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PRODUCTION SHARING CONTRACT

Production Sharing Agreement

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CAMAC ENERGY INC. | CAMAC Energy Kenya Limited

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Title: PRODUCTION SHARING CONTRACT
Date: 8/8/2012
Industry: Oil and Gas - Integrated     Sector: Energy

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EXHIBIT 10.4

 

 

 

REPUBLIC OF KENYA

 

 

 

 

 

PRODUCTION SHARING CONTRACT BETWEEN

 

THE GOVERNMENT OF THE REPUBLIC OF KENYA

 

 

 

AND

 

 

 

CAMAC ENERGY KENYA LIMITED RELATING TO

 

 

 

BLOCK L1B

 

Production Sharing Contract Block L1B

Ministry of Energy Page 1

 

 


 

 

 

TABLE OF CONTENTS

 

 

PART I               SCOPE AND INTERPRETATION

  7

 

 

1A SCOPE

  7

 

 

The Contractor shall -

7

 

 

1B INTERPRETATION

7

 

 

PART II TERM, EXPLORATION OBLIGATIONS AND TERMINATION

  13

 

 

2. TERM

  13

 

 

3. SURRENDER

14

 

 

4. MINIMUM EXPLORATION WORK AND EXPENDITURE OBLIGATIONS

15

 

 

5. SIGNATURE BONUS AND SURFACE FEES

17

 

 

6. TERMINATION AND WITHDRAWAL

18

 

 

PART III RIGHTS AND OBLIGATIONS OF THE CONTRACTOR

19

 

 

7. RIGHTS OF THE CONTRACTOR

19

 

 

8. GENERAL STANDARDS OF CONDUCT

20

 

 

9. JOINT LIABILITY AND INDEMNITY

21

 

 

10. WELLS AND SURVEYS 

  21

 

 

11. OFFSHORE OPERATIONS

  23

 

 

12. FIXTURES AND INSTALLATIONS AND TITLE TO ASSETS

  23

 

 

13. LOCAL EMPLOYMENT, TRAINING AND COMMUNITY DEVELOPMENT PROJECT

  24

 

 

1 4. DATA AND SAMPLES

  25

 

 

15. REPORTS

26

 

 

PART IV RIGHTS AND OBLIGATIONS OF THE GOVERNMENT AND THE MINISTER

27

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 2

 

 


 

 

16. RIGHTS OF THE GOVERNMENT

27

 

 

17. OBLIGATIONS OF THE GOVERNMENT

27

 

 

PART V WORK PROGRAMME, DEVELOPMENT AND PRODUCTION

28

 

 

18. EXPLORATION WORK PROGRAMME

28

 

 

19. DISCOVERY AND EVALUATION WORK PROGRAMME

29

 

 

20. DEVELOPMENT PLAN AND DEVELOPMENT WORK PROGRAMME

30

 

 

21. UNITISATION

31

 

 

22. MARGINAL AND NON-COMMERCIAL DISCOVERIES

32

 

 

23. NATURAL GAS

32

 

 

24. PRODUCTION LEVELS AND ANNUAL PRODUCTION PROGRAMME

33

 

 

25. MEASUREMENT OF PETROLEUM 

33

 

 

26. VALUATION OF CRUDE OIL AND NATURAL GAS 

34

 

 

PART VI                 COST RECOVERY, PRODUCTION SHARING, MARKETING AND PARTICIPATION

35

 

 

27. COST RECOVERY, PRODUCTION SHARING, WINDFALL AND INCOME TAX

35

 

 

28. GOVERNMENT PARTICIPATION

39

 

 

29. DOMESTIC CONSUMPTION

40

 

 

PART VII BOOKS, ACCOUNTS, AUDITS, IMPORTS, EXPORTS AND FOREIGN EXCHANGE

42

 

 

30. BOOKS, ACCOUNTS AND AUDITS

42

 

 

31. PREFERENCE TO KENYAN GOODS AND SERVICES

42

 

 

32. EXPORTS AND IMPORTS 

43

 

 

33. EXCHANGE AND CURRENCY CONTROLS

45

 

 

PART VIII GENERAL

46

 

 

34. PAYMENTS

46

 

 

35. ASSIGNMENT

46

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 3

 

 


 

 

36. MANAGER, ATTORNEY AND JOINT OPERATION AGREEMENT

47

 

 

37. CONFIDENTIALITY

47

 

 

38. FORCE MAJEURE

48

 

 

39. WAIVER

48

 

 

40. GOVERNING LAW

49

 

 

41. ARBITRATION

49

 

 

42. ABANDONMENT AND DECOMMISSIONING OPERATIONS

50

 

 

43. NOTICES

54

 

 

44. HEADING AND AMENDMENTS

55

 

 

APPENDIX “A”

57

 

 

THE CONTRACT AREA – BLOCK L1B

57

 

 

APPENDIX "B"

58

 

 

ACCOUNTING PROCEDURE

58

 

 

APPENDIX "C"

70

 

 

PARTICIPATION AGREEMENT

70

 

 

 

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 4

 

 

 


 

 

Block Map of Kenya: Arrow Showing Location of Block L1B

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 5

 

 


 

 

PRODUCTION SHARING CONTRACT

 

BETWEEN

 

 

THE GOVERNMENT OF THE REPUBLIC OF KENYA

 

 

AND

 

CAMAC ENERGY KENYA LIMITED

 

This contract is made and entered into on the 10 th day of May, 2012 between  the Government of the Republic of Kenya (herein after referred to as the "Government") represented for the purpose of this Contract by the Minister for the time being responsible for energy (hereinafter referred to as the "Minister"); and CAMAC Energy Kenya Limited  a company incorporated  in accordance with the  Laws of Kenya  (hereinafter referred to as "The Contractor").

