, extraction, processing, transportation and sale shall be covered in the event of economic strikes by the proceeds from the economic activities of the Joint Venture. 9.4. The amount set in the agreement between the participants (Appendix 6) the transfer of the rights for the borehole already sunk by the Soviet participant shall be offset with the private loan mentioned in Point 9.1 of this paragraph of the Soviet participant. Paragraph 10 Disposal of shares 10.1. Any disposal of shares in the Joint Venture or of parts of shares, that is to say any transfer, abrogation, encumbering or change in content of these shares, shall only be permitted in the event of the agreement of the participants with a unanimous vote of the Managing Board. 10.2. A participant may only refuse his agreement for projectively justified reasons. 10.3. In the event of the transfer of a share (sale, donation, contribution, exchange) in the Joint Venture or a part of such a share by either of the participants, the other participant shall have as right of preemption. 10.4. The selling participant must notify the content of the agreement conclude with the buying new participant immediately in writing to the party having right of preemption. The right of preemption may only be exercised up to the expiry of a period sixty days from receipt of this notice by written declaration to the disposing party. Paragraph 11 Inclusion of further participants 11.1. The contractual participants do hereby agree, where necessary to include further participants in the Joint Venture, in order to ensure the materialisation of the aims and the object of the Joint Venture, especially the financing of phases 2 and 3. 11.2. The contractual participants in so doing do hereby also agree, that such participants must be selected and included from the point of view of the optimum materialisation of the aims and object of the Joint Venture. The decision on the inclusion of further participants in the Joint Venture shall be taken amicably by the contractual participants. A unanimous resolution of the Managing Board shall also be necessary. Paragraph 12 Branches 12.1. The Joint Venture shall be entitled to set up branches and appoint representatives as well as subsidiaries inside and outside the USSR. 12.2. The decision concerning the setting up of branches, subsidiaries and the appointment of representatives shall be taken by the Managing Board. Paragraph 13 Reserve fund and further funds 13.1. The Joint Venture shall form a reserve fund in the amount specified by Soviet legislation from the gross profit remaining after deduction of any expenses and the amounts written off for depreciation of its assets. 13.2. The Managing Board of the Joint Venture shall decide on the formation of any further funds such as: - a fund for the promotion of science and technology, - a development fund in the event of the expansion of the commercial activities of the Joint Venture, - a fund for the repayment of long-term credit lines and their interest amounts, - a premium fund to pay for special services, - a continuation fund for the training and further education of the employees of the Joint Venture, - a fund for social and cultural measures and for the building of dwellings. 13.3. What portion of the gross profit is to be allocated annually to what fund shall be decided by the Managing Board. The Board of Directors of the Joint Venture shall decide on the withdrawals from the individual funds with the exception of withdrawals from the Reserve Fund in accordance with appropriate resolutions of the Managing Board within the framework of its relevant jurisdiction and powers. Paragraph 14 Liability of the Joint Venture 14.1. The Joint Venture shall be liable with all of its assets for its commitments. 14.2. The Soviet State and the participants of the Joint Venture shall not be liable for commitments of the Joint Venture, and the Joint Venture shall not be liable for commitments of the Soviet State or its participants. Paragraph 15 Profit distribution and loss cover 15.1. The profit or loss of the Joint Venture shall be determined by the Managing Board for each business year. 15.2. The profit which may be distributed shall the Balance Sheet profit less the contributions to the Reserve Fund and any other apportionments to further funds of the Joint Venture decided upon by the Managing Board in accordance with paragraph 13, point 13.3 of these Articles of Association, as well as less the payments of any tax commitments. 15.3. The profit available for distribution shall be distributed between the Austrian and the Soviet participants in proportion to their shares in the Articles of Association fund of the Joint Venture. 15.4. The profit share of the Austrian participant in the proceeds of the Joint Venture in freely convertible currency shall be calculated fully in freely convertible currency. In the event of the distribution of this profit share the credit in freely convertible currency available in accounts of the Joint Venture shall in the first place be used to satisfy the profit payment claim of the Austrian participant. 15.5. In the event of a loss the Managing Board shall decide on whether and how the loss is to be settled after listening to the Board of Directors. In so doing it must be assumed that losses, arising from exploration and development works, shall be covered first from the proceeds of extraction. However as long as exploration and development works remain unsuccessful, cumulative losses shall be earned forward to new account without any time limit. 15.6. Losses not arising from the works mentioned in the foregoing paragraph shall be covered from the Reserve Fund of the Joint Venture. Paragraph 16 Amounts written off 16.1. The amount of the depreciation rates for the assets and property rights of the Joint Venture shall be established annually by the Managing Board in accordance with the financial needs of the Joint Venture. Paragraph 17 Accountancy and reporting 17.1. The Joint Venture shall trade on the basis of complete economic accounting and cost coverage as well as by internal and external financing and shall carry on its activities in accordance with the annual plans confirmed by the Managing Board of the Joint Venture. 17.2. The Joint Venture shall for this purpose conduct an operational, bookkeeping and statistical system of accounting and form of invoicing as specified for Joint Ventures in the USSR. It will conduct its accounting system on the principle of double-entry bookkeeping. If for the purposes of the accounting system freely convertible currency is to be converted into Soviet Roubles, this must be effected at the commercial rate of exchange of the State Bank of the USSR applicable on the date of the remittance. 17.3. Additionally the Joint Venture shall conduct its bookkeeping and accounting for submission to the financial authorities competent for the participants in accordance with the conditions of proper bookkeeping and drafting of Balance Sheets in accordance with the Accounting Law of 1990 of the Republic of Austria (BGB1. No. 475 of 31.07.1990) in the currency applicable version in German and in United States Dollars. Paragraph 18 Chief Accountant 18.1. The Chief Accountant of the Joint Venture shall be appointed by the Board of Directors. The prior consent of the Managing Board must be obtained for that appointment. Paragraph 19 Annual Accounts 19.1. At the latest three months after the end of the business year the Balance Sheets together with Profit and Loss Accounts of the Joint Venture for the business year which has elapsed must be drawn up by the Board of Directors in accordance with Paragraph 17, points 17.2 and 17.3. 19.2. With regard to the profit made, the Board of Directors must submit a proposal for its utilisation to the Managing Board within the same time limit. Paragraph 20 Auditing of the financial and economic activities 20.1. Bookkeeping, invoicing and Annual Accounts shall be audited at the expense of the Joint Venture by an independent auditing company, to be selected by the Managing Board and which will have unrestricted access to all the ledgers and other records and vouchers of the Joint Venture. Paragraph 21 Organs of the Joint Venture 21.1. The organs of the Joint Venture are: - a Managing Board, - the Board of Directors. 21.2. Their composition and relevant powers and jurisdictions are set out and regulated in the following paragraphs. Paragraph 22 Managing Board 22.1. The top organ of the Joint Venture shall be the Managing Board. It will determine especially the basic outlines of the commercial activities of the Joint Venture in accordance with these Articles of Association as well as its integral component and will be responsible for any specially highlighted tasks, above and beyond the course of day to day business activities. The course of day to day business activities shall however be the task of the Board of Directors. 22.2. The Managing Board shall consist of four people. Of these both participants shall in each case appoint two people. The Chairman of the Managing Board shall be a representative of the Austrian, and the Deputy Chairman shall be a representative of the Soviet participant. Additionally both participants shall in each case appoint a replacement member. 22.3. The members of the Board shall be appointed for a period of four years. The appointment may be revoked prematurely at the discretion of that participant of the Joint Venture which has appointed a Managing Board member. The appointment several times of a member of the Board for in each case a further period of office shall be allowed. The participants shall inform each other and the Board of Directors of the joint company in writing of the appointment or revocation of a member of the Managing Board. The appointment or dismissal shall become effective on the thirtieth day after receipt of the notice. 22.4. If necessary in response to a proposal from the Managing Board the Participants of the Joint Venture may appoint additional Managing Board members. In this case to safeguard the share ratios in the Articles of Association Fund the appointment may be made in accordance with the shares subscribed by the participants. 22.5. The Managing Board meeting shall be convened in writing by the Chairman of the Managing Board or - in his absence - by his deputy. 22.6. The notice must state the date, place and agenda of the Managing Board meeting. The participants and the Joint Venture must have received the notice at least 45 days before the date set for the meeting. 22.7. In the event of being prevented from personally attending a Managing Board meeting, a Managing Board member may have himself represented with a deciding vote at the meeting on the basis of a Power of Attorney issued in writing thereby, by another Managing Board member, a replacement member or by a third parry who is not a member of the Managing Board. 22.8. Managing Board meetings shall be convened as required, but at least twice a year. The annual results shall be discussed by the Managing Board no later than three months after the end of the relevant business year. 22.9. The participants, each Managing Board member, the Managing Director and the First Deputy Managing Director of the Joint Venture may demand the convening of a meeting by written application stating reasons. The participant may also convene the Managing Board meeting themselves subject to the convening notice, if there is no reply to their request to convene a meeting within thirty days. 22.10.The right to submit questions for decision to the Managing Board shall be held by the participants of the Joint Venture, the Managing Board members, the Managing Director and the First Deputy Managing Director. 22.11.Minutes of the Managing Board meeting shall be prepared. The Chairman of the Managing Board shall submit the corresponding minutes thirty days after the meeting for the members of the Managing Board who attended the meeting for signature. 22.12.The Managing Board shall be able to take resolutions, inform the Managing Board members who are personally present at the meeting or if they are properly represented in accordance with point 22.7. If the meeting is unable to take resolutions, then a fresh meeting must be convened within six weeks, which shall in every case be able to take resolutions on the same agenda. 22.13.The Managing Board shall take its resolutions basically with a simple majority of the votes of the Managing Board members attending. If the votes are equal, then the Chairman of the Managing Board shal1 have the casting vote. Managing Board members properly represented in accordance with point 22.7 shall be deemed to be attending. 22.14.The decision on the following important and fundamental questions of commercial policy and the general commercial activities of the Joint Venture shall however require unanimity: 1) Amendments to the Articles of Association of the Joint Venture; 2) Stipulation of the fundamental aims of the activities of the Joint Venture; 3) The inclusion of further participants; 4) Disposal of shares in accordance with Paragraph 10 of these Articles of Association. 5) The making of investments not included in the plans; 6) The granting of securities for third parties, especially the acceptance of warranties, guarantees and similar promises; 7) The protection and utilisation of industrial protection rights of the Joint Venture; 8) The conclusion, amendment and cancellation of know-how, license and fundamental cooperation agreements; 9) The buying and selling of property; 10) The setting up and formation of funds additional to those listed in Paragraph 12; 11) The entering into service agreements with a duration of more than three years; 12) The appointment and dismissal of the Managing Director and his Deputy proposed by the Soviet participant; 13) Liquidation of the Joint Venture, the appointment of a Liquidation Committee and confirmation of the 1iquidation Balance Sheet. 22.15.Decisions on the following matters shall come especially within the jurisdiction of the Managing Board: 1) Confirmation of the Annual Balance Sheet and Annual Report of the Board of Directors of the Joint Venture; 2) Distribution of the profit of the Joint Venture; 3) Preparation of the method of covering losses; 4) Resolutions concerning the taking up of credit lines; 5) Confirmation of the programmes of the foreign trade activities of the Joint Venture as well as reports on their implementation; 6) Confirmation of the production and finance plans as well as reports on their implementation; 7) Stipulation of the funds of the Joint Venture. Determination of their scope, sources, from which they are formed, and the way in which they are used; 8) Formation of the organs of the Joint Venture, determination of their powers as well as the termination of their activities; 9) The setting up of branches and appointment of representatives as well as determination of their activities; 10) Stipulation of the rules of the internal Working Order, 11) Stipulation and amendment of the job plan; 12) Stipulation of the qualifications and number of Austrian technical people as well as the contractual conditions for their activities in the Joint Venture; 13) Confirmation of the training plan and measures for the training of the personnel of the Joint Venture; 14) The appointment and dismissal of the Deputy of the Managing Director to be proposed by the Austrian participant. 22.16.Resolutions of the Managing Board may also be taken in writing. If all the Board members agree to this form of resolution, then a Managing Board meeting need not be convened. 22.17.The activities of the Managing Board shall be effected basically on an honorary basis, however the expenditure for travel and accommodation of the Joint Venture incurred by the Managing Board members through taking part in Managing Board meetings shall be repaid thereto. In addition the participants shall pay the remuneration of their Managing Board members themselves and for their own account. 22.18.The Order of Business to be drafted by the Managing Board shall regulate anything else. Paragraph 23 Board of Directors 23.1. The Board of Directors shall manage the day to day activities of the Joint Venture. It shall report to the Managing Board of the Joint Venture, implement the instructions and resolutions of the latter and shall be liable to the Board for complying with and executing the said instructions and resolutions. 23.2. The Board of Directors shall consist of the Managing Director and the First Deputy Managing Director, who will be appointed and dismissed by the Managing Board of the Joint Venture. The Managing Director shall be appointed in response to a proposal from the Soviet participant, and the First Deputy Managing Director in response to a proposal from the Austrian participant. 23.3. The Managing Director and First Deputy Managing Director shall be appointed for a period of three years. Their appointment may be revoked by a resolution of the Managing Board or in response to a proposal from the Soviet participant concerning the Managing Director or a proposal of the Austrian participant concerning the First Deputy Managing Director. On revocation of the appointment the employment relationship of the affected parry with the Joint Venture is to be cancelled immediately. An appointment several times in each case for a further period of office shall be allowed. 