Agreement For Exploration Development & Production

AGREEMENT


FOR EXPLORATION, DEVELOPMENT AND
PRODUCTION
OF OIL IN KARAKUDUK OIL FIELD
IN MANGISTAU OBLAST
OF THE REPUBLIC OF KAZAKHSTAN


BETWEEN


MINISTRY OF OIL AND GAS INDUSTRIES
OF THE REPUBLIC OF KAZAKHSTAN
FOR AND ON BEHALF OF
THE GOVERNMENT OF THE REPUBLIC OF
KAZAKHSTAN


AND


JOINT STOCK COMPANY OF CLOSED TYPE
KARAKUDUK MUNAY JOINT VENTURE


ALMATY - 1995


CONTENTS


SUBJECT OF THE AGREEMENT......................................................................................1 SECTION 1. Definitions.......................................................................................2 SECTION 2. Ownership Rights..................................................................................6 SECTION 3. Duration of the Agreement and Termination.........................................................7
3.1. Duration.....................................................................7
3.2. Exploration Phase............................................................7
3.3. Development and Production Phase.............................................8
3.4. Termination..................................................................8 SECTION 4. Principle Rights and Obligations of the
Contractor and Investor.................................................................9
4.1. Rights of the Contractor and Investor........................................9
4.2. Obligations of the Contractor...............................................12 SECTION 5. Assistance and the Support of the
Authorized Body........................................................................14 SECTION 6. Board of Directors...............................................................................15 SECTION 7. Operational and Financial Requirements
and Budget.............................................................................15
7.1. Exploration.................................................................15
7.2. Development and Production..................................................16
7.3. Procedural and Approval Method of the
Operational Documents.................................................17 SECTION 8. Expenditures and Compensation....................................................................19 SECTION 9. Commercial and Financial Terms and Conditions....................................................19
9.1. Financial Matters...........................................................19
9.2. Customs.....................................................................20
9.3. Taxes and Payments..........................................................20
9.4. Compensation................................................................26
9.5. Accounting Procedures and Auditing..........................................26 SECTION 10. Protection of Subsurface Resources, Natural
Environment and Labor and Population Safety............................................27 SECTION 11. Other Legal Issues..............................................................................28
11.1. Transfer and Assignment of Rights..........................................28
11.2. Payments Related with Field Allocation
and Usage Right......................................................28
11.3. Insurance..................................................................28
11.4. Legal Adjustments in Relation with
Working Conditions...................................................29
11.5. Force Majeure..............................................................29
11.6. Local Consumption..........................................................29
11.7. Amendments to the Terms and Conditions
of the Agreement.....................................................30
11.8. Confidentiality............................................................30
11.9. Settlement of Disputes.....................................................31
11.10. Waiver....................................................................31
11.11. Correspondence............................................................32
11.12. Headings..................................................................32


SUBJECT OF AGREEMENT


This agreement (hereinafter referred to as "Agreement") is prepared and signed on "30" August 1995 by and between the Ministry of Oil and Gas Industry of the Republic of Kazakhstan, (hereinafter referred to as "Authorized Body") acting for and on behalf of and representing the Government of Republic of Kazakhstan in accordance with the legislation of the Republic of Kazakhstan and Joint Stock Company of closed type "Karakuduk-Munay Inc." Joint Venture, established and operating in accordance with and under the existing Laws of Republic of Kazakhstan, (hereinafter referred to as "Contractor"); and having the following shareholders: PGO "Mangistauneftegazgeologiya" with its new name GHK Zharkyn, "Kazakhstanmunaygaz" National Petroleum Company with its new name GHK Munaygaz and "Korporatsiya KRAMDS-Mangistau" Inc. which is owned by Korporatsiya Mangistau Terra International, by assignment of shares, established and operating under the laws of the Republic of Kazakhstan, hereinafter collectively referred to as "Shareholders of Kazakhstan Side" and Central Asian Petroleum (Guernsey) Limited, established and operating under the laws of Island of Guernsey, (hereinafter referred to as "Investor"). The Authorized Body and the Contractor are sometimes referred to individually as "Party" and collectively as "Parties" hereinafter in this Agreement.