 

The Government and the Contractor herein are referred to either individually as "Party" or collectively as "Parties".

 

WITNESSETH:

 

WHEREAS the title to all Petroleum resources existing in their natural conditions in Kenya is vested in the Government; and

 

WHEREAS  the Government wishes to promote and encourage the exploration and the development  of Petroleum  resources  in and throughout  the Contract Area, as defined herein; and

 

WHEREAS  the Contractor desires to join and assist the Government in accelerating the exploration and development  of the potential  Petroleum  resources within the Contract Area; and

 

WHEREAS   the   Contractor   has   the   financial   ability,   technical   competence   and professional   skills   necessary   to   carry   out  the   Petroleum   Operations   hereinafter described; and

 

NOW THEREFORE in consideration of the undertaking and covenants herein contained, the Parties hereby agree as follows:

 

Production Sharing Contract Block L1B

Ministry of Energy Page 6

 

 


 

 

 

PART I SCOPE AND INTERPRETATION

 

1A
SCOPE

 

This Contract is a production-sharing contract, in accordance with the provisions herein contained and is within the meaning of the term “petroleum agreement” under section 2 of the Act, and is an enforceable contract between the Government and the Contractor.

 

The Contractor shall -

 

(a) Be responsible to the Government for the execution of the Petroleum Operations contemplated hereunder in accordance with the provisions of this Contract and is hereby appointed and constituted the exclusive legal Contractor to conduct Petroleum Operations in the Contract Area for the term hereof;

 

(b) Provide all capital, machinery, equipment, technology and personnel necessary for the conduct of Petroleum Operations;

 

(c) Bear the risk of Petroleum Costs required in carrying out Petroleum Operations and shall therefore have an economic interest in the development of the Petroleum deposits in  the  Contract  Area.  Such  costs  shall  be  included  in  Petroleum  Costs recoverable as provided in clause 27 hereof.

 

During the term of this Contract, the total production achieved in the conduct of the Petroleum Operations shall be divided between the parties hereto in accordance with the provisions of clause 27 hereof.

 

1B INTERPRETATION

 

In this Contract, words in the singular include the plural and vice versa, and except where the context otherwise requires:

 

"Accounting Procedure" means the accounting procedures and requirements set out in Appendix "B" attached hereto and made an integral part hereof;

 

"The Act" means the Petroleum (Exploration and Production) Act (Cap 308) laws of

 

Kenya, 1986, enacted by the Parliament of the Republic of Kenya;

 

 “Additional Exploration Period” means the First Additional Exploration Period and/or Second Additional Exploration Period;

 

"Affiliate" means a Person directly or indirectly controlling or controlled by or under direct or indirect common control with another Person and "Control" means the ownership of at least fifty percent (50%) of voting rights in that Person;

 

“Appointee”  means  a  body  corporate  wholly  owned  or  Controlled  by  the

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 7

 

 


 

 

 

 

Government of the Republic of Kenya and appointed for the purposes of this Contract;

 

"Barrel" means a quantity consisting of 158.987 litres at standard atmospheric pressure of 1.01325 bars and temperature of fifteen degrees centigrade (15 C);

 

“Barrel of Oil Equivalent” means that 6000 standard cubic feet of Natural Gas at standard temperature (15oC) and pressure (1.01325 bars) is equivalent to one Barrel of Crude Oil for the purposes of volumetric calculations under this Contract;

 

“Blocks” means area covered by separate production sharing contracts between the

 

Government and the Contractor;

 

"Calendar Quarter" or "Quarter" means a period of three (3) consecutive months commencing with the first day of January, April, July and October;

 

"Calendar Year" means a period of twelve (12) consecutive months commencing with the first day of January in any year and ending the last day of December in that year, according to Gregorian calendar;

 

“Change in Control” means any direct or indirect change in Control of a Party (whether through merger, sale of shares or other equity interests, or otherwise) through a single transaction or series of related transactions, from one (1) or more transferors to one (1) or more transferees;

 

"Commercial Discovery" means a tested and delineated accumulation of Petroleum in an Exploratory Well which has been duly evaluated in accordance with the provisions of clause 19, and whose reserves are certified by a competent 3rd  party, appointed by the Contractor, as being capable of Commercial Production according to good international financial and petroleum industry practice, after the consideration of all pertinent technical and economic data;

 

"Commercial Production" means the quantity of Petroleum produced on a regular basis from a Commercial Discovery, not used in Petroleum Operations, but saved and sold at a value exceeding the combined exploring, finding, appraising, developing, producing, transporting and marketing costs of that production;

 

"Constitution" means the Constitution of the Republic of Kenya;