23.4. If necessary the Board of Directors may be supplemented by resolution of the Managing Board by the appointment of further Deputy Managing Directors as well as being reduced by dismissal thereof. 23.5. Two members of the Board of Directors appointed by different participants shall be entitled to represent the Joint Venture outwardly. They shall in each case have only jointly unrestricted powers to act and sign, provided this is not expressly restricted in this contract or in the Articles of Association of the Joint Venture. 23.6. The Managing Director and First Deputy Managing Director shall take part in meetings of the Management Board with a consultative vote. 23.7. The activities of the Board of Directors shall be effected in accordance with the conditions of this contract and the Articles of Association of the Joint Venture in accordance with the principle of unanimity. If there is no unanimity, each member of thc Board of Directors shall be entitled, to approach the Managing Board to bring about a binding decision. 23.8. Applications to the Managing Board are to be made basically by the Board of Directors as an organ. If it is impossible for its members to reach agreement, then each member of the Board of Directors shall make applications independently. 23.9. The Board of Directors must obtain the prior written consent of the Managing Board for the following transactions: 1) The acquisition, sale or encumbering of plots of land or rights equal to plots of land; 2) The erection of production plants at new locations; 3) The acquisition of third party companies or participation therein; 4) The granting of credit outside the usual commercial operations; 5) The appointment of special proxies or authorised agents; 6) The acceptance of warranties and guarantees (with the exception of the acceptance of guarantees in normal goods traffic); 7) The taking up of long-term bank credit lines or loans; 8) Entering into commitments on bills of exchange; 9) The making of investments and placing of orders with an initial or production value of more than US $500,000.00 or a corresponding value in Soviet Roubles, converted at the official commercial rate of exchange of the State Bank of the USSR; 10) The conducting of active proceedings with a value at dispute of more than US $50,000.00; 11) The conclusion of agreements, which as regards their financial effects are of special significance to the future development of the Joint Venture, especially if such agreements are to bind the Joint Venture for longer than two years; 12) Obligations as regards basic rates of remuneration, social security contributions and pensions. 23.10.The Managing Board may give its consent to certain transactions in advance as well as amending limits of amounts for the transactions mentioned under point 17.9. 23.11.The commercial activities of the Joint Venture shall take place in accordance with the Directives and at prices, proposed by the Board of Directors and which must be approved by the Managing Board when confirming the finance plan. 23.12.The placing of orders with third parties must be effected subject to the prerequisite of financial and technical competitiveness (price, technical execution, delivery times and the like) so that the participants of the Joint Venture will receive the order in preference on equal offer conditions. If offers of the Soviet participant and the Austrian participant are equa1, then the Soviet participant shall be given preference. In the Business Order of the Board of Directors conditions must be included concerning the methods of tender competitions and the allocation of orders. 23.13.The Board of Directors shall be liable to the Managing Board in respect of the following items, 1) The execution of the resolutions of the Managing Board and the provision of reports relating thereto; 2) The drafting of Annual investment and finance plans; 3) The provision at the latest 45 days after the end of each month of a monthly Profit and Loss Account, a list of the sums of the bills receivable for goods and services as well as a list of the cash flow and the positions of the Bank accounts including the current stage of the obligations of the Joint Venture, to be produced and forwarded directly to the participants; 4) to draft reports on those transactions, which may be of considerable significance to the profitability or liquidity of the Joint Venture in good enough time so that the Board can comment on them; 5) to submit no later than three months after the end of the business year the Annual Accounts, the Profit and Loss Account and the situation report and report on the profitability of the Joint Venture, especially the profitability of the ordinary capital; 6) at the request of the Board to report at any time on basic or fundamental matters of the Joint Venture. 23.14.The activities of the Board of Directors shall also be regulated by the Order of Business to be drafted by it and approved by the Managing Board. Paragraph 24 Powers of the Managing Director and the First Deputy Managing Director 24.1. The Managing Director of the Joint Venture shall within the framework of the powers accruing to him in accordance with this contract and the Articles of Association of the Joint Venture fu1fill the following functions: The Managing Director 1) shall manage the activities of the Joint Venture in accordance with the programmes of the Joint Venture; 2) dispose of the assets of the Joint Venture including its cash funds within the framework laid down in Paragraph 17, Point 17.9; 3) submit to the Managing Board of the Joint Venture the drafts of the programmes and plans as well as the reports on the implementation of these programmes and plans for confirmation; no later than three months after the end of the business year he will submit the Annual Balance Sheet, and Annual Report and the Report on the implementation of the Finance Plan; 4) shall act without Power of Attorney in the name of the Joint Venture, represent it with respect to authorities, companies and organisations both in the USSR and abroad; 5) undertake transactions of any kind and legal transactions, provided that this contract does not contain any restrictions, he shall issue Powers of Attorney and in agreement with the First Deputy Managing Director open current and other accounts of the Joint Venture at Banks; 6) shall be liable for the drafting of the rules of the internal Working Order, submit them to the Managing Board of the Joint Venture for confirmation and ensure that these rules are complied with; 7) in accordance with the precepts of the Order of Business of the Board of Directors he will determine the structural breakdown of the Joint Venture and the job plans of the employees of the Joint Venture; 8) shall decide and issue instructions concerning operational matters relating to the internal activities of the Joint Venture; 9) prepare proposals concerning the plans and measures for the training of the personnel of the Joint Venture and submit them to the Managing Board for confirmation; 10) prepare any further necessary materials and proposals, which must be submitted to the Managing Board of the Joint Venture for examination, and shall ensure the implementation of the decisions taken by the Managing Board. 24.2. Decisions, the financial consequences of which go above US $10,000.00 shall require the agreement of the Managing Director and the First Deputy Managing Director to be effective. In addition any documents to be submitted to the Managing Board for decision, as well as the hiring and firing of personnel shall require agreement. 24.3. The First Deputy Managing Director shall take over the tasks and powers of the Managing Director in the event of his illness or absence. Moreover his powers shall be regulated in the Order of Business of the Board of Directors. 24.4. The Managing Director and First Deputy Managing Director shall regularly inform each other comprehensively of the progress of the economic activities of the Joint Venture, but at least once a week. 24.5. The specific division of labour and method of operation of the Board of Directors shall be laid down in the Order of Business to be approved by the Managing Board. Regardless of the total liability of the Board of Directors the competence and liability of the Directors for their business area shall bc clear from this Order of Business. Paragraph 25 Directors and Personnel 25.1. The personnel of the Joint Venture shall consist largely of Soviet citizens, but also of foreign citizens, for which the Austrian Participant shall have a right of proposal. 25.2. Questions of the conditions for the appointment and dismissal of employees, wages and salaries and additional material incentives, the working hours and holidays, industrial protection and social support of the employees shall be regulated by the Joint Venture by way of deviation from any other valid labour legislation of thc USSR and the RSFSR independently by its Managing Board. 25.3. The Directors and personnel of the Joint Venture and its branches or representatives shall therefore receive in response to a decision of the Managing Board remunerations and Social Security payments, which shall not be less than those for comparable activities in the company, which has the right of proposal for the Director or employee. 25.4. Moreover the obligations and rights of the foreign Directors and foreign personnel shall be governed by the agreements concluded individually therewith. The technical requirements and qualifications of the individual employees shall in each case by stipulated separately by the Joint Venture. 25.5. Without the consent of the Managing Board only service agreements with a duration of at most three years may be concluded by the Board of Directors with Soviet and foreign employees of the Joint Venture. 25.6. The Board of Directors of the Joint Venture is obliged, to conclude collective agreement with the union organisation which is to be formed within the Joint Venture. Before commencement of negotiations with the collective detail framework conditions for the collective agreement must be submitted by the Board of Directors to the Managing Board for approval. If the framework conditions are exceeded this will again require approval by the Managing Board. 25.7. Each employee of the Joint Venture shall be entitled to also approach individual Managing Board members, if he feels that his rights have been violated. Paragraph 26 Cancellation and termination of the Joint Venture 26.1. The Joint Venture is formed for an unspecified duration. It will end on the expiry of the commercial extraction and completion of the processing, transport and sale of hydrocarbons in accordance with Paragraph 3 of these Articles of Association. 26.2. In the event of cancellation by a participant the Joint Venture shall not be ended. If the cancellation becomes legally effective, then the rights and obligations arising out of the credit and loan agreement between the Joint Venture and the cancelling participant shall become ineffective. The other participant shall in this case be entitled to take over the share of the cancelling participant. 26.3. The cancelling participant shall receive his share of the assets at the value, to be determined appropriately in the event of the liquidation of the Joint Venture. The conditions stipulated in this paragraph for this case shall be applied similarly. An auditing of the established value by an international auditing company shall in this case only be undertaken in response to a request from the participant, who will also pay the costs of the audit. 26.4. Cancellation by a participant may be effected at the earliest after complete granting of the loan by the said participant as mentioned in Paragraph 9, Point 9.1 of these Articles of Association. 26.5. In the event of the official establishment of the inability to pay of a participant by competent organs, involving the winding up of the said participant, or if a participant voluntarily causes the loss of his legal status, then the rights and obligations of this participant shall be treated by the Joint Venture as if he had cancelled. 26.6. The Joint Venture shall be prematurely terminated: - if the Managing Board of the Joint Venture takes an appropriate unanimous resolution; - in those cases, in which the regulation documents applicable to the Joint Venture (paragraph 4 of the contract relating to the formation and activities of the Joint Venture) provide for his liquidation. 26.7. The participants do hereby agree that the exploration on a risk basis will mean initially a fairly long loss period which will therefore not lead to premature winding up of the Joint Venture. 26.8. In the event of the termination of the Joint Venture the Managing Board shall appoint a liquidation committee, which will consist of three people. the liquidation committee shall issue a liquidation balance sheet, which will be submitted to the Managing Board for approval. The valuation of the assets shall be effected by the liquidation committee in accordance with the recommendations for the procedure of Auditors when valuing whole companies of the U.E.C. committee for technical matters and research (KFF) from the year 1980. The liquidation balance sheet shall require an audit by an international auditing company for its acceptance. 26.9. The residual assets shall after payment of the debts and redemption of the commitments of the Joint Venture be paid out in accordance with the approved liquidation balance sheet to the participants in proportion to their shares in the Articles of Association Fund. Freely available and transferable currency of the Joint Venture shall first be used for payments to the Austrian participant. If there is no freely available and transferable currency in the scope necessary to satisfy the Austrian participant, the Joint Venture must acquire freely convertible and transferable currency for the remaining share of the Austrian participant. 26.10.On liquidation of the Joint Venture or on the departure of a participant from the Joint Venture the outpayment of the relevant shares in the Joint Venture between the participants shall be effected in the form of cash or goods at the residual value of the share on the date of liquidation or departure determined in accordance with this paragraph. At the time of liquidation before any outpayment of shares the commitments of each participant must be settled in respect to the other participant and third parties. Paragraph 27 Court of Arbitration and Applicable Law 27.1. Any differences of opinion between the contractual participants, which cannot be settled amicably, shall be settled subject to the exclusion of the ordinary Courts by a Court of Arbitration of the Zurich Chamber of Trade to the exclusion of Swiss Collision Law ruling in accordance with material Swiss Law and binding on the participants, unless other legal principles are applicable in accordance with Paragraph 4 of the contract concerning the formation and activities of the Joint Venture. 27.2. The Court of Arbitration shall proceed in accordance with the applicable conciliation and Arbitration Decree of the Zurich Chamber of Trade and shall consist of the normal three Arbitrators. One each may be appointed by each contractual participant. The proceedings of the Court of Arbitration shall be conducted in German. 27.3. The decision of the Court of Arbitration shall be final. Paragraph 28 Amendments and addenda to the Articles of Association 28.1. Any amendments and addenda to these Articles of Association must be in writing in Russian and German and may only be included with the agreement of the representatives of the contractual participants given Powers of Attorney for this purpose. Paragraph 29 Language of the Articles of Association 29.1. The Russian and German versions of these Articles of Association shall be equally binding. 29.2. In the event of problems of interpretation caused by translation each contractual participant shall appoint an independent expert instructed to prepare a proposal to solve thc problems satisfying the financial aims and object of the Joint Venture. Paragraph 30 Validity clause 30.1. Should individual paragraphs of these Articles of Association or parts thereof be ineffective or become ineffective, this shall not affect the effectiveness of the other paragraphs and the whole Articles of Association. 30.2. The contractual participant shall in such a case be obliged, to replace the ineffective paragraph or its ineffective parts with a paragraph or parts thereof, which come the closest to the economic and financial sense of the ineffective paragraph or parts thereof. Paragraph 31 Adjustment of the Articles of Association 31.1. In the event of relevant regulation documents of the USSR, the RSFSR or the Yakut-Sacha Socialist Soviet Republic becoming effective, especially with regard to Company, Corporation or Trade Law including Balance Sheet Law, the law of ownership of the land, the natural earth resources and movable items, or other areas affecting the activities of the Joint Venture, the contractual participants shall be entitled, to adapt the conditions of these Articles of Association to the sense and purpose of these regulation documents. 