WHEREAS; as a result of the transfer of some of the rights and shares of the Contractor to the Investor in accordance with the Clauses 4.1.9. and 11.1.1, the parties to that certain agreement dated 1st of July 1993 between the Authorized Body and the Contractor, signed in accordance with the Decree of the Cabinet of Ministers of the Republic of Kazakhstan No: 498 dated June 11, 1993. Thus, by execution of this Agreement, the 1st of July 1993 dated agreement, as amended by this Agreement, is superseded by this Agreement and now this Agreement shall be in full force and valid.


WHEREAS; the Contractor has been formed with the re-registration of the Articles of Association of joint stock company of closed type Karakuduk-Munay Inc. Joint Venture (hereinafter referred to as the "Articles"); by the Registrar Office of Economical Corporations, Incorporated Partnerships and Companies of Financial Directorate of Mangistau Province No. 23625 dated March 1, 1995; and by the National Agency of Foreign Investments No. 2262 dated April 27, 1995.


WHEREAS; the usage right of the Subsurface Resources of the Field of 68.4 sq.km. in the Town of Mangistau of Mangistau Region of which the Geographical Coordinates are given herein below in drawing number L-39-xx, and whereas the Observation Map is provided as Enclosure-I to this Agreement; has been given to joint stock Company of closed type Karakuduk-Munay Inc. Joint Venture, for a period of 30 (thirty) years, for exploration, development, production, treatment, storage, refining, transporting and sales including export of hydrocarbons from Karakuduk oil field;


44o51'43" North Parallel 53o52'30" East Meridian 44o52'20" North Parallel 53o54'08" East Meridian 44o52'10" North Parallel 53o59'10" East Meridian 44o49'10" North Parallel 54o02'50" East Meridian 44o48'13" North Parallel 53o57'10" East Meridian 44o49'40" North Parallel 53o53'17" East Meridian


WHEREAS; the Contractor shall have the obligation to conduct the Work Program in accordance with the terms and conditions of this Agreement by taking into consideration the License for the Right to Use Natural Deposits (hereinafter referred to as "License") issued by the Government of Republic of Kazakhstan on June 28, 1995 with the serial number MG No:249 Oil.


SECTION-1


DEFINITIONS


Unless otherwise specifically referred to in this Agreement, any singular word may define the plural and any plural word may define the singular.


1.1. "Agreement" means this Agreement signed by and between the Ministry of Oil and Gas Industry of the Republic of Kazakhstan and joint stock company of closed type Karakuduk-Munay Inc. Joint Venture for the implementation of the Petroleum Activities.


1.2. "Petroleum Activities" means as foreseen in the Agreement; geological research, development, production, treatment and purification (treatment and drying process for the natural gas and the separation of it in different elements from petroleum), refining, storage, pipeline transportation and marketing and sales activities in local and international markets of the hydrocarbons and any other preparation and sub-activities associated with.


1.3. "Expenditures for Petroleum Activities" means all types of costs and expenditures incurred by the Contractor for the Petroleum Activities in accordance with the Agreement i.e. (expenditures related with well and equipment, maintenance, construction, subsurface and earth studies, repairs, chemicals, oils and lubricants, spare parts, labor force, required services for operations, catering and accommodation, management and administration, personnel training and the preparation and issue of project-budget documentation and other related documentation as well as removing the remaining).


1.4. "Authorized Body" means the Ministry of Oil and Gas Industry of the Republic of Kazakhstan who is acting for and on behalf of the Government of the Republic of Kazakhstan and legally empowered to conduct Petroleum Activities.


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1.5. "Contractor" means joint stock company of closed type Karakuduk-Munay Inc. Joint Venture whose Shareholders are; GHK Zharkyn with 20% (twenty percent) share, GHK Munaygaz with 20% (twenty percent) share, Korporatsiya Mangistau Terra International with 10% (ten percent) share and the Investor, Central Asian Petroleum (Guernsey) Limited with 50% (fifty percent) share.


1.6. "Sub-Contractor" means any private and/or juridical person who is used by the Contractor for the supply of required equipment, material and services in the required and demanded quality in order to fulfill the requirements of the Agreement.