 

“Contract” means this agreement upon execution;

 

"Contract Area" means Block L1B the geographic area covered by this Contract, and described in Appendix "A" and any part thereof not previously surrendered;

 

"Contract Year" means twelve (12) consecutive calendar months from the Effective Date or from the anniversary thereof;

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 8

 

 


 

 

"Contractor" means the Entities and their respective successors or any assignee or assignees of any paying Participating Interest, provided that the assignment of any such paying Participating Interest is accomplished pursuant to the provisions of clauses 6(4) or

 

 

35 hereof, and such term will include the Government, or its Appointee, in those certain Development Areas in which the Government exercises its right to acquire a fully paying Participating Interest in accordance with Clause 28(2);

 

“Cost Oil” shall have the meaning set out in sub-clause 27(1);

 

"Crude Oil" means all hydrocarbons regardless of gravity that are produced at the wellhead in liquid state at atmospheric pressure, asphalt ozokerites and the liquid hydrocarbons known as distillates or Natural Gas Liquids obtained from Natural Gas by condensation or extraction;

 

“Customs Duties” means duties, levies and other taxes on imports, which are

 

payable as a result of the importation of the item or items under consideration;

 

“Decommissioning Plan” means the plan for the decommissioning, abandonment, recovery and removal, or if applicable redeployment, of wells, flow lines, pipelines, facilities, infrastructure and assets related to Petroleum Operations;

 

“Delivery Point” means the inlet flange point F.O.B. Kenya export pipeline or loading facility at which Natural Gas or Crude Oil reaches the metering station of a pipeline or the inlet flange of the lifting tank ship’s intake pipe, or such other point that may be agreed by the Parties;

 

"Development Area" means the area delimited in a Development Plan adopted under Clause 20 hereof;

 

“Development Period” means the period for the development of a Commercial Discovery, which begins on the date of the designation of a Development Area in accordance with the provisions of Clause 20 hereof and continues for the term set out in clause 2(6);

 

“Development Plan” means the programme for drilling, testing and completing all wells meant for production or pressure maintenance, installation of a gathering system between wells, and installation and commissioning of any processing and transportation facilities necessary to deliver production to the Point of Sale, all of which are contained in a plan for development that is prepared and adopted under Clause 20 hereof;

 

“Discount Rate” means the sum of one (1) and the decimal equivalent of the percentage increase in the United States Consumer Price Index, as reported for the first time in the monthly publication "International Finance Statistics" of the International Monetary Fund, between the month of the Effective Date and the month when such costs were incurred;

 

“Discovery” means the Discovery of Petroleum;

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 9

 

 


 

 

 

“Economic Limit” means that point in the life of field where expected Revenue to Contractor from Petroleum Operations is insufficient to cover the operating costs to continue Petroleum Operations in accordance with the requirements of the Contract. In this context “Revenue” means the expected revenues derived from the conveyance and sale of Petroleum at the Delivery Point together with any firm tariff income earned by the field facilities, if any;

 

"Effective Date" means the date falling ninety days after this Contract is executed by the Government and the Contractor;

 

“Evaluation” means the logical cataloguing, interpretation and assessment of economic and or technical data and information in order to understand the implications and impact of such data and information on technical and business decisions with respect to Petroleum Operations and shall be inclusive of logging, coring and testing an Exploratory Well, but exclusive of drilling, reaming, sidetracking or similar activities;

 

"Execution Date" means the date this Contract is signed by the Government and the Contractor;

 

“Expert Determination” means the process whereby a technical dispute is resolved by the appointment of an internationally recognized technical expert who shall be appointed by mutual agreement of the Government and the Contractor, or, failing mutual agreement within thirty (30) days, by the International Chamber of Commerce for the purpose of making a determination related to disputes on technical matters or technical differences under sub-clause 26(1)(b), which determination shall be made within twenty (20) days of the appointment and shall be final and binding upon the Government and the Contractor

 

“Exploration Period” means the Initial Exploration Period and the Additional Exploration Period (as extended), as the case may be, during which Exploration Operations are undertaken by the Contractor;

 

"Exploration Operations" include geological, geophysical and Geochemical surveys and analyses, aerial mapping, investigations of subsurface geology, stratigraphic tests, drilling Exploratory Wells and work necessarily connected therewith;

 

"Exploratory Well" means a well drilled or to be drilled (as the case may be) in search of Petroleum to test a geological feature, which has not been determined to contain producible Petroleum sufficient for Commercial Production;

 

“First Additional Exploration Period” means the additional period of two (2) Contract Years after the Initial Exploration Period pursuant to sub-clause 2(3), as may be extended under this Contract;

 

"Fiscal Year" means a period of twelve (12) consecutive months corresponding to

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 10

 

 


 

 

 

the year of income as defined in the Income Tax Act of Kenya;

 

“Government” means the Government of the Republic of Kenya;

 

"Income Tax Act" means the Income Tax Act of Kenya, as from time to time amended;

 

“Initial Exploration Period” means the period of two (2) Contract Years commencing on the Effective Date of the Contract, as defined in sub-clause 2(1);

 

“Joint Account” shall have the meaning set out in subpart 1.1.1 of the Accounting

