Hydrocarbon Production Sharing Contract

BETWEEN

The Republic of Guinea, hereinafter referred to as the ‘Government’, represented for the purposes of this Contract by the ”Ministere des Mines et de la Geologie” as the Minister assigned to the hydrocarbons sector, On the one hand,

AND

SCS Corporation, a company incorporated under the laws of Delaware, United States of America, having its office in Sugar Land, Texas hereinafter referred to as “Contractor” On the other hand,

WITNESSETH:

- WHEREAS, the Government wishes to promote the exploration and exploitation of Petroleum within the territory of the Republic of Guinea to contribute to the economic development of the country;

- WHEREAS, the Government, in order to carry out in the best technical and economic conditions the Petroleum exploration and exploitation operations concerning the Contract Area, wishes to contract the services of a qualified contractor;

- WHEREAS, the Contractor represents that it has the technical competence and financial ability to perform the Petroleum Operations herein described, and wishes to carry out such Petroleum Operations under the terms and conditions of a production sharing contract pursuant to the provisions of the Petroleum Code;

NOW THEREFORE, the Parties hereby agree as follows:

ARTICLE 1: DEFINITIONS

The words used in this Contract shall have the following meanings;

1.1

“Calendar Year” means a period of twelve (12) consecutive months commencing with the first day of January and ending the last day of the following December.

1.2

“Contract Year” means a period of twelve (12) consecutive months commencing on the Effective Date or the anniversary date of the Effective Date.

1.3

“Barrel” means a quantity consisting of 158.984 liters at standard atmospheric pressure of 1.01325 bars and temperature of fifteen degrees centigrade (15 degrees C).

1.4

“Petroleum Code” means the Ordinance N 119/PRG/86 of September 23, 1986 concerning the legal and fiscal regime of the exploration and exploitation of Petroleum as well as the regulations made thereunder.

1.5

“Contractor” means collectively or individually SCS Corporation as well as any company to which rights and obligations may be transferred pursuant to Article 23 below.

1.6

“Contract” means this document and its appendices, as well as any extensions or modifications hereto which may be mutually agreed by the Parties in accordance with the provisions of Article 23 below.

1.7

“Petroleum Costs” means all costs and expenses incurred in carrying out the Petroleum Operations under this Contract including and not limited to royalties, exploration and development.

1.8

“Effective Date” means the date on which this Contract comes into force and effect, as defined in Article 30 below.

1.9

“Commercial Discovery” means the discovery of a Petroleum field which has been duly evaluated in accordance with the provisions of Article 6 below, and which can be produced commercially after taking into account all technical and economic data.

1.10

“Dollar” means dollar of the United States of America.

1.11

“Natural Gas” means the dry and wet gas, whether or not associated with Crude Oil, as well as all gases produced in association with Petroleum.

1.12

“Government” or “State” means the Republic of Guinea.

1.13

“Petroleum” means Crude Oil and Natural Gas.

1.14

“Minister” shall mean the Minister who has been assigned to the hydrocarbons sector.

1.15

“Petroleum Operations” means the operations authorized under this Contract, related to the exploration, appraisal, development, production, transportation and sale of Petroleum, and includes Natural Gas processing operations as well as all necessary connected operations, but does not include refining and marketing of petroleum products.

1.16

“Parties” means the Government and the Contractor, and “Party” means either the Government or the Contractor.

1.17

“Exploitation Area” means that portion of the Contract Area delimited by a Commercial Discovery and defined pursuant to Article 7.2 below.

1.18

“Crude Oil” means all hydrocarbons which are produced in liquid state and at atmospheric pressure, at the wellhead, at the separator or after processing, asphalt, ozokerites and all other liquid hydrocarbons either in natural condition or obtained from Natural Gas by condensation or extraction, including inter alia condensates and Natural Gas liquids.

1.19

“Delivery Point” means the FOB point at loading terminal of Crude oil or Natural Gas in the Republic of Guinea or any other point agreed upon by the Parties.