31.2. The adaptation of these Articles of Association or individual conditions thereof requested in writing with reasons by a contractual participant may only be refused by the other contractual participant for objectively justified reasons. Paragraph 32 Integral components of the Articles of Association 32.1. The following items shall form integral components of these Articles of Association and the business principle for the formation and activities of the Joint Venture: 1. Survey map of the exploration areas; 2. Survey map for section 1; 3. Survey map for section 2; 4. Credit and loan agreement between PGO LENANEFTEGASGEOLOGIJA and the Joint Venture; 5. Credit and loan agreement between OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. and the Joint Venture; 6. Agreement between OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. and PGO LENANEFTEGASGEOLOGIJA; 7. Service agreement between PGO LENANEFTEGASGEOLOGIJA and the Joint Venture; 8. Service agreement between OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. and the Joint Venture. Paragraph 33 Signing of the Articles of Association 33.1. These Articles of Association were signed on 7th June 1991 in Vienna in four copies in Russian and in German, the two language versions being equally binding. 33.2. These Articles of Association become effective the moment they are signed. In the name and on the instructions of PGO LENANEFTEGASGEOLOGIJA (signature) Selenski, V.V. (Signature) Jachenko, V.M. In the name and on the instructions of the Company OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. (Signature) Helmut Langanger Amendment of the CONTRACT relating to the formation and activities of the Joint VentureTAKT between The State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Enterprise 67022 Yakutsk Ulica Kirova No. 11 Republic of Sacha (Yakut) Russian Federation - hereinafter called the "Yakut Participant" - represented by Mr. R. Burnashov and the OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. A-1090 Vienna Otto-Wagner-Platz 5 Austria a legal entity governed by Austrian Law, - hereinafter called the "Austrian Participant" -, represented by the Director,Dipl. Ing. Helmut Langanger PREAMBLE PGO Lenaneftegasgeologia and OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. signed the incorporation documents for thc TAKT Joint Venture on 7th June 1991; The TAKT joint venture was registered with effect from 18th June 1991 in the Soviet City of Yakutsk and on 18th August 1991 at the Ministry of Finance of the Russian Federation; In consideration of Decree No. 477 of 23.9.1991 of the Council of Ministers of the Republic of Sacha the Managing Board of TAKT decided on 2nd October 1991 to include GosKomnedra, of the Republic of Sacha (Yakut) as a further member of TAKT; By decision of the Council of Ministers of the Republic of Sacha of 23rd September 1991 GosKomnedra Republic Sacha (Yakut) was liquidated. The legal successor of GosKomnedra Republic Sacha (Yakut) is the Ministry for the Energy and Fuel Industry of the Republic of Sacha; By decision of the Council of Ministers of the Republic of Sacha of 19.1.1992, No. 27, the raw materials industry of the Republic of Sacha was freshly organized. The Government of the Republic of Sacha (Yakut) stipulated the changing of the founders of TAKT on the Yakut side on 29.5.92 in Decree No. 346/8. The Managing Board of TAKT agreed on 29th September 1992 to the departure of Lenaneftegasgeologia and of GosKomnedra from TAKT and the inclusion of the Ministry for the energy and fuel industry as well as Jakutburneftegas as a new participant in TAKT. By decree of 14th October 1992 No. 848-r the Government of the Republic of Sacha transferred all the shares of the State Administration organs in Joint Ventures to the State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Enterprise. The Managing Board of TAKT on 22nd February 1993 agreed to the transfer of the shares in the TAKT joint venture from the Ministry for the Energy and Fuel Industry and from Jakutburneftegas to the State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Enterprise. Article 1 The Yakut member and the Austrian member do hereby agree, that on the basis of thc contract relating to the formation and activities of a joint venture including any appendices mentioned there of 7th June 1991 (Annex 1) as well as the addenda and amendments in accordance with subsequent Article 2 the Yakut participant is freshly included as a participant in the TAKT Joint Venture. The Yakut participant takes over the rights and obligations under the aforementioned contract as they have so far existed for the Yakut Russian participant. Article 2 2.1. The contract relating to the formation and activities of the TAKT Joint Venture is hereby amended as follows: a) Preamble The first paragraph is amended as follows: "The State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Enterprise, which in accordance with the decree of the Government of the Republic of Sacha of 14th October 1992 No. 848-r has to take over all the shares in joint ventures from the State Administration organs." b) Paragraph 7 point 2 is amended as follows: "The funds as laid down in the Articles of Association shall be formed as follows by the parties to the contract by cash inpayments in the form of inpayments to the current accounts to be formed of the joint venture for Roubles and for freely convertible currency or by non-cash capital contributions, to be approved by the Managing Board: 1. Austrian Participant Cash inpayment or Non-cash capital contribution Totalling US $1,000,000 2. Yakut participant Cash inpayment or Non-cash capital contribution Totalling US $1,000,000 payable in US$ or Russian Roubles, converted at the officially published rate of exchange of the State Bank of the Russian Federation on the date of inpayment or provision of the non-cash capital contribution. Total value of the inpayments US $2,000,000." c) Paragraph 7 point 4 is amended as follows: "The cash inpayments or non-cash capital contributions shall become due for payment at the latest thirty days after receipt of all the necessary approvals for the licenses in accordance with Paragraph 4.4 and the exploration and production splitting contract." d) Paragraph 8 point 1 is amended as follows: "In addition to the inpayments of the parties to the contract to the funds in accordance with the Articles of Association the participants do hereby grant to the Joint Venture for the first phase (Exploration) of his activities fixed agreed private loans totalling US $28,000,000 (in words: Twenty eight million US Dollars), whereby each participant shall be responsible in accordance with the credit and loan agreements attached to this contract (Appendices 5 and 6) for US $14,000,000. (in words: Fourteen million US Dollars), payable in US$ or Russian Roubles, converted at the officially published rate of exchange of the State Bank of the Russian Federation on the date of inpayment or provision of the non-cash capital contribution." e) Paragraph 8 Point 4 is deleted and not replaced. f) Paragraph 28 Point 1, 1st paragraph is amended as follows: "-It will make available to the Joint Venture free of charge all geological, geophysical and other technical data relating to the sections mentioned in Appendices 2 and 3 of this contract, which are in the possession of companies, which are subordinate to the Yakut participant directly or indirectly." g) Paragraph 31. Point 5 is supplemented at the end with a new subparagraph "The rights and obligations of the two participants arising out of Paragraph 31 Point 5 also apply equally to companies, which are subordinate to one of the two participants, directly or indirectly." h) Paragraph 43 Point 1 Figure 5 and Figure 8 are amended as follows: "Credit and loan agreement between the State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Enterprise and the Joint Venture". Figure 8 is deleted and not replaced. 2.2. The Articles of Association of the joint venture TAKT are amended as follows: a) Paragraph 5 point 1 is amended as follows: "State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Enterprise" b) Paragraph 8 Point 2 is amended as follows: "1) The funds in accordance with the Articles of Association shall be formed as set out hereinafter by the parties to the contract by cash inpayments in the form of inpayments to the current accounts of the joint venture to be set up for Roubles and for freely convertible currency or by non-cash capital contributions, to be approved by the Managing Board: 1. Austrian participant: Cash inpayment or non-cash capital contribution totalling US $1,000,000 2. Yakut participant: Cash inpayment or non-cash capital contribution totalling US $1,000,000 payable in US$ or Russian Roubles, converted at the officially published rate of exchange of the State Bank of the Russian Federation on the date of inpayment or non-cash capital contribution. Total value of the inpayments US $2,000,000. c) Paragraph 8 Point 4 is amended as follows: "The cash inpayments or non-cash capital contributions shall become due at the latest thirty days after receipt of all the necessary approvals for the licenses in accordance with Paragraph 4.4 and the exploration and production splitting contract." d) Paragraph 9 point 1 is amended as follows: "In addition to the inpayments of the parties to the contract into the funds in accordance with Articles of Association the participants do guarantee to the joint venture for the first phase (exploration) of its activities fixed agreed private loans totalling US $28,000,000. (in words: Twenty eight million US Dollars), each participant being responsible in accordance with the credit and loan agreements (Appendices 4 and 5) attached to this contract for US $14,000,000. (in words: Fourteen million US Dollars), payable in US$ or Russian Roubles, converted at the officially published rate of exchange of the State Bank of the Russian Federation on the date of inpayment or the non-cash capital contribution." e) Paragraph 9 point 4 is deleted and not replaced. f) Paragraph 32 point 1 Figure 4 and Figure 7 are amended as follows: Figure 4 "Credit and loan agreement between the State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Enterprise and the Joint Venture" Figure 7 is deleted and not replaced. 2.3 The State Committee of the Republic of Sacha for Privatisation, Antimonopoly Policy and Support for Environment will enter with the TAKT joint venture into a credit and loan agreement in accordance with Appendix 2. The credit and loan agreement shall be included as an integral component and commercial principle of the contract governing the formation and activities of the Joint Venture as Paragraph 43.1 Point 5 and as Paragraph 32.1 Point 4 of the Articles of Association. Article 3 All other paragraphs and appendices of the Contract relating to the formation and activities of the joint venture as well as the Articles of Association remain in force unchanged. In the name and on the instructions of (Stamp and signature THE STATE COMMITTEE OF THE REPUBLIC dated 21.04.93 of the OF SACHA FOR State Committee of PRIVATISATION, ANTIMONOPOLY POLICY AND Sacha) SUPPORT FOR ENTERPRISE (Signature of Helmut Langanger) In the name and on the instructions of OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. Last part - Contract EX-10 5 Exploration and Production-Sharing Contract for hydrocarbons between Republic of Sacha (Yakut) and Russian Federation on the one hand and The Sacha - Austrian Joint Venture TAKT on the other TABLE OF CONTENTS Preamble Article 1 Definitions Article 2 Object of the contract Article 3 Contractual area Article 4 Duration Article 5 Surrender of areas Article 6 Minimum work obligation Article 7 Discovery, estimating, commercial discovery Article 8 Apportionment of hydrocarbons extracted, recovery of costs, production sharing Article 9 Evaluation of hydrocarbons Article 10 Marketing of natural gas Article 11 Accounting and cost apportionment Article 12 Rights and obligations of TAKT Article 13 Provision of goods and services Article 14 Rights of the representatives of the Government Article 15 Joint extraction from a deposit Article 16 Taxes and levies Article 17 Internal demand Article 18 Promotion of natural gas projects Article 19 Currency and Bank Accounts Article 20 Ownership of assets Article 21 Liability and insurance Article 22 Transfer of shares Article 23 Secrecy and confidentiality Article 24 Notifications Article 25 Arbitration Article 26 Language of the contract Article 27 Force majeure Article 28 Validity clause Article 29 Bonus Article 30 Miscellaneous Article 31 Amendments and addenda to the contract Article 32 Government Article 33 Entry into force Preamble TAKT was formed on 7th June 1991 by PGO Lenaneftegasgeologija and OEMV (JAKUTIEN) Exploration Gesellschaft m.b.H. and on l8th August 1991 was registered by the Ministry of Finance of the RSFSR, in order to make a fundamental contribution to the development of Yakut in the field of developing hydrocarbons. By a decision of the Managing Board of TAKT on 10th September 1998 the Nationale Erdoel - und Erdgasgesellschaft Sachaneftegas was included as a new founder on the Yakut side. Confident of the conclusion of this contract TAKT has already sunk and attested a borehole to a final depth of 2928 m in the contractual area, reprocessed seismic data and has interpreted 2090 km of unreprocessable seismic data. On 21st February 1992 the law concerning natural earth resources of the Russian Federation was published, and mentioned the conclusion of exploration and production sharing agreements. On 22nd December 1992 the law of natural earth resources of the Republic of Sacha (Yakut) became effective. On 24.12.1993 a Decree relating to matters of production sharing agreements for the utilisation of the natural earth resources, No. 2285 was published by President Yeltsin. The geological companies of the Republic of Sacha (Yakut) have collected and evaluated extensive geological and geophysical data in the areas. By disposition of the Government of the Republic of Sacha (Yakut) of 25th January 1994 the Ministry of Industry of the Republic of Sacha (Yakut) was empowered, to sign this contract as representative of the said Government. On the basis of the common aim of the parties, to utilise the hydrocarbons in the Republic of Sacha (Yakut) efficiently and on a profit-making basis, the parties have reached agreement as follows: Article 1 Definitions Activities: this means all the activities, which are the object of this contract. Export point: means any point at which the crude oil will be handed over to TAKT FOB Export port. The export port will be agreed between the parties hereto. Contractual area: means Section 1 and Section 2, shown on the map in Appendix 1. Extraction area: means any part of the contractual area, marked and indicated as such by TAKT and will also include all the reserves of hydrocarbons of a commercial discovery. After conclusion of the activities in accordance with Art. 7.1 the extraction area may be extended by TAKT, if the results of these activities indicate a greater extension of hydrocarbons. Strike (discovery): means the discovery of hydrocarbons regardless of the quantity. Hydrocarbons deposit: means the hydrocarbons in accordance with Article 8 Point 7. Entry into force of the contract: means that date on which the last approval was issued for the validity of the contract in accordance with Article 33. Calendar year: means a year that begins on 1st January and ends on 31st December. Hydrocarbons: means crude oil of various degrees of density, asphalt, natural gas, condensate and any other substances containing hydrocarbons, found in the contractual area and which can be extracted, as well as any substances, which can be obtained therefrom, including sulphur, helium, carbon dioxide and other hydrocarbons. Costs: means all those costs, incurred in connection with exploration, estimating, development and extraction, regardless of whether these are investment costs or operating costs, storage costs, marketing and export costs, loan costs for outside financing, royalties, the legally specified VAT, personnel costs including legal levies and voluntary additional payments, interest amounts in accordance with Art. 8 point 5 and 6, bonus in accordance with Article 29, amounts, used for apportionment to funds set up by TAKT as well as any further costs, listed in the offsetting agreement. Costs also covers costs for projects for the economic and social development of Yakut, incurred by TAKT. Hydrocarbons costs: means the hydrocarbons in accordance with Article 8, point 4. Commercial extraction: means any date, from which TATK on the basis of delivery agreements conveys crude oil or natural gas out of the extraction area. The date shall be stipulated individually for each commercial discovery. Extraction for test purposes shall not be considered as commercial extraction. Commercial discovery: means a discovery or strike in the contractual area, which in the opinion of TAKT has the potential, to be developed and extracted in the future on a financially viable basis. Party or parties: means the Government or TAKT or both together as well as their legal successors. Production period: means the period from the commencement of commercial extraction, lasting 20 years, if not extended in accordance with Article 4. Government: means the Government of the Republic of Sacha (Yakut) ("RS") as the legitimate representative of RF and the Government of the Russian Federation ("RF") as the legitimate representative of the RF. Royalty: means the extraction interest of 8 % of the available hydrocarbons, which will be made available to the Government of TAKT at the handing over point or will be paid in cash. Standard cubic metre or SKM: means the quantity of gas, which is necessary, to fl1 a container of 1 cubic metre at the atmospheric pressure of 101.325 kPA and at a temperature of 0 degrees Celsius. Hand over point: means the point at which hydrocarbons are handed over to the customer in accordance with delivery agreements and measured. Offsetting contract: means the document, attached hereto as Appendix 2 and which contains detailed rules and regulations concerning cost accounting. Contract: means this exploration and product sharing contract including Appendices 1, 2, 3, 4, 5 and 6. Article 2 Object of the contract 2.1 The object of this contract is any activities for the exploration, development, extraction including processing, storage, marketing, transportation and exporting of hydrocarbons in the contractual area as well as any auxiliary activities, connected therewith. 