 

Procedure;

 

“Joint Operating Agreement” (JOA) means the operating and participating agreement between the Parties constituting the Contractor that governs their operational activities, obligations and responsibilities under this Contract,

 

"LIBOR" means London Inter-Bank Offered Rate of interest on six (6) months United States dollars deposit quoted at 11 a.m. by the National Westminster Bank Plc, or any other bank agreed by the parties on the first banking day of  each month for which interest is due;

 

“Lower Thermal Heat Rate” means the Btu content of a fuel by international

 

Standards used for comparison of thermal value of a hydrocarbon;

 

“Market Evaluation Report” means a report for a potentially commercial Natural Gas Discovery by the Contractor including but not limited to identifying potential markets for the Natural Gas, expected volumes for such markets, infrastructure potentially required to access such markets and expectations of price for the Natural Gas supplied to such markets;

 

"Maximum Efficient Rate" means the rate at which the maximum ultimate economic petroleum recovery is obtained from a commercial field without excessive rate of decline in reservoir pressure and consistent with good international petroleum industry practice;

 

Minimum  Expenditure”  means  the  minimum  expenditure  obligations  of  the

 

Contractor during each of the Exploration Periods as specified in Clause 4 herein;

 

"Minister" means the Minister for the time being responsible for energy or his designated representative;

 

"Ministry" means the Ministry for the time being responsible for energy or its designated representative;

 

"Natural Gas" means hydrocarbons that are in a gaseous phase at atmospheric conditions of temperature and pressure, including wet mineral gas, dry mineral gas, casing

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 11

 

 


 

 

 

head gas and residue gas remaining after the extraction or separation of liquid hydrocarbons from wet gas, and non-hydrocarbon gas produced in association with liquid or gaseous hydrocarbons

 

 “Natural Gas Liquids” or “NGLs” means liquefiable hydrocarbons obtained from Natural Gas by condensation or extraction, including, but not limited to, ethane, propane, butane, pentanes and heavies;

 

 “Normal Cubic Meter” means the volume of gas that occupies a cubic meter when this gas is at a temperature of 15 degrees Celsius and a pressure of 1013.25 millibar;

 

 “Offshore” shall mean any area which lies below the elevation of the lowest tide

 

level of the shoreline in question for the 10 years preceding this Contract;

 

 “Participation Agreement” means that model agreement as set out in Appendix C between the Government and Contractor that sets guidelines with respect to the relationship between the Government and Contractor in connection with their respective activities, obligations and responsibilities and which shall only come into force after negotiation of a mutually acceptable form and on signature by the Parties upon the election of the Government to acquire, hold and execute a fully paing working Participating Interest in one (1) or more Development Areas in accordance with Clause 28 of this Contract;

 

“Participation Interest or Participating Interest” shall mean, as the context requires, the fully paying Participating Interest, expressed as a percentage, and held by the Entities in and to this Contract and the Contract Area, and will include the Government, or its Appointee, in those certain Development Areas in which the Government exercises its right to acquire such a fully paying Participating Interest in accordance with Clause 28.

 

“Person” means any legal Contractor, corporeal or otherwise; "Petroleum" means Crude Oil and Natural Gas.

 

 

"Petroleum Costs" means those expenditures made and obligations incurred by the Contractor in carrying out Petroleum Operations hereunder, determined in accordance with this Contract and the Accounting Procedure attached hereto in Appendix "B" and made a part hereof;

 

"Petroleum Operations" means all or any of the operations, authorised under this Contract, related to the exploration for, finding, appraisal, development, extraction, production, decommissioning, separation and treatment, storage, transportation, and sale or disposal of, Petroleum up to the point of export or the agreed Delivery Point in Kenya or the point of entry into a refinery and includes Natural Gas processing, liquefaction and compressed Natural Gas operations but does not include petroleum refining operations;

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 12

 

 


 

 

“Point of Sale” means Delivery Point unless otherwise specified; “Profit Oil” shall have the meaning set out in sub-clause 27(3);

 

"Regulations" mean the Petroleum (Exploration and Production) Regulations;

 

“Second Additional Exploration Period” means the second period of two (2) contract years after the First Additional Exploration Period pursuant to sub-clause 2(4), as may be extended under this Contract;

 

 

“Second Tier Amount” shall have the meaning set out in sub-clause 27(3); "Semester" means a period of six (6) consecutive months commencing with the first

 

day of January or the first day of July of a

 

Calendar Year;

 

“Stub Year” shall mean that portion of the first Contract Year between the Effective

 

Date and the last day of the Calendar Year then in progress;

 

“Threshold Price” shall have the meaning set out in sub-clause 27(3)(e).

 

 

PART II TERM, EXPLORATION OBLIGATIONS AND TERMINATION

 

2. TERM

 

(1)

The Contractor is authorized to conduct Exploration Operations in the Contract Area during an Initial Exploration Period of Two (2) Contract Years  from the Effective Date.

 

(2) 

The Contractor shall begin Exploration Operations within three (3) months  of the

 

Effective Date .

 

(3)

Upon written application by the Contractor made not later than one (1) month prior to the expiry of the Initial Exploration Period, the Minister shall, if the Contractor has fulfilled his work and expenditure obligations under this Contract, grant a First Additional Exploration Period of two (2) Contract Years.