1.20

“Affiliated Company” means any company which directly or indirectly controls or is controlled by any entity constituting the Contractor, or any company which directly or indirectly controls or is controlled by a company or entity which itself directly or indirectly controls any entity constituting the Contractor. For the purposes of the foregoing definition, “Control” means the direct or indirect ownership by a company or any other entity of at least fifty percent (50%,) of the shares or interest forming the capital of another company or entity conferring upon the owner thereof a majority of voting rights exercisable at general meetings of that another Company or entity, or a participation giving a determining position in the management of another company or entity.

1.21

“Quarter” means a period of three (3) consecutive months commencing with the first day of January, April, July and October.

1.22

“Contract Area” means the area described in Appendix A, being understood that when areas are surrendered by the Contractor they shall be deemed as excluded from the Contract Area. Conversely, the Exploitation Area(s) shall make an integral part of the Contract Area during the term of this Contract. The Contract Area represented on the attached Map consists of approximately 80,000 Sq. Km., further indicated by reference points on the Map attached to this Contract Appendix A.

ARTICLE 2: NATURE AND OBJECT OF THE CONTRACT

2.1

This Contract is a production sharing and marketing contract whereby the Government appoints the Contractor for rendering all the necessary services, on behalf of the Government, regarding the exploration for and, where applicable, the exploitation of Petroleum that may exist in the Contract Area.

The Contractor shall act, on an exclusive basis for the Government, to conduct and execute the Petroleum Operations. It shall supply all technical means technologies, equipment and materials as well as the personnel necessary for operations.

The Contractor shall bear, at its sole risk and expense, the full responsibility to finance the Petroleum Operations, except for the provisions of Article 15 below.

In the event of a Commercial Discovery in the Contract Area, the production of Petroleum shall be, during the term of the exploitation period, shared between the Parties in accordance with the provisions of Article 13 below.

2.2

The object of this Contract is to define the terms and conditions under which the Contractor shall provide the Government with the services set forth in Article 2.1 above, as well as the respective rights and obligations of the Parties.

ARTICLE 3: DURATION OF THE CONTRACT

3.1

This Contract shall consist of an exploration period and, in respect of each Commercial Discovery, an exploitation period.

3.2

The exploration period consists of a First Exploration Period and a Second Exploration Period. The First Exploration Period shall be for two Contract Years and the Second Exploration Period shall be for four Contract years.

3.3

The Contractor shall begin performing the Petroleum exploration operations within two (2) months after the Effective Date.

3.4

The Contractor shall be able to obtain ipso jure, the renewal of the First Exploration Period twice for an additional exploration period of one (1) Contract Year each time. For each renewal, the Contractor shall notify the Minister at least two (2) months prior to the expiry of such exploration period.

3.5

The Contractor is authorized to conduct First Exploration Period operations for the duration of this contract upon notification to the Minister two (2) months before the commencement of such work.

3.6

During the First Exploration Period, the Contractor may perform work obligations towards the fulfillment of the Second Exploration Period.

3.7

In order to enable the Contractor to complete its work, the Minister will grant an extension to the Second Exploration Period, for a period of four (4) years, upon notification made by the contractor at least two (2) months prior to expiry of the Second Exploration Period.

Upon a Petroleum discovery made during the Second Exploration Period and the remaining time is insufficient to allow the Contractor to undertake the appraisal works of such discovery, the Minister will grant an extension of two (2) years upon notification made by the Contractor at least two (2) months prior to expiry of the Second Exploration Period.

3.8

Subject to the provisions of Article 24 below, the Exploration Period shall expire two years after the end of the Second Exploration Period with the exception of the Exploitation Area(s) as defined in Article 7 below except in the event of surrender of the Contract Area as defined in Article 5.1 below in which case this Contract will not expire.

3.9

Following the determination by the Contractor of the commerciality of a discovery, the Exploitation Period with respect to that Commercial Discovery shall commence upon the date of adoption of the development plan in accordance with the provisions of Article 7 below and shall expire twenty-five (25) years following that date.

However, where the Contractor at the expiry of the Exploitation Period considers and provides the Minister with justifications, that the field is able to continue to produce commercially, said Exploitation Period shall be extended twice for ten (10) years each.

3.10

The Contractor shall have the right to drill more wells in the Exploitation Area during the Exploitation Period and where there are more than one Commercial Discovery, each of them shall have a different Exploitation Period.