2.2. The Government grants TAKT thc exclusive right, during the period of validity of the contract and in the contractual area to undertake activities and to freely export the hydrocarbons in accordance with the conditions of this contract. The Government does hereby guarantee that the licences, which are necessary to carry on the activities and which are not attached to th1s contract as Appendix 4, will be issued immediately by the Government or its administrative sub-units. Any costs for the issue of such additional licences shall be covered with the portion of the Government in accordance with Article 8.7. If licences have not been issued within one month after an application has been made by TAKT, then the period of validity of the contract shall be extended accordingly. 2.3 The licences, necessary in accordance with Yakut and Russian legislation for the utilisation of the natural earth resources, have been agreed between TAKT and the Government and are attached to this contract as Appendix 4. Article 3 Contractual area 3.1 The Government does hereby guarantee that Appendix 1, may be used exclusively by TAKT for the duration of the contract. If for this purpose the cooperation of administrative departments of the RS is necessary, then allocation shall be effected by the Government and these departments jointly. 3.2. TAKT undertakes, to make available the following amounts to the administrative departments of RS for projects for social development purposes: Exploration phase(s): 2.5% of the costs of TAKT for searching and surveying. Development phase: Up to 2% of the costs of TAKT for the development of petroleum or natural gas deposits. TAKT shall not make available more than US$ 30 million for such projects. TAKT and the administrative department shall decide jointly on the projects to be promoted. 3.3 If in the opinion of TAKT an extraction area extends beyond the contractual area, then this area shall become part of the contractual area, if it has not been given to another company. In this case the Government undertakes to grant licences to TAKT, on the same conditions as apply to the original contractual area. 3.4 If the partners agree, additional areas may also be included as part of the contractual area. 3.5 The Government undertakes, to grant to TAKT all the rights which are necessary for the construction of pipelines and transportation of hydrocarbons, if such pipelines go beyond the contractual area. 3.6 If on the territory of the Republic of Sacha (Yakut) TAKT receives further licences for searching and extraction of hydrocarbons, then TAKT may offset the costs of each other licence with the costs of this contract. Article 4 Duration 4.1 The first exploration period shall last five years from the entry into force of the contract. TAKT is entitled, to extend the first exploration period by a further, second exploration period of 5 years, if tax has fulfilled its obligations completely from the first exploration period. TAKT must inform the Government at the latest 3 months before commencement of the first exploration period, if TAKT wishes to move into the second exploration period. 4.2 If at the latest at the end of the second exploration period an extraction area has not been designated by TAKT, the contract shall be deemed to be terminated. 4.3 The first and/or second exploration periods shall be automatically extended, if on the date of the end of the relevant exploration period a borehole has in fact just be sunk. The extension shall be valid for a period of three months, after the final depth has been reached in accordance with the drilling plan. This extension shall not apply to the sinking of the borehole(s) in accordance with Arts. 6.1 and 6.2. 4.4 Concerning any extraction area the contract shall remain valid for 20 years from the commencement of commercial extraction. If in the opinion of TAKT after the expiry of the 20 year period commercial extraction shall be guaranteed, then TAKT shall be entitled, to extend this contract. The freshly negotiated conditions, may not be worse than the conditions applicable until that point in time. TAKT shall have at least 12 months before the expiry of the production period to notify the Government, that it is going to exercise the right to extend the production period by as many years as the extension totals and whether it wishes, on the basis of financial features, to freshly negotiate parts of the contract. If TAKT wishes a fresh negotiation, the parties shall make the greatest efforts, before the commencement of the extension of the production period, to come to an agreement. 4.5. If before commencement of commercial extraction the parties conclude a natural gas delivery contract, the period of validity of which is longer than 20 years, then the production period shall automatically last as long and the possibility of an extension shall only arise after that. Article 5 Relinquishment of areas 5.1 If TAKT does not go into the second exploration phase, then it must relinquish all areas with the exception of the extraction areas on the expiry of the first exploration period. 5.2 After the expiry of the second exploration period, TAKT must relinquish all those parts, which it has not designated as extraction areas. 5.3 During the exploration period TAKT may voluntarily give up parts of the contractual area, but without however being released from the obligations of the minimum work obligation. The relinquishment of areas in accordance with this Article 5.3 shall become legally effective 30 days after the receipt by the Government of an appropriate notification. 5.4 At the end of the relevant exploration period TAKT will retain areas, which are in Section 1 and/or Section 2, to the Government, which in the opinion of TAKT are no longer worth exploration. 5.5 In accordance with standard practice throughout thc world in the petroleum and natural gas industry as well as in accordance with the rules, which in the RS apply to the area of environmenta1 protection and protection of the natural earth resources, TAKT will restore the areas, which it has to hand back in accordance with this Article 5 and on which it has carried out survey and extraction activities. Article 6 Minimum work obligation 6.1 During the first exploration period TAKT must fulfill at least the following work obligation: 6.1.1 In Section 1 TAKT shall especially carry out the following tasks: -- Processing of seismic data - 850 km; -- Evaluation of seismic information -- Simulation and drawing up of the geological and facies maps -- The sinking of a test bore with breakdown and information concerning the subsalinary deposits. 6.1.2 In Section 2 TAKT shall carry out especially the following tasks: a) Verchnemurbaysk Area: -- Processing of seismic data - 820 km -- Evaluation of seismic information -- Technical and economic evaluation of the area on the basis of the seismic interpretations; -- On proof of the financial viability on extraction in the opinion of TAKT -- drilling work to the extent to be stipulated by TAKT. b) Otradrunsk area: -- Processing of seismic data - 420 km -- Evaluation of seismic information -- Sinking of two test holes, whereby borehole 314-2 will be included. 6.3 During the second exploration phase TAKT must fulfill a minimum work obligation stipulated by TAKT. 6.4 The minimum work obligation for the first or second exploration period shall be deemed fulfilled, if the works have been completed in accordance with Art. 6.1 or Art. 6.2. Should TAKT not have fulfilled the minimum work obligation in accordance with Art. 6.1 or 6.2, then TAKT shall pay to the Government the differential amount between the amount actually expended for the activities and the sum of US$ 30 million. (Art. 6.1) or US$ 15 million (Art. 6.2). After fulfillment of the relative minimum work obligation TAKT may cancel the contract without further claims on the part of the Government. If the works in the first exploration period exceed the scope laid down in Article 6 Point 1 or an amount was expended which exceeds US$ 30,000,000, then the works and amounts of money shall be charged to the minimum work obligations of the second exploration period. 6.4 The Government recognises that, even before the entry into force of this contract, TAKT has carried out the following geologica1 and geophysical works and drillings, which as a result shall be recognised as partial fulfillment of the work obligation in accordance with Art. 6.1: -- sinking of borehole 314-2 and test investigation in Section 2, Otradinsk area (final depth 2928 m) -- reprocessing of 865 km seismic data and probably a further 100 km -- Interpretation of 2090 km of unreprocessable seismic data. For these works costs have been accumulated in accordance with the Table in Appendix3. These costs may be recovered as hydrocarbons costs in accordance with Article 8. In addition any costs of TAKT shall be recognised as recoverable, which can be properly proven by means of vouchers and documentation and are connected with the works in accordance with Article 6 Point 4 as well as costs for additional works before and after the signing of this contract. 6.5 If a drilling in accordance with Article 6.1.1 or 6.1.2 does not reach the planned drilling target for technical reasons, then the drilling obligation shall be considered as fulfilled, if in the opinion of TAKT every technical possible and economically sensible efforts have been made, to reach the drilling target. Article 7 Discovery, estimating, commercial discovery 7.1 Within 60 days after TAKT has made a discovery, the Government is to be informed. After the Government has been informed TAKT may declare a commercial discovery and designate an extraction area. In this case TAKT shall have the possibility of carrying out studies, and if necessary and economically justified, of effecting additional drillings for more precise determination of all the fundamental parameters of the deposit discovered. These activities may, but need not be carried out during the first and second exploration period. If carried out during the two exploration periods, the costs shall be charged to the relevant task obligations in accordance with Article 6 Point 3. If TAKT has not carried out the aforementioned activities in an extraction area by the end of the second exploration period, then TAKT shall have a further period of five years or shall be entitled to cancel the contract. 7.2 After the termination of the activities in accordance with Art. 7.1 TAKT must within two years submit a development project to the Government, in accordance with the International Standard of the oil industry taking into account local features or the contract shaft be considered as canceled. TAKT shaft be entitled, to carry out the development project including amendments and addenda made by TAKT with the aim of commercial extraction. The date for the commencement of the development project shall be stipulated by TAKT based on the conclusion of delivery agreements for the hydrocarbons to be extracted at world market prices, in convertible currency and financially tolerable conditions or in accordance with the existence of detailed rules and regulations in accordance with Article 17 Points 1 and 2. Article 8 Allocation of extraction Recovery of costs Production sharing 8.1 TAKT must make available any cash amounts, necessary for the completion of the activities, and may only recover its accumulated costs from the hydrocarbons costs. TAKT shall be entitled to freely use extracted hydrocarbons to the extent required for the carrying out of the activities. 8.2. The extracted hydrocarbons which are not needed for carrying out the activities ("available hydrocarbons") shall be measured at the transfer point and shall be split up at the transfer point in accordance with the following conditions. 8.3. 8% of the available hydrocarbons shall be made available to the Government at the transfer point as royalty or shall be paid in cash. Royalties are recoverable within the framework of the hydrocarbons costs. 8.4. TAKT shall be entitled to recover its accumulated costs from up to 90 ./0 of the available hydrocarbons after deduction of the royalties ("hydrocarbons costs"). The type and method of recovery of the costs for individual cost types shall be established by TAKT. 8.5. The costs incurred through carrying out the activities up to the beginning of commercial extraction, financed from own funds or loans not bearing interest, shall bear interest half-yearly. The applicable interest rate shall be the 6 month Libor for US$. The costs for each half-year shall be totaled up at the end of the half- year and shall bear interest at the interest rate applicable on the first day of the half-year. The interest amounts determined for each half year shall be added to the costs for the next half-year. 8.6. If the costs accumulated before and after commencement of commercial extraction cannot be recovered within one year, then costs not recovered shall be carried forward to the next year, and indeed for as long as necessary until all costs have been recovered. All costs not recovered in one year shall bear interest for the prior year and the interest amounts do determined shall be added to the costs for the next year. Loans taken up from Banks shall be excepted from bearing interest. 8.7. Those quantities of available hydrocarbons, which are not used as hydrocarbons costs ("hydrocarbons deposit"), shall be split up as follows between TAKT and the Government: Portion of the Government: 40% Portion of TAKT: 60% The total portion so determined for TAKT of hydrocarbons recovery shall be taxed at a rate of 24%. Regardless of any change in laws, the tax rate shall be maintained during the whole period of validity of the contract. 8.8. During a current calendar year the costs and proceeds shall be estimated on the basis of assumptions by TAKT, which will also form the basis for the splitting of the hydrocarbons. Within three months after the expiry of each calendar year TAKT will forward to the Government annual accounts, which will contain the actual results of the year which has expired. Differences between the provisional splitting of hydrocarbons during a current calendar year and the result of the annual accounts must be equalised within the following calendar year. 8.9. Regulations concerning the shipment of hydrocarbons are to be agreed between the parties hereto before commercial extraction. Article 9 Evaluation of hydrocarbons for hydrocarbons costs, hydrocarbons recovery and tax assessment 9.1. Natural gas shall be valued at the average of the price, which was achieved by the Government and TAKT at the transfer point in accordance with a natural gas delivery contract during the previous quarter. 9.2. Crude oil shall be valued at the average of the export price, which was achieved by TAKT during the previous quarter. Export price means the price FOB export point, as would be achieved between non-bound companies and on the basis of the triple comparison in freely convertible currency. Deductions on account of sales or trading discounts shall be restricted by TAKT to the internationally customary extent. 9.3. If TAKT sells crude oil to a bound company, then the average price of the past quarter shall be determined on the basis of the quotations published in Platt's for crude oil of comparable quality and destination. 9.4. The aforementioned rules shall be adjusted within the framework of the annual cost recovery account to the average price actually applicable to a quarter. Article 10 Marketing of natural gas 10.1. The Government and TAKT may jointly export natural gas and for this purpose conclude a natural gas delivery contract with one or several buyers. 10.2. If for the financial viability of a natural gas export contract the quantities of TAKT should not be adequate, then the Government TAKT will make the greatest possible efforts to achieve the joint sale of natural gas. Article 11 Accounting, and costing 11.1. TAKT must keep its commercial ledgers in accordance with the specifications of the offsetting contract, the principles internationally recognised in the oil industry and the internal TAKT accounting regulation. To determine the value of hydrocarbons costs and hydrocarbons recovery, TAKT will use only the US$ as the currency. 11.2. Within 90 days from the end of a calendar year TAKT must forward to the Government a list of the costs accumulated in connection with the activities. 