 

(4)

Upon written application by the Contractor made not later than one (1) month prior to the expiry of the First Additional Exploration Period, the Minister shall, if the Contractor has fulfilled all its work obligations under this Contract, grant a Second Additional Exploration Period of two (2) Contract Years.

 

(5)

In  order  to  enable  the  Contractor  to  complete  the  drilling  and  testing  of  an Exploratory Well actually being drilled or tested at the end of the any  Additional

 

           

 

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 13

 

 


 

 

 

Exploration Period, the Minister shall, on written application by the Contractor made not later than three (3) months before the expiry of   such Additional Exploration Period, unless another period of notice is agreed by the Parties, extend the period in which the work is to be expeditiously completed, which in any event shall not extend such period by more than four (4) months.

 

(6)

This Contract shall expire automatically at the end of the Initial Exploration Period or at the end of any Additional Exploration Period as extended in accordance with this Contract, except as to any Development Area. If the Contractor reports, pursuant to sub-clause 19(6) hereof, that a Commercial Discovery has been made before the expiry of the Initial Exploration Period stipulated in sub-clause 2(1) hereof or any Additional Exploration Period thereof, this Contract shall not expire in respect to the relevant Development Area, but shall continue as to such Development Area for Crude Oil for a Development Period term of Twenty Five  25 years  from the date the Development Plan for that Development Area is adopted under sub-clause

 

20(3) hereof, provided that the Development Period for a Natural Gas Development Area shall continue for a term of twenty five (35)  from the date the Development Plan for such Natural Gas Development Area is adopted under sub-clause 20(3) hereof.

 

 

3. SURRENDER

 

 (1)

The Contractor shall surrender:

 

(a) Twenty Five (25 %) Percent  of the original contract area at or before the end of the Initial Exploration Period;

 

(b) Twenty Five (25%) Percent  of the remaining contract area at or before the end of the First Additional Exploration Period.

 

(2)

When calculating surrender under sub-clause 3(1), a Development Area shall be excluded from the original Contract Area.

 

(3)

Notwithstanding the terms of surrender set forth under sub-clause 3(1) herein the Contractor may surrender an additional part of the Contract Area and such a voluntary surrender shall be credited against the next surrender obligation of the Contractor under sub-clause 3(1).

 

(4)

The shape and size of an area surrendered shall be approved by the Minister, which approval shall not be unreasonably withheld.

 

(5)

The Contractor shall give one (1) year's written notice of surrender in respect of a Commercial Discovery, which is producing or has produced Petroleum and one (1) month written notice of surrender in respect of any other part of the Contract Area. In case of a surrender of the entire Contract Area this Contract shall terminate.

 

(6)

No surrender shall reduce shall reduce the minimum amount of exploration work and expenditure fixed in clause 4

 

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 14

 

 


 

 

4. MINIMUM EXPLORATION WORK AND EXPENDITURE OBLIGATIONS

 

(1)

The Contractor shall have the obligation to fulfil the following minimum work and expenditure obligations –

 

(a) During the Initial Exploration Period of Two (2) Contract Years –

 

1.1     Minimum Work and Expenditure Obligations

( i)        Acquire Gravity and Magnetic data and interpret 1000km2 at a minimum expenditure of

USD250,000.00

(ii)      Acquire, process and interpret 500line kilometres of   2D seismic data a minimum expenditure of US$5,000,000.00

 

 

 

TOTAL  MINIMUM  EXPENDITURE  DURING  THE  INITIAL EXPLORATION PERIOD
USD5,250,000.00

 

 

(b) During the First Additional Exploration Period of Two (2) Contract Years:

 

Minimum Work and Expenditure Obligations

( i)        Acquire, process and interpret high density 300 km2 3D seismic data at a minimum
expenditure of a minimum expenditure of USD12,000,000.00

(ii)      To drill one (1) exploratory well to a minimum of depth of 3,000m at a minimum
expenditure USD20,000,000.00

 

 

TOTAL MINIMUM EXPENDITURE DURING FIRST ADDITIONAL EXPLORATION PERIOD  US$32,000,000.00

 

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 15

 

 


 

 

 

(c) During the Second Additional Exploration Period of Two (2) Contract Years:

 

Minimum Work and Expenditure Obligations

( i)        Acquire , process and interpret high density 150 km2 3D seismic data at a minimum 
expenditure of  USD6,000,000.00

 

(ii)      To drill one (1) exploratory well to a minimum of depth of 3,000m at a minimum
expenditure USD20,000,000.00

 

 

TOTAL MINIMUM EXPENDITURE DURING FIRST  ADDITIONAL EXPLORATION PERIOD  US$26,000,000.00

 

 

 

(2)

The fulfilment of all the minimum work obligations in respect of each  Exploration Period as set forth in sub-clauses 4(1) (a), 4 (1) (b) and 4 (1) (c) shall  relieve the Contractor of the corresponding expenditure obligation thereto.