1.7. "Agreement Field" means Karakuduk Oil Field allocated for Petroleum Activities, as defined in the Subject of the Agreement Section of this Agreement and as shown in geographic coordinates in Enclosure-I. During the course of the Petroleum Activities, in case the geographic settlement borders of the Oil and Gas fields are determined to be extended the borders of the field defined in the Subject of the Agreement Section of this Agreement and in Enclosure-I; issue of expanding the "Agreement Field" shall be resolved by the Parties through mutual negotiations.


1.8. "Commercial Disclosure" or "Commercial Exploration" means the exploration of the Hydrocarbon reserves in the Agreement Field of which their operation is found economical and where the income to be obtained from their production shall meet with the operation and production expenditures and shall generate the profit to be found appropriate and reasonable by the Parties. In such a case, the field is considered productive for the purpose of operation.


1.9. "Field" means one or more natural accumulation of Hydrocarbons, which are deposited in the Agreement Field one over the other either in connected or isolated levels or reservoirs, within one or several interconnected geological traps in vertical form and considered as the whole for the purpose of the operations.


1.10. "Hydrocarbons" means Crude Oil, Condensate, Natural Gas, natural gas liquids and any other associated substances found during the production of those. Natural gas liquid is the Hydrocarbons where the Natural Gas and Associated Gas is turning into liquid in a different environment than normal conditions.


1.11. "Petroleum" or "Crude Oil" means; asphalt bithium and liquid Hydrocarbons that are also known as "Distillate" or "Condensate" and obtained from the wells in the form of liquid under normal heat and pressure without being dependent upon their density by densing Natural Gas that can also easily be steamed.


1.12. "Gas" or "Natural Gas" means the gas which is not Hydrocarbon but obtained from the wells with the Hydrocarbons in the form of gas liquid and Gas remains after densing different type of Hydrocarbons and elements, sulfur, carbonic acid, helium (excluding densed gasses that can become liquid), greasy mineral gas, dry mineral gas, Associated Gas and Hydrocarbons, under normal heat and pressure.


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1.13. "Associated Gas" means the gas comes out during the production of the Petroleum which is mixed with Crude Oil or accumulated in the Gas cap.


1.14. "Subordinate Petroleum Components" means various mineral and other elements.


1.15. "Work Program" means all programs that are prepared and issued for the implementa- tion of the Petroleum Activities in accordance with the License and the terms and conditions of the Agreement.


1.16. "Investment" means all amounts required for the Petroleum Operations including properties, rights on properties and intellectual rights.


1.17. "Effective Date" means the date when this Agreement is signed by the Parties.


1.18. "Commencement Date of the Productive Production" means the date when the income achieved from the sale of the Petroleum becomes in excess of the expenditures made for the production and sales of the same.


1.19. "Payout" means the date when Contractor has repaid Investor the Investment.


1.20. "Shareholders Of The Kazakhstan Side Profit" means the amount of the Shareholders of the Kazakhstan Side are collectively entitled to as their share of the distributable profit of Contractor. Such amount shall be calculated and distributed on a quarterly basis, unless the Board of Directors determines otherwise, and shall be equal to 50% (fifty percent) of the amount of Contractor cash flow remaining after subtracting from Contractor's gross revenue for the quarter: Royalty, Investment Recovery, all operating expenditures, Fiscal Obligations as required pursuant to this Agreement, any other actual expenditures made by Contractor during the quarter.


1.21. "License" means a permission granted by the Government of the Republic of Kazakhstan to the Contractor for conducting exploration and production activities for a period of 25 (twenty five) years within the Agreement Field.


1.22. "Delivery Point" means the point where the link is established to the existing pipeline for the further transportation of the product. Such point is determined with the mutual agreement of the Parties and shall be placed either within the boundaries of the Agreement Field or outside of such boundaries, in the most economical point for the transportation of the product.


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1.23. "Force-Majeure" means any occurrence that can not be predicted by and outside the reasonable control of the Parties preventing or delaying any of the Parties' timely performance of obligations. (Such as riot or civil commotion, declared or undeclared war, hostilities, actions of not being compliant with the law, terrorism, natural hazards and disasters, decisions issued by the Government Authorities, etc.).