11.3. After recording commercial extraction TAKT must additionally forward a report to the Government concerning the quantity of the extracted hydrocarbons for the drafting of the costs. 11.4. The Government shall be entitled at its own expense to check the annual cost accounting including the relevant documentation of TAKT regularly for purposes of correctness. If the Government does not check the cost accounting within 12 months from 31st December of any year in which the costs have been incurred, then the costs shall be deemed to have been accepted and the Government shall not be able to make any later objections to the costs contained in the cost accounting documents. The costs contained in the cost accounting system shall be deemed as the basis of the cost recovery in accordance with Article 8. 11.5. If the Government has undertaken a check in accordance with Article 11.4, the Government must make available to TAKT in writing the results of the check within 6 months from the end of the said check. The Government may only make the following objections: -- the figures of the cost accounting are not correct; -- the costs for acquired goods and services criteria are not in accordance with Article 13.4; -- Payments for goods and services are not in accordance with the relevant contracts of the suppliers; -- the quality of the goods, taking into account the market situation, is not in accordance with the price paid. 11.6. If the Government and TAKT cannot agree on the test results, then if necessary the international centre of experts of the International Chamber of Trade, Paris, may be called in, in accordance with the procedure relating to the expert report required by the Chamber. Article 12 Rights and obligations of TAKT 12.1. At the latest 30 days after the entry into force of this contract TAKT must appoint a representative as the correspondent (interlocutor) for the Government. 12.2. In accordance with the applicable legal situation, during the period of validity of this contract, representatives of TAKT as well as other persons appointed by TAKT shall at any time have free access to the contractual area. 12.3. Without further approval all the machines and plants necessary for the completion of the activities may be brought into the contractual area and set up and operated there, provided the machines and plants, are in accordance with the international standard. 12.4. TAKT must bear all costs connected with the activities and may only recover these costs from the hydrocarbons costs. 12.5. TAKT shall be entitled, to use public facilities, such as roads, on conditions which do not discriminate against TAKT compared with third parties. Subject to the widest possible protection of nature, TAKT shall be entitled to build roads and other traffic routes in the contractual area, if necessary for the activities. In response to queries from the Government TAKT shall generally permit the utilisation of these roads and traffic routes, provided this does not restrict TAKT in its activities and does not give rise to any additional financial burden. 12.6. For purposes of the activities in the contractual area TAKT may make use of the raw materials which exist there, such as sand, rocks, water and timber, in the necessary scope and on conditions which do not discriminate against TAKT, compare with third parties, 12.7. If necessary for the activities, TAKT shall be entitled to sink water wells. 12.8. Taking into account local features TAKT must carry out its activities in accordance with the conditions of this contract as well as the internationally recognised standards governing the petroleum and natural gas industry. The activities shall be carried out efficiently, safely and so as to save costs with the aim of achieving the best financial and economic exploitation of the deposits. 12.9. When carrying out the activities TAKT must ensure that it avoids to the greatest extent possible: -- the loss of hydrocarbons above and below the surface of the earth -- damage to rock formations which carry hydrocarbons -- the unintended penetration of water into rock formations carrying hydrocarbons -- environmental pollution and damage. TAKT shall accept no liability for damage to the environment in the contractual area, which occurred before this contract became effective. The activities of TAKT in the field of environmental protection are listed in Appendix 5. 12.10. TAKT must inform the Government half-yearly of the activities and forward reports to it in accordance with the regulations of the Government relating to statistical reports. 12.11. Within 6 months from expiry of the first or second exploration phase TAKT will submit a geological report to the Government. 12.12. Within 6 months from the end of the contract TAKT will forward to the Government drilling cores and other technical data, which have come into the possession of TAKT during the period of validity of the contract. Article 13 Provision of goods and services 13.1. TAKT must make available itself or through subcontractors, who would be selected by TAKT, all the materials, machines, plants and other equipment as well as services for the activities. 13.2. The number and remuneration of the employees, involved in the activities, shall be determined solely by TAKT, whereby the remuneration must not be less than the legally stipulated minimum. 13.3. TAKT shall make every effort to ensure that the majority of the employees are citizens of the RF and that these employees are allowed further education specific to their trade or profession in accordance with the directives laid down by TAKT. 13.4. For orders to subcontractors, which go above an amount of US$ 500,000 TAKT shall be obliged to instigate a tender competition. TAKT must place the order with the company, which in the opinion of TAKT as regards price, quality, delivery time and technical skills best satisfies the requirements of TAKT. In the event of equality of bids or tenders, Russian and Yakut companies must be given preference. Article 14 Rights of the representatives of the Government 14.1. Representatives of the Government shall by prior agreement with TAKT be entitled to access at any time to the contractual area and may examine all documents on the spot, inspect items of equipment as well as generally observe the activities. 14.2. The access of the representatives of the Government shall be at their own risk and expense. They shall not have any right to intervene directly in the activities or give instructions concerning the activities, provided the activities are not in conflict with this contract and are in accordance with the laws. In response to prior notice in good time of a visit of the representatives of the Government, they will be offered the same accommodation and subsistence possibilities as the employees of TAKT. The number of visitors as well as their stay time shall be agreed between the Government and TAKT. 14.3. The Government shall grant TAKT the greatest possible support in obtaining visas, work permits and any other approvals necessary for Yakut, Russian and foreign employees as well as employees of subcontractors. Article 15 Joint extraction from a deposit 15.1. If an extraction area extends beyond the borders of the contractual area and this adjacent area has been placed with another company within the framework of a licence agreement, the Government, if the companies affected do not reach agreement within a reasonable deadline, may request in writing, that this extraction area be developed uniformly and that a joint development project be submitted. 15.2. If this development project is not submitted within a year following a written request from the Government and the Government does not grant any extension of this deadline, then the Government may request that an internationally known consultancy company prepare this development project. As regards the costs of the consultancy company the companies affected must reach an appropriate agreement. If no agreement is reached, the costs shall be borne in the ratio of the hydrocarbons reserves of the relevant company to the hydrocarbons reserves of the whole development project. 15.3. All measures for the preparation and execution of the development project shall require a contractual settlement between the companies affected. Article 16 Taxes and levies 16.1. TAKT is obliged to pay taxes on hydrocarbons VAT recoveries and the legally specified up to a maximum rate of 20 % in accordance with the conditions of this contract and royalties in the form of hydrocarbons to be delivered in accordance with Article 8 Point 3 to the Government or in cash, valued in accordance with Article 9. Within the framework of the development project in accordance with Article 7 Point 2 TAKT and the Government shall reach agreement as to whether the taxes and levies are to be paid in cash or in hydrocarbons. In consideration thereof the Government does hereby guarantee that TAKT shall be exempt from all other taxes, levies and fees (i.e. fees for the transfer of the land (lease agreement)), of any kind whatsoever, during the period of validity of this contract. The share of the Government in hydrocarbons recoveries in accordance with Article 8 Point 7 shall cover, in addition to other expenditure, also the expenditure described in this paragraph. This exemption from tax shall only apply to activities connected with this contract. 16.2. The Government does hereby guarantee that TAKT and its employees in the RS and RF shall not pay any import and export duties, or any other levies of any kind whatsoever, for goods, including goods required daily, involved directly and indirectly with the activities. This guarantee also applies to subcontractors appointed by TAKT. 16.3. The Government does hereby guarantee and shall not be subject to the regulations to compulsory purchase for foreign exchange either when importing or exporting capital. 16.4. Taxes and levies shall be paid within 30 days after the termination of each quarter on the basis of the provisional prices and quantities. Within 90 days from the end of a calendar year the taxes and levies shall be established on the basis of exact prices and quantities for the preceding calendar year. Credits in favour of the Government or TAKT shall be settled with the first payment of the current calendar year. 16.5. The aforementioned guarantees apply both to the currently existing and also any future legal situation. Article 17 International demand 17.1. Should natural gas be needed to settle internal demand, then TAKT shall conclude a natural gas delivery contract with the Government, which will provide for the payment of TAKT in convertible currency at an agreed price. Taking into account Article 10 the Government and TAKT must reach an agreement on the quantities, which are to be available to satisfy internal demand. 17.2. In the event of the commercial extraction of crude oil and condensate TAKT shall sell to the Government that part of the available crude oil and condensate, accruing to it in accordance with Art. 8 Points 4 and 7. As purchase price the Government does hereby undertake to make available to TAKT the same quantity of crude oil and condensate taking into account quality differences at the point of export. Detailed regulations are to be agreed between the parties on conclusion of the activities in accordance with Art. 7 Point 1. There need not be any exchange, if the Government pays for the crude oil and condensate in convertible currency at world market prices. The world market price or the quantity of crude oil and condensate made available at the point of export shall be reduced by an amount or a quantity, which will be stipulated between the Government and TAKT and take into account transport costs. Article 18 Promotion of natural gas projects In accordance with the development of the natural gas potential of the RS and in view of the activities of TAKT, working as the first Yakut-Austrian Joint Venture searching for hydrocarbons in the RS, the Government will make the greatest possible efforts, to allow TAKT the earliest possible connection to the pipelines for the exporting of natural gas and produce all the necessary documents and take all the necessary resolutions to have a positive effect on natural gas extraction by TAKT. Article 19 Currency and Bank accounts 19.1. To calculate costs and income and to calculate the expenditure obligation in accordance with Artic1e 6 TAKT will use US Dollars as the currency. 19.2. To calculate expenditure in Roubles generally the rate of exchange at which TAKT can obtain Roubles against Dollars shall apply. 19.3. To calculate income in Roubles the same rate of exchange at which TAKT can obtain US Dollars against Roubles shall apply. 19.4. The Government guarantees TAKT the right at any time to free payments in convertible currency from and to the RS and RF. 19.5. TAKT shall be entitled to set up and open accounts abroad at any time for freely convertible currency and freely dispose of the cash deposited there, without the cash having first to be transferred to the RS or RF. 19.6. TAKT shall be entitled, taking into account the applicable double taxation agreements, to make dividend payments to its foreign participants, as well as fulfilling loan and other monetary obligations, without deductions of any kind whatsoever from accounts in the RS and RF or from accounts abroad. Article 20 Ownership of assets 20.1. All assets, which TAKT acquires and the purchasing costs of which are recoverable as hydrocarbons costs, shall transfer into the ownership of the Government on the date on which the costs for these have been recovered. 20.2. During the period in which these assets are used for the activities, TAKT shall have an unrestricted and free right of utilisation 20.3. On termination of the contract TAKT shall in no way be liable for the condition of the assets. 20.4. Article 20.1 does not apply to assets leased by TAKT or provided by subcontractors. Article 21 Liability and insurance 21.1. In accordance with the applicable legal situation ~e assets procured by TAKT for the activities shall be insured with insurance companies of the RS or RF. 21.2. The conclusion of other insurance policies such as risk insurance, operating interruption and third party liability insurance policies as well as the usual international insurance policies for exploration and extraction activities shall be at the discretion of TAKT. 21.3. TAKT shall be liable to the Government only for those direct damages, caused by gross negligence or deliberately by executives of TAKT. Liability for consequential damages, of any kind, is excluded. 21.4. TAKT undertakes, to release the Government from the claims of third parties, the damages of which have been caused by TAKT or its representatives, insofar as these actions were not taken in accordance with this contract. TAKT cannot however be made liable if TAKT has no possibility of exercising direct control in accordance with the standard practices of the international petroleum and natural gas industry. 21.5. The Government does hereby undertake to release and exempt TAKT from the claims of third parties, damages to which have been caused by actions of the Government or its representatives. Article 22 Transfer of shares 22.1. Without the prior consent of the Government TAKT shall not be entitled to transfer right and obligations under this contract either partly or wholly to third parties. 22.2. The consent of the Government may only be refused for important reasons, concerning the financial and social situation or for reasons of national security. 22.3. Within 45 days after written notification by TAKT the Government must state in writing whether any of the reasons in accordance with Article 22.2. prevail. If TAKT receives no comments, then the transfer shall be considered as approved by expiry of the 45 day deadline. The Government undertakes to sign the agreements to be amended as a result of the transfer. 22.4. On the basis of proceeds from the transfer of rights and obligations under this contract TAKT need not pay any taxes or fees. 22.5. For the legal effectiveness of the transfers of rights of obligations under this contract the consent of the Government will be adequate. An approval in accordance with Article 32 is not necessary. Article 23 Data and confidentiality of data 23.1. During the period of validity of this contract TAKT must preserve technical documents as well as a selection of drilling cores and other rock samples for a reasonable period of time and at the request of the Government make them available or allow them to be inspected by the Government, whereby the activities of TAKT must not be prejudicially affected by this. 23.2. TAKT shall be entitled at any time to use or evaluate parts of the rock samples as well as other technical documents inside and outside the RF and RS. 23.3. These rock samples and technical documents may only be passed on by the Government and TAKT to executive, subcontractors, consultancy companies or bound companies. It must however be guaranteed, that these rock samples and technical documents shall be treated confidentially, and not passed on to third parties. TAKT may also pass on these rock samples and technical documents to companies, which are interested in a transfer of rights and obligations from TAKT under this contract. The prerequisite for the onward transmission is in connection with the activities. 