 

(3) 

     If the drilling of an Exploratory Well is discontinued, prior to reaching the minimum depth herein specified, because that well has encountered the basement, an impenetrable substance or any condition which in accordance with the good international petroleum industry practice would make it unsafe or impractical to continue drilling, the minimum depth obligation in respect of that well shall be deemed to be fulfilled.

 

(4)

A well drilled to evaluate a Discovery under an Evaluation work programme pursuant to sub-clause 19(2) and 19(3) shall not be considered to  an Exploratory Well for the purpose of fulfilling the required number of Exploratory Wells, unless the written consent of the Minister is obtained.

 

(5) 

The minimum exploration expenditure set forth in sub-clause 4(1) is expressed in U.S. dollars of the year of the Effective Date. In any Contract Year of either the Initial Exploration Period or any Additional Exploration Period, for the purpose of comparison of the actual costs incurred and paid by the Contractor with the minimum exploration expenditure, the actual costs incurred and paid by the Contractor for seismic operations and the drilling of Exploratory Wells during that Contract Year shall be converted into constant U.S. dollars by dividing the costs by the Discount Rate.

 

(6) 

If during either the Initial Exploration Period or the First Additional Exploration Period, the Contractor exceeds the minimum work obligation in accordance with

 

 

 

Production Sharing Contract Block L1B

Ministry of Energy Page 16

 

 


 

 

 

sub-clause 4(4) exceeding the Minimum work obligations for such Exploration Period, then such excess may be credited toward the respective obligation of the next succeeding Additional Exploration Period or periods.

 

(7)

Upon entry into each exploration period, Contractor shall provide 50% Bank and 50%   Parent Company Guarantee  guaranteeing its full minimum work and expenditure obligations for each exploration period guaranteeing the Contractor's minimum work and expenditure obligations under sub-clause 4(1) hereof.

 

(8) 

If at the end of either the Initial Exploration Period or of the First/Second  Additional Exploration Period or upon the date of termination of this Contract, whichever occurs first, the Contractor has not fulfilled all its minimum work obligations under sub-clause 4(1) hereof, the Contractor shall pay the Government the minimum monetary obligation in respect of all the work for the expiring period multiplied by the Discount Rate and calculated on the last month of that Exploration Period, and/or the shortfall, if any, between the amount expended, in accordance with sub-clause 4(4) and the minimum monetary obligation for the expiring Exploration Period, multiplied by the Discount Rate.

 

5. SIGNATURE BONUS AND SURFACE FEES

 

(1) 

The Contractor shall pay a Signature Bonus of Three Hundred and Ten Thousand United States Dollars (USD310,000) on or before the Execution Date of this contract by means of a direct bank transfer to an accepted Ministry bank account and in accordance with applicable law.

 

(2) 

The Contractor shall pay, on or before the beginning of the relevant Contract Year to the Ministry, the following surface fees;

 

 

(i) Five United States Dollars (USD5.00)  per square kilometre per annum during the Initial Exploration Period,

 

 

 

(ii) Ten United States Dollars  ( USD10.00)  per square kilometre per annum during the First Additional Exploration Period,

 

 

 

(iii)         Fifteen United Dollars (USD15.00)  per square kilometre per annum during the Second Additional Exploration Period,

 

 

 

(iv) One Hundred United States Dollars USD (USD100.00)  per square kilometre per annum during the Development and Production Periods

 

(3) 

The surface fees shall be calculated on the basis of the surface area of the Contract Area on the date those payments are due.

 

A fee payable under sub-clause 5(2) is not refundable and a late payment shall attract interest in accordance with sub-clause 34(2).

 

 

 

 

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6. TERMINATION AND WITHDRAWAL

 

 

(1) 

The Minister may terminate this Contract by giving the Contractor written notice, if the Contractor –

 

 

(a) Fails to make any payment to the Government or the Minister required under this Contract for a period exceeding sixty (60) days; or

 

 

 

(b) Is in material breach of any other obligation under this Contract; or

 

 

 

(c) becomes insolvent, makes a composition with its creditors, or goes into liquidation other than for reconstruction or amalgamation.

 

(2) 

The period of notice in respect of sub-clause 6(1)(a) hereof shall be two (2) months, and in any other case three (3) months, but if the Contractor remedies the breach within the period of notice, the Minister shall withdraw the notice.  Where the Minister reasonably believes the Contractor is using its best efforts to remedy the default, the Minister may extend the notice, accordingly.

 

(3)

When this Contract is terminated or expires in whole or in part, the Contractor shall conclude the Petroleum Operations in the area as to which this Contract has terminated or expired in an orderly manner minimising harm to the Government and third parties.

 

 

 

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PART III RIGHTS AND OBLIGATIONS OF THE CONTRACTOR

 

7. RIGHTS OF THE CONTRACTOR

 

(1)

The Contractor shall have the right to carry out the Petroleum Operations within the Contract Area, subject to the provisions of this Contract for the term hereof.

 

(2)

The Contractor is granted the right to enter upon the Contract Area and conduct Petroleum Operations there, but permission may be granted by the Government to other Persons to search for and mine minerals, other than Petroleum, so long as they do not interfere with the Petroleum Operations, and easements and rights of way may be granted to other Persons for the benefit of land adjacent to the Contract Area.