1.24. "Investor" means Central Asian Petroleum (Guernsey) Limited who possesses the 50% (fifty percent) shares of closed type Karakuduk Munay Inc. Joint Venture or any other juridical body that its shares are transferred and/or assigned to. The priority for the assignment of the shares is given to the Shareholders of the Kazakhstan Side.


1.25. "Investment Recovery" means the amount of each installment Investor is entitled to receive as partial repayment of the Investment from the Contractor, inclusive of interest at the rate of Libor plus 1% (one percent). Such installments shall be calculated and paid on a quarterly basis and shall be equal to 65% (sixty-five percent) of Contractor's gross revenues after deduction of Royalty (State Share). Any amount of Investment, plus interest, remaining unpaid after each quarterly installment shall be carried forward to the next quarter until the full amount of the Investment, plus interest, is repaid. The Investment Recovery shall be exempt from all Fiscal Obligations.


1.26. "Investor Profit" means the amount the Investor is entitled to as its share of the dividend (distributable profit) of Contractor. Such amount shall be calculated and distributed on a quarterly basis, unless the Board of Directors determines otherwise, and shall be equal to 50% (fifty percent) of the amount of Contractor cash flow remaining after subtracting from Contractor's gross revenue for the quarter. Royalty, Investment Recovery, all operating expenditures, Fiscal Obligations as required pursuant to this Agreement, and any other actual expenditures made by Contractor during the quarter.


1.27. "Libor" means the annual interest rate on US Dollars ("US$") for one night offered to the leading banks of the London Interbank by Citibank N.A., London Branch on the 15th day of each month at 11:00 hr. and published by the Financial Times Journal in London/United Kingdom. In case the 15th day of the month is a holiday then the immediately subsequent working day shall be accepted as the base date for the purpose of such calculation.


1.28. "Royalty (State Share)" means the percentages of the gross production of the Contractor as shown in Clause 9.3.1. hereinbelow.


1.29. "Board of Directors" means the highest Executive Committee of Karakuduk Munay Inc. (Contractor) consisting of 8 (eight) members, 4 (four) members each assigned by Shareholders of the Kazakhstan Side including the Authorized Body and by the Investor.


1.30. "Fiscal Obligations" means without limitations: all taxes, royalties, levies, imposts, fees, fines, withholdings, forced savings, mandatory funds, escrow's, accounting or valuation procedures which impact the timing or magnitude of Shareholders Of the Kazakhstan Side Profit, Investor's Profit, or


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Investment Recovery or any other amounts to be received by the shareholders of the Contractor.


SECTION - 2


OWNERSHIP RIGHTS


2.1. The Contractor, as a result of the expenditures incurred and due to the obligations undertaken, has the exclusive right to perform any type of activities to conduct research, exploration, development, operations, production, sales activities, transportation, export, and any other related activities or sub-activities regarding any, and all, Hydrocarbon (hereinafter referred to as "HC") reserves within the boundaries of the Agreement Field, for the full term of this Agreement.


Republic of Kazakhstan has the authority to protect the ownership right of earth and subsurface. Contractor is not the owner of natural resources in the Agreement Field and can only demand the HC produced in accordance with the terms and conditions of this Agreement.


2.2. Contractor receives the ownership to all HC produced from the Agreement Field at the point of severance from the wellhead, free of any debts or financial obligations except as may be provided for in this Agreement.


2.3. If the Government of the Republic of Kazakhstan elects to take Royalty in kind as provided in Clause 9.3.1. then any such amount of HC shall be brought to the Point of Delivery by the Contractor and shall be transported by the Authorized Body on behalf of the Government of the Republic of Kazakhstan promptly without any delay. Contractor can transport and sell the HC share of the Government if the Parties so agree. In such a case, Contractor has the authority to buy and sell the HC share of the Government. If the Government intends to raise a demand to have its own share partially or wholly sold by the Contractor, then Government shall notify the Contractor in written form 3 (three) months before the end of each calendar year and semi-annual year and shall reach an agreement with the Contractor about the terms and conditions and time period for the sale of its own HC share by the Contractor. Contractor can be compensated as a result of performing such services. This compensation should be equal to transportation and marketing expenses. Therefore, the amount received by the Government out of this HC shall equal to the amount obtained out of sale after deduction of the mentioned compensation. In case the Contractor wishes to buy the HC share of the Government, then sales price shall be determined in accordance with Clause 9.4.2. In such a case, the payment shall take place on monthly basis. (Within 30 (thirty) days commencing from the end of the month that the HC share of the Government is sold.)