23.4. The obligation to maintain secrecy and confidentiality shall end on the expiry of this contract. 23.5. All data and information relating to the contractual area, in the possession of the Government, authorities subordinate to it or in the possession of companies, controlled by the Government, shall be made available within 60 days after the entry into force of this contract to TAKT in the form of copies. Article 24 Notices 24.1. All notifications and notices, to be forwarded in accordance with this contract or in connection with it, must be in writing and sent to the following addresses and shall be considered as received. a) in the case of personal hand over on being handed over, whereby the addressee must confirm receipt; b) in the case of a registered letter on its arrival; c) in the event of a telex, when the telex sent bears a correct reply endorsement of the addressee in each case at the beginning and at the end, on the day after it is sent. 24.2. The Government and TAKT do hereby undertake to notify in advance in good time any change in these addresses. 24.3. Notifications and notices may be made both in Russian, English or in German. The recipient must always ensure translation. Article 25 Applicable law and Arbitration 25.1. The contract shall be subject to the law of tile Republic of Sacha (Yakut) and the Russian Federation. 25.2. Any disputes arising out of this contract, which cannot be settled amicably, shall be settled by a Court of Arbitration in accordance with the rules of UNCITRAL (Community of the United Nations for International Trading Law). The Court of Arbitration shall consist of 3 members. 25.3. The Court of Arbitration must conduct its proceedings in Zurich, Switzerland. 25.4. The Government waives the right to plead State immunity and does hereby subject itself to the Court of Arbitration and its decision as well as the execution of the Arbitration decision. Article 26 Language of the contract 26.1. The Russian and German version of this contract are both equally binding. 26.2. In the event of interpretation problems caused by translation an independent expert is to be appointed by the parties hereto and shall be responsible for preparing a proposal to solve the problem satisfying the financial and economic aims and the object of the Joint Venture. Article 27 Force Majeure 27.1. TAKT shall be released from liability for the complete or partial non- fulfillment or incorrect fulfillment of its obligations under this contract, if these disturbances are caused by events, which are outside the control of TAKT. 27.2. On the occurrence of the aforementioned events TAKT must immediately inform the Government thereof in writing, but no later than fourteen days after the occurrence thereof. The notice must give details of the nature of the events and - if possible - an estimate of the effects on the fulfillment of the obligations under this contract by TAKT as well as the probab1e date for the fulfillment of these obligations. 27.3. In the event of averting or on the termination of aforementioned events TAKT must inform the Government thereof in writing at once, but no later than after seven days. The notice must state a time, when the obligations under this contract shall probably be fulfilled. 27.4. On the occurrence of the aforementioned events fulfillment of the relevant obligations under this contract by TAKT shall be postponed by the time of the circumstances. Should these circumstances last longer than twelve months, then TAKT and the Government shall meet to determine the further procedure. 27.5 In accordance with Article 25 a decision shal1 be taken by the Court of Arbitration mentioned therein concerning disputes arising due to circumstances of force majeure. Article 28 Validity clause 28.1. Should individual articles of this contract or parts thereof be or become ineffective, this shall not affect the effectiveness of the other articles and the total contract. 28.2. The parties shall in such a case be obliged to replace the ineffective article or its ineffective parts by an article that comes closest to the financial purpose of the ineffective article. Article 29 Bonus TAKT undertakes to pay a bonus totaling US$ 840,000 on the entry into force of the contract to the Government. The Government recognises that TAKT has fulfilled this obligation on paying the same amount to Lenaneftegasgeologia as partial remuneration for the drilling of well 314-2 and there shall therefore be no further payments for this reason to the Government. Article 30 Miscellaneous 30.1. This contract consists of a main part, Appendix 1, Appendix 2, Appendix 3, Appendix 4, Appendix 5 and Appendix 6, which represent integral components of this contract. 30.2. In the event of conflicts between the main part and the appendices, the conditions of the main part shall be given precedence. 30.3. In the event of a conflict between the licences in accordance with Appendix 4 and the conditions of the main part of the contract, the conditions of the main part shall be given precedence. 30.4. The rights and obligations of the parties under this contract shall transfer to their legal successors. 30.5. The Government does hereby guarantee that on signing this contract only those further licences for the utilisation of the contractual area exist as listed in Appendix 6. Should there be problems in the simultaneous utilisation of the contractual area between TAKT and other licensees, the Government shall resolve this dispute also in view of the overriding significance of the search for and extraction of hydrocarbons for the development of the Republic of Sacha. Licences, given by the Government after the signing of this contract, shall contain a condition, providing for the preferential utilisation of the contractual area by TAKT. Under no circumstances however may licences be given, which have as their object the searching for and extraction of hydrocarbons. Article 31 Amendments and addenda to the contract. Any amendments and addenda to this contract must be in writing and in Russian and German and may only be undertaken by agreement between the representatives of the parties empowered for this purpose. Article 32 Government 32.1. The Government of the RS, represented by its competent organs and the Government of the RF, represented by its competent organs, do hereby guarantee the rights and entitlements granted to TAKT in this contract. The Government will hand down all the necessary documents and appoint and instruct the subordinate authorities in such a way that in its activities TAKT shall be able to enjoy these rights and entitlements. The rights, obligations and guarantees of the Government shall transfer to their relevant legal successors. 32.2. The Government shall within 30 days from the entry into force of this contract appoint a representative, who will be empowered to receive any notices in accordance with this contract. Notices from TAKT to this representative shall be considered as properly sent. Regardless of the effectiveness of the serving of notices, the Government shall immediately notify TAKT of the receipt of such notices. 32.3. If the Government appoints a representative as a replacement for the representative in accordance with Article 32.2. above, TAKT must be notified of this. The appointment shall become legally effective 10 days after receipt by TAKT of an appropriate notice. Article 33 Entry into force This contract shall become effective after being signed by the parties and after approval of the contract by the legislating bodies of the Republic of Sacha and the RF. The approvals must be published. In the name and on the instructions of The Republic of Sacha (Yakut) In the name and on the instructions of Russian Federation In the name and on the instructions of TAKT Appendix No. 1 Map and coordinates of the sections Two maps with Russian place names APPENDIX No. 2 Offsetting Agreement GENERAL CONDITIONS 1. Purpose The purpose of this offsetting agreement is to stipulate the principles of cost recovery and the cost recovery account in connection therewith, as well as the rules connected therewith for the costs, as Appendix 2 of the contract. All costs from the activities of TAKT, whether costs of exploration, the valuation and development of a discovery, or in addition costs of maintaining the current operation, as well as costs for processing and selling hydrocarbons and activities of TAKT connected therewith, are to be put into the KRR (cost recovery accounting system) and may be recovered from hydrocarbons costs. 2. Definitions The terms used in this offsetting agreement have the same significance as in the case of the definitions of the contract, unless additional definitions are given hereinafter. Cost recovery: the method by which the costs incurred by TAKT are deducted from the proceeds of the hydrocarbons sold by TAKT. Cost recovery account: in short, KRR. Account into which all the costs are put for purposes of cost recovery. Roubles: The currency or its successor currency currently applicable in the sovereign territory of the Government. Participant: The owners of the shares of the TAKT Articles of Association Fund. US-Dollars: The currency of the United States of America (USA), abbreviated to: USD or US$ - as well as its successor currency. 3. Currency and payments The unit of currency in which the KRR is to be conducted, is the USD. The USD is also the currency on the basis of which cost recovery is effected, whereby however TAKT shall be entitled at any time to choose a currency other than the USD. - -- Roubles and other currencies. To pay its expenditure and obligations in the RS and RF TAKT shall use the Rouble as currency. If payment in a currency other than the Rouble becomes necessary inside and outside the area of the Government and is permitted, TAKT may also pay in this other currency. - -- Rate of exchange -- For conversion of Roubles to USD and USD to Roubles the rate of exchange stipulated in Article 19.2 and 19.3 of the contract (i.e. on the date of signing of the contract the rate of exchange of the "MOSCOW INTERBANK CURRENCY EXCHANGE"). -- To convert expenditure in Roubles but also income in Roubles of TAKT into USD - for purposes of cost recovery accounting - TAKT shall take an average of the Rouble rate of exchange, in accordance with Art 19.2 or 19.3 of the contract, over the current month, and adjust Rouble transactions in this month, with the rate of exchange calculated in this way, into USD in the KRR. If only a few Rouble transactions are to be allocated to the current month TAKT may also use the daily rate. -- In transactions in all other currencies the rate of exchange in the KRR is to be used which corresponds to the daily rate at which thc basic transaction became payable for TAKT. With a multiplicity of such transactions TAKT may also form an average rate over the current month, and at this rate put transactions into the KRR in other currencies, related to the relevant month. 4. Financing TAKT shall be entitled to independently select the type and source of financing of its commercial activities, inside and outside the area of the Government COST RECOVERY ACCOUNT Cost items of the KRR are all those TAKT costs incurred by TAKT in connection with the activities. The costs and proceeds of TAKT incurred for other reasons are not the object of tile cost recovery and the KRR, and in addition shall not be the object of any split of hydrocarbons recovery between the Government and TAKT. Insofar as possible and if they exist, invoices are to be used as the TAKT vouchers for costs incurred. 1. Cost items The following are considered as costs in the sense of the cost items of the KRR: 1.1. Materials and items of equipment All equipment in connection with the materials and items of equipment purchased by TAKT to complete its activities. 1.2. Labour and personnel costs 1.2.1. Personnel costs of the employees of TAKT including taxes and any additional levies allocated to personnel to paid by companies. The earmarked wage portions which go above the legally stipulated minimum wage portion, will not be paid, in accordance with Article 16.1 of the contract and shall therefore not go into the KKR either. 1.2.2. Costs for labour services of third parties 1.3. Services 1.3.1. Costs for services acquired by TAKT from third parties. 1.3.2. Costs for services purchased from participants by TAKT within the framework of service agreements. 1.4. Administration costs All costs, connected with the administration of TAKT (i.e.: telephone fees, postal charges, . . . . .). 1.5. Joint costs 1.5.1. Joint costs are costs incurred directly by the participants of TAKT in connection with the following general services (i.e.: general management, general consultancy and monitoring of thc total project, legal auditing, financing and engineering services) and which are not regulated by the corresponding service agreements. 1.5.2. The following shall be offset to TAKT by the participants of TAKT for joint costs annually: 1.5.2.1. 10 % of the total costs of TAKT per annum for the first 30 million USD in expenditure per annum. 8 % if this expenditure is between 30 and 50 million USD. 5 % if the expenditure is between 50 and 100 million USD, and 3 % in the case of annual costs over 100 million USD. 1.5.2.2. The participants of TAKT in total shall put per annum 1,400,000 USD in the exploration phase and development phase, before commercial exploitation and 2,000,000 USD thereafter as a minimum of the joint costs in the KRR, if the remuneration determined above in 1.5.2.1. for joint costs of the participants exceeds the amounts listed here in USD in 1.5.2.2. 1.6. Leases, rights, bonus payments and patents. Any leases, lease costs, bonus payments as well as payments in connection with the acquisition and utilisation of all types of rights and patents. 1.7. Incidents (damages etc.) Costs in connection with any types of incidents such as loss, theft, accident, catastrophes, force majeure etc. 1.8. Insurance policies, premiums All types of premiums and insurance policies incurred as costs by TAKT. 1.9. Legal costs and costs for approvals Costs incurred by TAKT for legal advice, lawyers, Court proceedings, payments imposed on TAKT by Courts etc., including costs in connection with arbitration proceedings, as well as costs connected with the placing or acquisition of all types of licences and approvals. 1.10. Costs for ecological expenditure. Costs for ecological and environmental protection- related expenditure of TAKT. TAKT can independently stipulate the scope of its ecological and environmental protection-related expenditure and outlays. 1.11. Social Security, research and development costs 1.11.1. Costs for research financed by TAKT 1.11.2. Costs for training and further education, as well as any Social Security payments for the employees of TAKT. 1.11.3. Costs of social, cultural and economic promotion and infrastructure measures in favour of third parties financed by TAKT, especially however local and regional units of the Government. 1. 11.4. Costs for social expenditure in general, as well as costs in accordance with Art. 3.2. of the contract. 1.12. Capital costs 1.12.1. Costs of outside capital: Outside capital interest amounts, premiums, fees, continuous expenditure and other costs of outside capital, whereby the period of validity of the obligation entered into by TAKT with respect to the outside capital provider (i.e. short, medium and long-term credit lines) is insignificant. Outside capital costs may be recovered by TAKT regardless of the periods of validity of the obligations entered into by TAKT. 1.12.2. Costs of company's own capital that is to say the interest on the funds made available by the participants of TAKT, shall be stipulated by the rule in accordance with Article 8.5 and Article S.6 of the contract. These own capital costs, in accordance with Art. 8.5 and Art. 8.6 of the contract, shall be put into the KRR as costs. 1.13. Strikes, lockouts, confiscation and non-fulfillment Costs incurred by TAKT through strikes and lockouts, non-fulfillment by business partners, as well as Government emergency measures, as well as costs also incurred by TAKT in connection with the confiscation of property of TAKT such as goods, plant, hydrocarbons, etc. 1.14. Costs of erection, maintenance and operation Costs of erection, maintenance and operation of any items of equipment to carry out the activities of TAKT -- including buildings and other structures, as well as hydrocarbons stores and extraction equipment, such as tax, pipelines, the procurement of any infrastructure for the development of a discovery of hydrocarbons, the procurement of any infrastructure for the transportation of hydrocarbons, and including any costs in connection with the processing of hydrocarbons. 1.15. Taxes, royalties, customs duties, other levies All taxes, royalties, customs duties and any other levies to the Government, if not already dea1t with in Art. 8.3 of the contract, are to be put into the KRR as costs. 1.16. Miscellaneous costs Miscellaneous costs such as costs in connection with Bank accounts of TAKT as well as money remittances, costs in connection with money exchange (especially the changing of Roubles into USD and USD into Roubles), other shipping costs, costs for repairs and maintenance works, costs of organising meetings and conferences, travel costs, removal costs of communications equipment, computer costs, energy and power costs, freight and storage costs, transport costs including costs of the transportation of hydrocarbons by pipelines, liquefaction costs of gas, costs of medical care for employees of TAKT, payment of damages, miscellaneous tests costs, as well as any kinds of remunerations and premiums. 