 

(3)

The Minister shall facilitate on behalf of the Contractor any permit necessary to enable the Contractor to use the water in the Contract Area for the purpose of the Petroleum Operations but the Contractor shall not unreasonably deprive the users of land, domestic settlement or cattle watering place of the water supply to which they are accustomed.

 

(4)

The Contractor may, for the purpose of the Petroleum Operations, use gravel, sand, clay and stone in the Contract Area but not in –

 

 

(a) Trust land without a licence granted under section 37 of the Trust Land Act;

 

 

 

(b) Other private land without the consent of the owner; and

 

 

 

(c) A beach, foreshore or reef without the consent of the Minister.

 

(5) 

Subject to the provisions of section 10 of the Act and of regulation 6 of the Regulations, and subject to the provisions of Chapter V and Articles 261 and 262 in the 5th schedule of the Constitution and Part IV of the Trust Land Act, the Contractor may exercise all rights granted to him by this Contract.

 

(6) 

Subject to the approval of the applicable Development Plan, the Contractor shall have the right to freely consume or re-inject, without being subject to any taxes, royalties or other payments, Crude Oil and Natural Gas from the Contract Area for the purpose of conducting the Petroleum Operations.

 

(7)

As a result of conducting the Petroleum Operations, the Contractor shall have the right, without any additional payment, except for those payments provided for in this Contract, to:

 

 

 

 

(a) Enter into contracts with the other Parties for the services of their personnel or to provide services in relation to the Petroleum Operations;

 

 

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(b) Arrange financing for a portion of the capital costs of the development operations to be undertaken by the Contractor, as determined by the Contractor;

 

 

 

(c) Enter into agreements providing for the transportation and terminalling of Crude Oil and Natural Gas;

 

 

 

(d) establish a marketing agreement with one or more of the parties to market the Crude Oil and Natural Gas on behalf of the Contractor on international markets; and

 

 

 

(e) Enter into  any other  agreements  that  may be  necessary to  conduct  the Petroleum Operations.

 

 

 

8. GENERAL STANDARDS OF CONDUCT

 

(1)

The  Contractor  shall  carry  out  the  Petroleum  Operations  diligently  and  in accordance with good international petroleum industry practice.

 

(2)           In particular, the Contractor shall -

 

(a) Ensure that all machinery, plant, equipment and installations used by the Contractor in connection with the Petroleum Operations are of proper and accepted construction and are kept in good repair;

 

(b)  Use  the  resources  of  the  Contract  Area  as  productively  as possible and ensure that good international petroleum industry practice is used to prevent Petroleum discovered and produced, or mud or any other fluids or substances escaping or being wasted;

 

(c) prevent damage to adjacent strata which bear Petroleum or water, and prevent water entering through wells into strata bearing petroleum, except where water injection methods are used for secondary recovery operations;

 

(d) properly confine Petroleum in receptacles constructed for that purpose, and not place Crude Oil in an earthen reservoir except temporarily in an emergency; and

 

(e) Dispose of waste oil, salt water and refuse in accordance with good international petroleum industry practice, avoiding pollution.

 

(3)      In  conducting  the  Petroleum  Operations,  the  Contractor  may  use  any  of  its Affiliates, any Affiliate of the entities constituting the Contractor or independent contractors.   The Contractor, however, shall remain responsible for the performance of its obligations.

 

 

 

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9. JOINT LIABILITY AND INDEMNITY

 

(1) 

Where a Contractor consists of more than one (1) Person their liability shall be joint and several.

 

(2) 

The Contractor shall cause as little damage as possible to the surface of a Contract Area and to trees, crops, buildings and other property thereon, shall forthwith repair any damage caused, and shall pay reasonable compensation for any loss suffered, as determined by an independent Expert appointed by the parties, subject to sub- clause 9(5).

 

(3)

The Minister may, if he has reasonable cause to believe that the Petroleum Operations may endanger persons or property, cause pollution, harm marine life or interfere with navigation and fishing, order the Contractor to take reasonable remedial measures or order the Contractor to discontinue the relevant Petroleum Operations until such measures, or mutually agreed alternatives thereto, are implemented.  If Petroleum Operations are suspended in accordance with this sub- clause 9(3) during the Exploration Period, then the Exploration Period shall be extended by the same number of days as the period of the suspension.

 

(4) 

The  Contractor  shall  maintain  appropriate  and  adequate  third  party  liability insurance and workmen's compensation insurance and shall provide the Minister with evidence of those insurances before the Petroleum Operations begin.

 

(5) 

The Contractor shall indemnify, defend and render the Government harmless from all and any third party claims for loss or damage which, but for the conduct of Petroleum Operations by the Contractor or sub-Contractor, would not have arisen or occurred.  Under no circumstances, however, shall the Contractor be liable for indirect or consequential losses or damages, pool formation or structure damage, loss of reservoir, loss of production or loss of profits arising out of or in connection with this Contract or the Petroleum Operations.

 

(6)

In the event of an emergency or extraordinary circumstances requiring immediate action, including the safeguarding of lives or property or protection of the environment or for health reasons, the Operator, on behalf of the Contractor, may take all such actions as it deems proper or advisable to protect the joint property, its  investments  and  its  employees,  and  shall  give  written  notice  to  the Government immediately thereafter.   Any and all costs incurred in connection with such emergency activities shall be regarded as Petroleum Costs for the purpose of cost recovery under Clause 27 and the Accounting Procedure.