ARTICLE 4: EXPLORATION WORK AND EXPENDITURE OBLIGATIONS

4.1

The Contractor shall carry out the following minimum exploration work and expected expenditures:

4.2

The fulfillment of any work obligations shall exempt the Contractor from fulfilling the expenditure obligations.

4.3

Each of the exploratory wells set forth in this Article shall be drilled to a minimum depth of 2,500 meters. However, the Contractor may, after prior notice to the Minister, discontinue an exploratory well at a lesser depth than initially specified for one of the following reasons:

In the event that any of the above reasons exists, the exploratory well in question shall be deemed to have been drilled to the minimum contractual depth.

4.4

If the Contractor carries out, either during the First Exploration Period or the Second Exploration Period, exploration works in excess of the minimum work obligations in respect of such exploration period, said excess work may be carried forward to the following exploration period(s) and shall be deducted from the contractual obligations set forth for such exploration period(s),

4.5

The expected exploration expenditure obligations set forth in Article 4.1 above are expressed in constant Dollars.

ARTICLE 5: SURRENDERS

5.1

Immediately after the effective date of this Contract, the passage of the “Projet de Loi” by the National Assembly, a legal opinion of the Supreme Court certifying the validity of this Contract and the issuance of a Presidential decree affirming this Contract the Contractor will surrender sixty four percent (64%) of the original Contract Area.

5.2

In recognition of the expenditure and work performed by SCS Corporation in the past the Government shall authorize SCS to participate in any other development of the surrendered area as referred to in Article 5.1 above on a priority non-exclusive basis.

ARTICLE 6: APPRAISAL OF A DISCOVERY

6.1

The Contractor shall forthwith notify the Minister of any Petroleum discovery made within the Contract Area and shall supply the Minister with all information related to such discovery.

6.2

If the Contractor decides to appraise the above-mentioned discovery, it shall notify the Petroleum Operations Management Committee defined in Article 9.2 below, with a detailed appraisal work program and the corresponding budget for such discovery. The provisions of Article 9.5 below shall apply mutatis mutandis to that appraisal work program as regards its adoption.

6.3

After adoption of the appraisal work program and the corresponding budget, the Contractor shall carry out such works with due diligence and in accordance with the established program.

6.4

Within two (2) months after the appraisal works are completed, the Contractor shall supply the Minister with a report establishing whether the discovery is commercial and including all information related to the technical and economic characteristics of such discovery.

ARTICLE 7: DEVELOPMENT AND PRODUCTION

7.1

If the Contractor considers a discovery to be a Commercial Discovery, it shall, within six (6) months from the completion of the appraisal works mentioned in Article 6.4 above, notify to the Petroleum Operations Management Committee referred to in Article 9.2 below the development plan concerning such Commercial Discovery.

7.2

The development plan submitted by the Contractor shall, inter alia, contain:

The commercial nature of a discovery shall be determined by the Contractor. A discovery may be declared as commercial by the Contractor if, after taking into account the contractual provisions and the submitted development plan, the forecasts of incomes and expenses prepared in accordance with the standards used in the international petroleum industry confirm its commerciality.

7.3

Within sixty (60) days from the notification of the development plan to the Petroleum Operations Management Committee; the latter may notify to the Contractor revisions or changes to that development plan. The Contractor will endeavor to include said revisions or changes in accordance with good international petroleum industry practice.

No later than thirty (30) days after the expiry of the time period referred to above, the Contractor shall submit the development plan to the Minister, for its adoption within thirty (30) days.

The date of adoption of the development plan shall be the date of its notice given by the Minister. If the Minister fails to give such notice within the thirty (30) day period, the development plan submitted by the Contractor shall be deemed adopted at the date of expiry of said period.

7.4

The Contractor shall commence the physical development works on the field within six (6) months after the date of adoption of the development plan and shall continue them with due diligence.

7.5

No later than three (3) months prior to the end of each Calendar Year, the Contractor shall notify to the Petroleum Operations Management Committee the annual development program, and, as the case may be, the annual production program relating to each Exploitation Area, for the following Calendar Year. The provision of Article 9.5 below shall apply mutatis mutandis to the annual development and production programs as regards their adoption.