2.4. Contractor shall bear the ownership of the tangible assets in the Agreement Field after the execution of the Assignment/Delivery Certificate of the


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Karakuduk Field in accordance with the balance sheet of the Ministry of Geology and Preservation of Underground Resources (GHK Zharkyn).


The right of ownership of the tangible assets shall be transferred to the Authorized Body after the completion of the amortization. Contractor shall be entitled to use these amortized tangible assets during the whole term of the Contract free of charge.


2.5. Contractor possesses all and every type of rights on any type of geological and other information received in relation to the Field Assignment/Delivery Certificate of the Karakuduk and on any type of geological, geophysical, technical and other information obtained by the Contractor during the course of Petroleum Activities.


Contractor, during the term of the Agreement shall give all obtained information related with the subsurface to the Ministry of Geology and Preservation of Underground Resources of the Republic of Kazakhstan in accordance with clause 3.37 of the Law of "Subsurface Resources and Raw-Material Operation" subject to and without prejudice to its right of bearing ownership on this information.


SECTION - 3


DURATION OF THE AGREEMENT AND
TERMINATION


3.1. Duration


3.1.1. Duration of the Agreement is continuous 30 (thirty) years
commencing from the date of the execution of this Agreement and later
on can be extended to a date to be mutually agreed between the Parties
as long as Productive Production of Petroleum and/or Gas is continued
in the Agreement Field.


3.1.2. The information regarding the necessary funding/financing, as
convincing evidence shall be submitted to the Authorized Body prior to
the operations.


3.1.3. Contractor, prior to Field research and operation activities,
shall include the assets in the Field and the geological and
geophysical data related to the Agreement Field to its own balance
sheet in accordance with the issued Assignment/Delivery Certificates.


3.2. Exploration Phase


Exploration activities in the Field shall start within 1 (one) month commencing from the date of the execution of this Agreement, and/or as indicated in Clause 9.1.5. hereinbelow, to conduct the project studies and field seismic surveys,


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preparation and operation of temporary production projects, the evaluation of HC reserves by determining the geological-mining characteristics and the production capacity of the Field, preparation and completion of the technology and project documentation needed for the industrial usage of the Field and finally to secure the necessary permissions and the required funding/financing. The Petroleum produced (which cannot exceed 100,000 (one hundred thousand) tons during the full exploration phase) from the exploration and development wells during the testing of the wells, will belong to the Contractor and will be utilized to cover the expenditures incurred for the Petroleum Activities. The exploration phase will be 3 (three) years. The forgoing shall not in any way diminish Contractor's exclusive right, even after the initial 3 (three) year exploration phase, to conduct exploration, development, production and other related activities in all areas within the Agreement Field for the full term of this Agreement, as provided in Clause 3.1.


3.3. Development and Production Phase


3.3.1. Operation Activities of the Agreement Field shall be started
within 6 (six) months following the approval of Technology and Project
Documentation in the required order. Within the capacity of this
operation, completion of the exploration and the construction as
required for the production wells as indicated in the Project Documents
and the disposal of water and/or the application and realization of
other technologies as necessary to obtain maximum Petroleum, are
included. For the purpose of all permits and licenses required for
development of the Hydrocarbon reserves in the Agreement Field, the
entire Agreement Field shall be considered a single Field for such
purpose, and such permits and licenses shall permit development of any
and all Hydrocarbon reserves within the Agreement Field for the full
term of this Agreement.


3.3.2. Petroleum development, production and sales activities may start
before, but shall start no later than upon the conclusion of the
initial exploration phase and Contractor's obtaining of the permits and
licenses to develop the Agreement Field.


3.4. Termination


3.4.1. Contractor may terminate this Agreement by serving 60 (sixty)
days written notice to the ...