1.17. Initial project costs All the costs kept in the ledgers of TAKT incurred before the signing of this contract, may be put into the KRR of TAKT as costs after signing, in accordance with Appendix 3 of the contract. 1.18. Other costs Any other costs not explicitly listed in this section but incurred by TAKT in connection with its activities. 2. Proceeds 2.1. Proceeds from the sale of hydrocarbons. In accordance with Art. 8.4 of the contract TAKT shall recover its costs from the proceeds from the sale of disposable hydrocarbons. 2.2. Other sales proceeds Proceeds from the sale of goods and services purchased by TAKT, which TAKT bought for the completion of the activities are to be deducted from the costs listed in the KRR, provided and only insofar as they were first put into the KRR as costs. For this purpose proceeds are to be valued at the price achieved on the date of sale. 2.3. Proceeds from insurance policies and other premiums Proceeds for the TAKT from insurance payments and similar payments, as well as miscellaneous premiums, lease charges and rents - provided these proceeds are based on the activities of TAKT -- are to be put into thc KRR as proceeds. 3. Establishment of the KRR 3.1. The KRR shall be considered as audited and confined in all points, with the exception of the points objected to by me Government within the twelve month deadline. Only in these points shall the KRR be considered as not confined. Up to the final decision concerning a cost item objected to, this item shall be considered as properly put into the KRR. If there is no final decision concerning a cost item within two years after the putting of this item into the KRR, this cost item shall ~n any case be properly put into the KRR after the expiry of this two years. 3.2. If in connection with an audit or examination, areas of a participant of TAKT are affected then the Government -- represented by the body appointed to audit the KRR by the Council of Ministers of the RS -- may request of this participant, the confirmation of the Auditor of the partners concerning the proper nature of this cost item must be submitted to it. For the purpose of examining an item of the KRR of course the Government may not directly audit the documents of a participant. The audit is in any case to be conducted so that completion of the activities of TAKT is not prejudiced. In the event of a conflict the completion of the activities of TAKT shall take precedence over the interests of an audit. In each case however TAKT must make all reasonable efforts to cooperate to the fullest with the Government in carrying out an audit. 4. Cost types and time schedule of the recoverable costs The drawing up of the cost types and the time schedule of recovery shall come solely within the liability of TAKT, and must be broken down by TAKT into the following cost types: A. Extraction Costs B. Development Costs C. Exploration costs From the hydrocarbons costs first A, then B and finally C shall be covered. Re. A Extraction costs are all those costs incurred through commercial extraction and any other costs, which cannot be counted as development cost8 and exploration costs. Re. B Development costs are all those costs, incurred by TAKT from the date of termination of the activities in accordance with Art. 7.1 of the contract for the development of the discovery. Re. C Exploration costs are all those costs to be put in the KRR, incurred by TAKT from the entry into force of this contract up to termination of the activities in accordance with Art. 7.1 of the contract, whereby initial project costs are also included. The annual costs and proceeds of TAKT shall be collated in a list of costs and proceeds at least every 6 months. At the end of the year annua1 accounts shall be drawn up. APPENDIX No. 3 Initial costs TAKT already made payments before this contract entered into force. These payments mentioned in Article 6 Point 4 and in addition all the costs of TAKT, for which proper vouchers and records can be provided and which are connected with the works in accordance with Article 6 Point 4, are hereby recognised as recoverable. INITIAL COSTS in total: USD2,313,942*) *) This figure (the total up to 31/12/93) is not final and shall be calculated again up to the date of entry into force of the contract. APPENDIX No. 4 New licences for the TAKT activities APPENDIX No. 5 Environmental protection Table of contents 1. Assessment of the condition of the environment and the effects of the activities of the Sacha-Austrian Joint Venture TAKT on these taking into account the environmental protection measures intended by TAKT 1.1. Nature of the environment in the sections intended for the carrying out of the geological exploration and extraction works 1.2. Social and economic data of the sections and areas involved 1.3. Effect of the searching, exploration and extraction activities on environment and nature 2. Environmental protection measures 2.1. Environmental protection measures when planning petroleum and natural gas drillings 2.2. Environmental protection measures when carrying out the preparation works for the drillings and wells 2.3 Measures to protect the environment and the natural earth resources when sinking wells 2.4. Prevention of environmental protection during the borehole tests and extraction 2.5. Fulfillment of the measures to satisfy the recommendations of the mining Supervisory Body of the RS (Y) and Point 2 of certificate No. 184 of the authority for ecological certificates of the RS (Y) 3. The completion of liquidation and recultivation works in the sections with wells to be decommissioned 4. Obligations of TAKT in the field of environmental protection 5. Summary 1. Assessment of the condition of the environment and the effects of the activities of the Sacha-Austrian Joint Venture TAKT on these taking into account the environmental protection measures intended by TAKT. 1.1. Nature of the environment in the sections intended for the carrying out of the geological exploration and extraction work. Section No. 1 intended for the activities of TAKT, which belongs to the Kempenjay basin and occupies an area of 14,400 square kilometres, is located from a geomorphological point of view in the Western part of the Central Yakut plane. Section No. 2, which occupies a surface area of 6,900 m2 and is in the transitional area between the Nepsk-Botuobinsk uplift and the Patomsk basin, is located in the area of the Lena plateau. Both section 1 and section 2 are characterized by extensive permafrost rock and are both in the geocryological Lena-Wilyuj area. Climatic conditions. The occurrence of powerful high pressure areas in Winter and low pressure areas in Summer is crucial to the condition of the atmosphere over West Yakut. The climate of the area is therefore markedly continental with long and cold Winters, relieved by short but relatively hot Summers. With the monthly increase in temperatures the absolute humidity and quantity of precipitations increase. Annually 74-80 % of precipitations evaporate, the rest run away or seep into the sediments of the humus layer. Pattern of the land. The pattern of the land of both sections is a flat or slightly hilly surface broken up by a system of shallow valleys. The relief arose mainly through surface erosion. The valleys are in general wide and form moors, the slopes are flat and asymmetrical and change imperceptibly into watersheds. Poor surface drainage leads to serious marshiness, to the formation of lake and marsh deposits on the watersheds as well as on the slopes and bottoms of the water runs. The patterns of relief have arisen through temporary water runs, on the slopes of the river valleys gaps, troughs and cones of scree or debris have developed. Networks of rivers and hydrogeological conditions. The network of rivers in Section No. 1 belong to the basin of the Wiljuj river and its tributaries: Botomoyu, Chongar, Tonguyu and Byrakan, and the one in Section No. 2 to the basin of the left hand bank of the Lena with its tributary Nyuya and the rivers flowing into this, namely Orto-Sala, Ulachan-Murbajy, Chotogo and Otschuguy-Murbajy. The river valleys alternately exhibit narrows and expansions. The depth to which the rivers cut in with average waterflow is 60 to 120 m, that of the shallower tributaries 20 to 50 m. At the mouths of the rivers of average depth the valleys have a canyon-type appearance and on the upper reaches represent weakly carved marshy, trough-shaped gaps with wandering river bed. On 215 to 220 days the rivers are frozen up; the ice begins in the first half of October and ends in May. River deposits form terraces, river and stream meadows. The massiveness of the flood sediments is 1.5 to 2.0,m, that of the first terrace located over the meadow 2 to 4 m. Lake and marsh formations are relatively extensive in the area and can be found on the basins and thermokarst craters in the river valleys, on the watersheds and on the upper regions of streams. Most lakes have a low depth (up to 2-3 m). The hydrogeological features of the land of both sections were determined by the fact of them belonging to the Yakut artesian basin with continuous permafrost rock with a solidity of 200 to 400 m. Underground saltwater occurs in depths from 300 to 320. This is mineralised water with a sodium chloride composition, which is under great pressure. The water occurring above the frost area is relatively extensive, but occurs in small quantities and only briefly during the year as a fluid phase. A small amount of water and the relatively low reserves mean it is impossible to use it for temporary water supply. Geocryological conditions. Both sections belong to the extensive area of permafrost rock, which forms the upper part of the cryolith zone up to a depth of 200 to 400 m. The profile section beneath consists up to a depth of 500 to 900 m of rock cooled to below 0 degrees C, containing salt water and lyes. In total the extent of the frost layer and the total cryolith zone decreases from North to South to the Lena valley. The annual time-dependent depth, to which the rock thaws, fluctuates greatly in the area: with the dry sand and fine sand deposits it is 2.5 to 3.0 m, in the case of the loam and peat deposits 0.7 to 1.0 m. In the area of the outcrops of the diabase residues it increases to 4-5 m. Cryonegic processes and formations. Cryogenic developments exist and occur in the relevant areas in the form of solifluction, thermokarst, occurrences of frost and surface grooves caused by frost. Solifluction processes usually occur on slopes, which have an inclination of over 2 to 3 degrees and the composition of which contains fine sand-loamy permafrost rock containing ice. This process is particularly active on concave, relatively humid slopes with increased drainage. The formation of grooves by frost on the surface gives a slightly undulating land pattern. The rising up of the land caused by the redistribution of moisture during freezing is the most extensive phenomenon. The types of thermokarts depend on the occurrence and conditions and storage of the underground ice in the mountain rock. When these sediments thaw thermokarst basins occur, which can be split up as follows: Meadows, river terraces located above them, watersheds with the formation of peat, wide valleys on the upper regions of streams. Vegetation in the development areas. The vegetation of these areas belongs to the type of vegetation of the Taiga subzone. The prevailing types of tree are larch and pine. For all forest types, apart from the pine forest, there is a dense undergrowth of birch trees, alders, and aspens. The bushes mainly consist of wild rosemary, marsh bilberry and dwarf birch. Thc meadow vegetation is fairly extensive and mainly occurs in the river valleys and on the lakes in the form of sedge. Within the two sections of TAKT the following geobotanical associations occur: pine, larch-pine-bush-moss-lichen-forest. The floor cover consists of lichen and green mosses. 1.2. Social and economic data of the relevant sections and areas. The areas for the activities of TAKT are practically undeveloped from an economic point of view. There are social-economic data available for large areas, which concern the petroleum and geological division of the areas, especially for the West-Wiljujsk (Section No. 1) and Predpatomsk (Section 2) petroleum and natural gas area. Section No. 1 - West-Wil3uisk petroleum and natural gas area. This area is in the basin of the middle reach of the river Wiljuj. The West-Wiljujsk petroleum and natura1 gas area extends over four administration districts of the Republic and embraces the Eastern part of the Suntarsk, the South Eastern part of the Njurbinsk, the Southern half of the Verchnewiljujsk and a smaller area in the South of the Wiljujsk area. The main river Wiljuj runs 25 to 60 km in the North West of Section No. 1. The section contains the biggest tributaries of Kempendyay, Botomoyu, Tonguyu and Byrakan. In addition there are the smaller tributaries, lakes and marshes. Only the river Wiljuj is navigable. The most important settlements are Njurba, Ustje and Tojoku. All the settlements along the Wiljuj from Ojusut to Njurba are connected to the power supply network of the Wiljujsk power station. Typical of thc region is the felling of timber to heat the numerous settlements. Timber felling totals about 45,000 to 50,000 cubic metres per annum. The only raw materials extraction company in the district is the Kempendjaysk salt works with a capacity of 2000 tonnes per annum. Brown coal and rock salt take first position as regards natural earth resources. Most freight goods are transported via the Lena and Wiljuj rivers (the Lena is navigable 150 days, the Wiljuj for 130 days). The freight goods collected in the Wiljuj ports are mainly transported onwards in Winter by lorry to the relevant sites of utilisation. The "Winter roads" are navigable from the end of December to the middle of April. Helicopters are used for the transportation of urgent freight and to carry crews. Section No. 2 - Predpatomsk petroleum and natural gas area. This petroleum and natural gas area occupies a narrow, but fairly lengthy strip along the Baikal-Patomsk highland in the basin of the upper region of the Lena and belongs to the marginal basin of the same name. Section No. 2 is located in the North of the central part of this petroleum and natural gas area. The central part of the petroleum and natural gas area covers administratively the South Eastern part of the district of Lensk, the North Western part of the Olegminsk and a small area of the Southern part of the Sutarsk area. The river Lena Bows through the petroleum and natural gas area (60 km from section No. 2). Parallel to the Lena its left hand tributary Njuja runs in the central part of the petroleum and natural gas area. Straight through section No. 2 flow the left hand Njuja tributaries Chotogo, Orto-Sala and Otschchuguj-Murbajy. The most important settlements are the City of Lensk and the towns of Witim and Peleduj. On the Lena and the Njuja there are about 20 small towns and settlements. The number of inhabitants is about 50,000, 10,000 of which being agricultural population. Most freight goods are processed in the river harbour of Lensk. The Lensk-Mirnij motorway, which is navigable throughout the year, passes through the central section of the area. The delivery of freight goods for the geological survey team is effected via provisional motorways, which are only navigable in the Winter. Freight traffic is mostly done through local and internal airlines of the Republic. There are flight connections, between Lensk and Novosibirsk or Irkutsk as well as between Mirnyj and Moscow. The high voltage line 220 runs from the settlement of Chernysheskiy (Wiljujsk power station) to the City of Lensk along the motorway. Two natural gas, one salt and hydrobromine and construction materials deposits have been found. Medical and cultural facilities as well as education possibilities only exist in the district centres of Lensk, Sutar and Verchnevilyuysk. 