7.6

During the Exploitation Period of a field, the Contractor shall produce annually reasonable quantities of Petroleum from said field in accordance with good international petroleum industry practice and taking into consideration, inter alia, the rules for the proper conservation of fields and the optimal recovery of Petroleum reserves under economic conditions.

7.7

The suspension of all production during a continuous period of at least twenty four (24) months, decided by the Contractor without the agreement of the Government, may result in the termination of this Contract pursuant to the provisions of Article 24.5 below.

7.8

Where a field extends beyond the boundaries of the Contract Area, the Minister may, as the case may be, require the Contractor to exploit said field in association with the contractor of the adjacent contract area under the provisions of a unitization agreement.

Within six (6) months after the Minister has notified the Contractor, the later shall notify the Minister of the development plan relating to the Commercial Discovery which shall be prepared in agreement with the contractor of the adjacent contract area.

If the development plan is not submitted to the Minister within the above-mentioned time period, or if such plan is not adopted by the Minister, the Minister will prepare a development plan in accordance with good international petroleum industry practice. Said plan shall be adopted by the Contractor, provided that the conditions imposed by the Minister do not reduce the economic profitability of the Contractor as arising from this Contract, and do not require more capital than normally the Contractor would contribute in the conduct of the Petroleum Operations.

7.9

The Contractor shall measure all Petroleum produced, after extraction of associated water and foreign substances, by using the measurement appliances and methods customarily used in the international petroleum industry. Pursuant to the provisions of Article 18 below, the Minister shall have the right to examine such measurements and cause to inspect the appliances and methods used.

If during the Exploitation Period the Contractor wishes to modify said appliances and methods, it shall notify the Minister.

Where the appliances and methods used therefore have caused an overstatement or understatement of measured quantities, the error shall be deemed to have existed since the date of the last calibration of the measurement device, unless the contrary may be justified, and an appropriate adjustment shall be made for the period said error has existed.

ARTICLE 8: NATURAL GAS

8.1

The provisions of this Contract shall apply mutatis mutandis to Natural Gas, subject to the specific provisions set forth below.

8.2

In order to enable the Contractor to establish the commercial nature of a non-associated Natural Gas discovery duly evaluated in accordance with the provisions of Article 6 above, the Second Exploration Period shall be, upon the Contractor’s notification to the Minister, extended for the time period necessary to establish the commercial nature. Such extension shall only be in respect of the area of the discovered Natural Gas Field.

8.3

Any associated Natural Gas production which, in the opinion of the Contractor, cannot be utilized in Petroleum Operations, nor economically re-injected or sold, may be flared.

8.4

If the Contractor decides to flare associated Natural Gas, or if the Contractor decides not to exploit its non-associated Natural Gas discovery, the Government may produce or allow others to produce, process and dispose of said Natural Gas, without any compensation to the Contractor.

In such a case, the Government shall bear all costs and risks related to the production, processing and disposal of said Natural Gas.

ARTICLE 9: ANNUAL WORK PROGRAMS AND PETROLEUM OPERATIONS 

MANAGEMENT COMMITTEE

9.1

All Petroleum Operations shall be carried out by the Contractor during any Calendar Year according to the annual work program and the corresponding budget in respect of that Calendar Year.

The annual work programs and budgets referred to above shall set apart the exploration, appraisal, development and production activities, and shall be submitted to the Minister in accordance with the provisions of the following Articles.

9.2

In order to ensure the timely notice of Petroleum Operations, a Petroleum Operations Management Committee shall be set up within sixty (60) days of the Effective Date.

That Committee shall consist on one hand, of two (2) representatives from the Minister, and, on the other hand, of two (2) representatives from the Contractor

That Committee shall be alternatively chaired by a representative of the Contractor for two years and thereupon by a representative of the Minister for two years in continuing sequences and shall meet upon request made by its chairmen. Unless otherwise agreed by the Parties, the Committee shall meet in Conakry or Houston.

The Petroleum Operations Management Committee shall be able to create ad hoc operation committees(s) for the purpose of fulfilling the operations of the contract. The number of members and definition of scope of the ad hoc committee(s) shall be determined by the Petroleum Operations Management Committee.

9.3

Within three (3) months from the Effective Date, the Contractor shall notify to the Petroleum Operations Management Committee of the annual work program and the corresponding budget for the remaining period of the current Calendar Year.

9.4