1.3. Effect of the searching, exploration and promotion activities on the environment and nature. The greatest damage to the environment and nature, occurring during drilling activities, is the damage to the humus layer. The latter is caused by the following works: -- Construction of roads, power and water lines -- Transportation of drilling equipment, materials and people on defective and specially paved roads -- Planning of locations for the setting up of drilling rigs and camps -- The erection of drilling sludge and petroleum tanks. A further important damaging factor is contamination by the fluids used and which occur during drilling activities and tests: -- Borehole flushing and cement sludges -- Flushing and drilling waste -- Products occurring during testing and extraction (oil, gases, system water) -- Combustion products when operating combustion engines and boiler systems -- Weighting material, flushing and cementation additives -- Cutting and lubricating fluids -- Domestic refuse and effluents -- Rainwater The degree of environmental pollution by effluents and other fluids and solid waste, occurring during drilling activities, is understood to be the amount exceeding the permissible hazardous substance concentrations (HK) in the individual media. The harmful substances maximum concentration is the maximum concentration, which with the relevant substance does not exercise any direct or indirect effect on the health condition of people or does not prejudicially affect the hygiene conditions for the use of water. The contaminating effect of the drilling solutions depends on the toxicity of the ingredients and components, which are split up into the following areas: Toxic, health toxic, total health and the like. The values for some substances and chemicals, which are valued according to the amount of the maximum concentrations in the individual media, are given in Table 1. Maximum harmful substance concentration values for the chemical substances in the water used during drilling activities. Table No. 1 Name of substance Area HKg* (mg/l) HKfg*(mg/l) Class of harmfulness Aluminium sulphate Health-toxic 2.8 2 Bariumsulphate Health-toxic Calcium chloride Health-toxic Sodium hydroxide Health-toxic Sodium carbonate Health-toxic Sodium choride Health-toxic Sulphate ion Health-toxic Chloride Organoleptic Chrome-ion (C13 +) Organoleptic Chrome-ion (Cr 6 +) " Polyphosphate (-PO4) " Sodium phosphate (- PO 4) Total-health Sodium solicate (-03) Health-toxic Carboxymetahylcellulose Health-toxic Condensed sulphite alcohol Lye Health-toxic Polyacrylamide " Polyacrylnitrile- Hydrolsate Health-toxic Polyoxyethlyene M= 2-3 million Total-health Polyoxyethlene M= 5 million Total-health Chromligniosulphanate Total-health Carbon alkali reagent Health-toxic Flotation agent T-66, T-80 (floxanalcohol) Health-toxic Foam remover, coagulator Sulphanol NP-1 Organoleptic (foam) Health-toxic Sulphanol NP-3 Organoleptic (foam) Health-toxic Olein acid Total-health Oxethylalkimphenol OP-7 Organoleptic (foam) Oxethylalkimphenol OP-10 Organoleptic (foam) Other petroleum Organoleptic (foam) Suspended particles Total-health pH value Minerals in the dry residue of which: chloride sulphate *) HKG - hydrocarbons in the water of effluents HKFG - HK in the water of fishing waters Classes of harmfulness: Class 1 - extremely harmful Class 2 - very harmfu Class 3 - harmful Class 4 - moderately harmful The quality of the drilling effluent will be valued on the basis of the following main criteria: density, clarity, colour alkali content, proportions of chlorine-ion (Cl -) and sulphate-ion (SO4 2 - ), general mineralisation, pH value, content of petroleum products, suspended particles and surface-active substances. Pollution of the areas caused by toxic gaseous products, as arise during the operation of combustion engines, boiler systems and during borehole tests. The permissible maximum values for harmful substance concentrations in air are given in Table 2. Hydrocarbons values for chemical substances, which occur during drilling, when operating combustion engines, boiler systems and during borehole tests, in the air. Table 2 Description of substance Max 1-off Daily MAK Brief Class of concentrat. average (mg/dm3) permiss. harmless (mg/dm3) concern. value (mg/dm3) Benzine (petroleum benzine converted to hydrocarbons) Gas condensate Nitrogen dioxide Carbon dioxide Sulphuric acid anhydride Sulphur anhydrite Hydrogen sulphide Soot Asbestos Potassium chloride Copper sulphate Sodium chloride Sodium hydroxide Sodium carbonate Cement dust: Potassium borate Carbide, oxide For classes of harmfulness see Table 1. 2. Environmental protection measures On the occasion of all the environmental measures taken by the Joint Venture during its activities in both sections (both during exploration activities by TAECT, as also during the operation of the developed deposits), the following conditions shall be fulfilled: -- Article 4 of tile law relating to the protection of nature in the Republic of Sacha (Yakut), which defines the ecological status of the Republic as an easily vulnerable, delicate region with limited ecological capacity, where "preference is given to clean technologies which create little or no waste and where projects which overtax the capacity of the natural areas are forbidden". -- Expert report No. 184 of the State Ecology Committee of the Ministry for the Protection of Nature of the Republic of Sacha (Yakut) of 29th July 1993, in which it is recommended that account be taken a all phases of planning, exploration, erection and operation of the negative experience with regard to the effects on the environment during development and extraction of deposits in West Siberia (Russian Federation). Since the working programme of TAKT in the first phase provides for an exploration period of many years, this paragraph deals in great detail with the measures to protect nature during this period of drilling activities by TAKT to search for oil and gas. In the event of the search and exploration works being successful, allowing commencement of exploitation of the discoveries, projects will be developed for the economic development of such discoveries, the sinking of extraction wells, the building of transport roads and the provision and removal of pipelines, whereby these projects, will make clear the assessment of the effects on the environment and the environment protection measures by means of specific technical tests on specially demarcated areas of land within the sections made available as part of the "environmental protection" tasks. These projects shall be submitted to the competent bodies of the Republic of Sacha (Yakut) for harmonisation and approval, and they will also be subjected to an ecological report. 2.1. Environmental protection measures during the planning of oil and gas drillings The pieces of land for the drilling rigs, the accommodation for the drilling crews, installation and removal of pipelines as well as roads and helicopter landing places will be selected on the basis of the site investigations taking into account the merest technical effects on the environment, whereby the drilling projects must be approved by the competent environmental protection centres of the Republic. Drilling works within bank protection areas may only be carried out if there exists a special permit from the authorities competent for the protection of nature and water resources. When planning preparation works for the drilling (erection of access roads, including the construction of bridges over waterways, ravines (gorges) and other obstacles, work in connection with the transportation of the drilling rig and the main construction units of the drilling equipment, planning of the site) factors causing pollution of the soil, water and air must be avoided. When planning for the construction of the drilling rig and the works for sinking and liquidation (preservation) of drilling shall take into account the following criteria: -- Use of new progressive and environmental-friendly technologies when carrying out search and exploration drillings, which have been developed by foreign participants of the TAKT Joint Venture, of the Austrian company OEMV. -- The drawing up and preparation of extensive measures to protect the surface and formation water (also the groundwater), of the soil and the air against contamination by chemicals contained in drilling flushing fluids and cement sludges, flushing waste, consumed drilling Hushing fluids, s1udge, mineralised water and other toxic products occurring during borehole tests. -- Work to determine the permissible maximum concentration (HK) for a new chemical substance, the use of which is planned when sinking wells. -- Solutions for the recultivation of the destroyed areas of land and soil and their punctual handing over to the permanent user. 2.2. Environmental protection measures when undertaking the preparation works for drilling. When stipulating the drilling locations on the site a location is to be selected, which has natural drainage of the surface water. If there are no locations with natural drainage, then the drilling location shall be protected by the erection of embankments, moats, permafrost strips and artificial drainage systems against flooding. The following measures shall be taken when preparing the drilling location on the site: -- extensive avoidance of site sections with seriously frozen land, where the ice portion totals 40 % of the total volume of the permafrost land; -- preservation of the moss and peat cover adjoining existing ravines and slopes to prevent the occurrence of thermo-erosion; -- spreading and banking with non-swelling material (sand, sand-gravel mixtures), when the layout of the drilling location on slopes of seriously frozen soil with an inclination of over 10 degrees cannot be avoided; -- Planning of the drilling location in Autumn or Winter and only on the condition that the depth of the frost soil is 20 to 30 cm, whereby the fertile humus layer is to be preserved. The delivery of materials and equipment to the drillings can only be effected overland after the freezing of the streams, lakes and rivers. When setting up the well site the pipelines will be laid above ground and will be thermally insulated. In the area of drilling locations, drilling rigs, fuel and lubricating oil stores walls of impermeable 80il shall be erected. To store the petroleum products and collect the old oil and flushing fluids tanks will be installed on the drilling site. The installation of the drilling rig, the installation of the drilling equipment and the erection of sedimentation systems shall be effected in accordance with the applicable and general health regulations. The established drilling site will be surrounded by a moat, which will prevent the penetration of draining rain and thawing water into the site. At the bottom part of the site slope a ditch and collection tanks shall be installed, which will collect all of the water draining from the drilling site. The rain and thawing water draining into the ditch and tanks must be used for technical purposes. 2.3. Measures to protect the environment and the natural earth resources when sinking wells. The progressive technology for deep drilling developed by the OEMV gives a whole set of technical solutions, intended to prevent environmental damage and open gas and oil eruptions and to avoid contamination of surface and groundwater. On the basis of the experience of the drilling operations of the Republic of Sacha (Yakut) and the OEMV, a Joint Venture will take measures to protect the environment and the natural earth resources during drilling activities. Where there are loose rock layers and formations which carry water, which can be used as drinking and medical water sources, special measures will be taken. When sinking the wells every measure will be taken, to prevent harming the environment, especially: -- Use of environment-friendly materials; -- If this is not possible, use of other media complying with every precautionary measure; -- Safe transport and storage of all materials to be used and which accrue; -- The insertion of materials only in very deep layers of the earth; -- The most modern sinking technology, preventing layers having any effect on each other and penetration into the ground and underground water. The waste occurring when sinking wells or boreholes shall be deposited by agreement with the competent authorities at the working site. Modern technology will be used for the sealing devices on the borehole. To prevent oil and gas leaks and escapes during drilling and development works, all the conditions of the Mining Supervisory Authority (Gosgortechnadsor) applicable to such works shall be fulfilled. 2.4. Prevention of environmental pollution during borehole tests and extraction Thanks to the most modern casing (tubbing) schemes TAKT guarantees a high quality when sinking wells, amongst other things through an improvement of the quality of the cementation process with me extensive use of casing packers, centering baskets, scrapers and gas-tight threaded connections for the casing pipes as well as the use of the most modern technologies when dri11ing the extraction column in the area of the productive layers. The borehole tests are effected after completion of the preparation measures, including the installation of a E-cross and torching devices with remote ignition and complete combustion, the erection of measuring sections for dynamic inflow measurements as well as the installation of metal containers for the storage of the oil the condensate and the flushing fluid stock with guaranteed installation and measuring devices. Before carrying out the tests thc devices above ground (aggregates and lifting devices), the probe head equipment, the pipes for taking away the layer fluid and natural gas as well as the containers for the flushing fluid and the petroleum are installed and mounted in accordance with the existing plan and the technical regulations and fire protection standards. In the event of escapes and other oil leaks on the surface of the earth the contaminated areas of the land are treated with absorbing materia1 (peat, sawn timber, sand). The absorption medium is removed from the soil with the oil and used as a fuel or is taken away completely. During the economic exploitation of the deposits enclosed and sealed collection and conveying systems shall be used, which will prevent contamination of the environment with the product of the drilling. Projects for the setting up of the deposits will include the erection of systems for the cleaning and reutilisation or removal of effluents. 2.5. Fulfillment of the measures to implement the recommendations of the State Atomic Supervisory body of the RS (J) of 21.07.1993 and of Point 2 of Expert Report No. 184 of the Ecology Committee of the RS (J) of 29.07.1993 2.5.1. In accordance with the recommendations of the State Atomic Supervisory body of the RS (J) TAKT ensures during drilling activities in section No. 2 regular observations to establish any occurrence of artificial radionuclides in groundwater and water near the surface as well as the possibility of determining the content of radionuclides in the extracted products in the works for the development and extraction of hydrocarbons. 2.5.2. The possibi1ity will also be given for the extraction of underground and surface water samples in section No. 1, in order to establish any content of strontium-90 and Caesium-137. 3. Liquidation and recultivation works in the sections with wells to be shut down 3.1. When carrying out liquidation works at the borehole safe insulation of the oil and gas layers of layers carrying water shall be guaranteed and a migration of fluids and gases when the permafrost soil thaws. 3.2. After dismantling of the drilling rig, the drilling tower equipment and the provision and removal of pipes the earth contaminated by petroleum and chemicals shall if necessary be removed. 3.3. At places where the surface of the soil is extremely compacted, loosening shall be effected. 3.4. Walls shall be leveled and the location shall be leveled off subject to preservation of the natural relief. 3.5. The works to restore the land shall be carried out continuously until final conclusion. If the works cannot be carried out at once due to the weather conditions, the deadline for this may be extended, but this must not exceed one year from the date of termination of the works on the well. 3.6. If after recultivation the land is to be used for agricultural purposes, works must be undertaken to produce a condition suitable for agricultural use in accordance with the deadlines laid down in the regulation concerning the apportionment of the land. 3.7. Reafforestation measures on the recultivated land and soil shall be effected at the expense of TAKT by the permanent land user, to whom the land will be returned. 3.8. The handing over of the recultivated land shall be effected by a committee of the administration district, in which this land is located. This will be recorded in documents. 3.9. On accepting the recultivated land, the committee will examine the quality of the recultivation and whether the works carried out satisfy the approved project. 4. Obligations of TAKT in the field of environmental protection Within the framework of its environmental protection activities TAKT shall guarantee the following: 4.1. Training of the personnel of the Joint Venture in the area of environmental protection, the use of the most modern environmental protection technologies during exploration and extraction of gas and oil. 4.2. Strict monitoring as to whether the ecological conditions of the project for the installation of wells as well as the installation and development of the deposits are being fulfilled by the personnel. 4.3. Regular monitoring of the condition of the soil, the flora and fauna as well as the waterways in the areas to be developed, whereby if necessary amendments of the technological solutions selected to protect the environment and nature shall be effected. 5. Summary The Joint Venture TAKT is of the view that the statements contained in this section document ~e fact, that the Joint Venture in its activities in the areas made available to it in Yakut can reduce the negative effects on the environment to a minimum and guarantee ecological safety for the areas to be developed by the use of modem, practically waste-free drilling technology. APPENDIX No. 6 Licences of other companies concerning commercial activities in the contractual area -----END PRIVACY-ENHANCED MESSAGE-----