 

10. WELLS AND SURVEYS

 

(1) 

Unless such a notice is waived, the Contractor shall not drill a well or borehole or recommence drilling after a six (6) months' cessation without thirty (30) days' pnotification to the Minister which notice shall set forth the Contractor's reasons for undertaking such well and shall contain a copy of the drilling programme.

 

 

 

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(2)  

The design of a well or borehole and the conduct of drilling shall be in accordance with good international petroleum industry practice.

 

(3) 

No borehole or well shall be drilled so that any part thereof is less than five hundred (500) metres from a boundary of the Contract Area, without the consent in writing of the Minister, which consent shall not be unreasonably withheld.

 

(4)  

The Contractor shall not, except where there is danger or a risk of significant economic loss –

 

(a) abandon a well or remove any permanent form of casing there from, without giving forty-eight (48) hours prior notification to the Minister, and an abandoned well shall be securely plugged to prevent pollution, sub- sea damage, or water entering or escaping from the strata penetrated; or

 

(b) Commence drilling, re-enter or plug a well unless a representative of the Minister has been given a reasonable opportunity to be present.

 

(5)

The Contractor shall state, in its application to abandon a well on land, whether that well is capable of providing a water supply.

 

(6)

The Contractor shall, within two (2) months of termination or expiry of this Contract or the surrender of part of the Contract Area, deliver up all productive wells, in said surrendered area, in good repair and working order together with all casings and installations which cannot be moved without damaging the well, but the Minister may require the Contractor to plug the well at the Contractor's expense by notifying the Contractor within thirty (30) days after such termination or expiry is effected or at least three (3) months prior to surrender of a Development Area.

 

(7)

Where the Contractor applies to permanently abandon an Exploratory Well in which petroleum of potentially commercial significance has not been found, the Minister may request the Contractor to deepen or sidetrack that well and to test the formations penetrated as a result of such operations, or to drill another exploration well within the same prospect area, subject to the following provisions;

 

(a) Any such additional Petroleum Operations shall be at the sole cost, risk and expense of the Minister and shall be paid for in accordance with the Accounting Procedure.   The Government shall advance to the Contractor the funds necessary to conduct the operations.

 

(b) The Contractor shall not undertake such additional work if it will interfere with the conduct of the Contractor's Petroleum Operations or if it is not commercially, technically or operationally feasible.

 

 

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(c) In the event that the Petroleum Operations undertaken under this sub-clause 10 (7) result in a Discovery which the Contractor elects to evaluate and/or develop as a commercial field, the Contractor shall reimburse the Government Six Hundred per cent (600%) of the costs and expenses incurred by the Government for the conduct of the operations and such sum shall be paid within thirty (30) days of the notification made by the Contractor.  If the Contractor does not make such election, the Government shall have the right to continue the Petroleum Operations on this Discovery at the sole cost, risk and expense of the Government.

 

(8) 

The Contractor shall give the Minister thirty (30) days; notice of any proposed geophysical survey of the Contract Area, which notice shall contain complete details of the programme to be conducted. At the request of the Contractor, the Minister may waive the notice period.

 

11. OFFSHORE OPERATIONS

 

(1)  

The Contractor shall ensure that works and installations erected offshore in Kenya's territorial waters and exclusive economic zone shall be -

 

(a) Constructed, placed, marked, buoyed, equipped and maintained so that there are safe and convenient channels for shipping;

 

(b) Fitted with navigational aids approved by the Minister;

 

(c) Illuminated between sunset and sunrise in a manner approved by the managing director, Kenya Ports Authority; and

 

(d) Kept in good repair and working order.

 

(2) 

The Contractor shall pay reasonable compensation for any interference in fishing rights caused by the Petroleum Operations.

 

12. FIXTURES AND INSTALLATIONS AND TITLE TO ASSETS

 

(1) 

With the written consent of the Minister, which consent shall not be unreasonably withheld, the Contractor shall have the right to construct, operate and maintain roads, drill water wells and to place and/or construct fixtures and installations necessary to conduct the Petroleum Operations, including but not limited to, storage tanks, trunk pipelines, shipment installations, pipelines, cables or similar lines, liquefaction, processing and compression, located inside or outside the Contract Area, as well as construct, operate and maintain or lease facilities for the transportation of Crude Oil and Natural Gas from the Contract Area. The consent of the Minister may be conditional on the use by other producers of the excess

 

 

 

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capacity, if any, of those facilities. Where the Minister and Contractor agree that a mutual economic benefit can be achieved by constructing and operating common facilities, however, the Contractor shall use its reasonable best efforts to reach agreement with other producers on the construction and operation of such common facilities.

 

(2) 

Other producers may only use the facilities of the Contractor where there exists excess capacity and on payment of a reasonable compensation which includes a reasonable return on investment to the Contractor and provided the use does not interfere with the Contractor's Petroleum Operations.

 

(3) 

The Minister may, in consultation with the Contractor, consent to the laying of pipelines, cables and similar lines in the Contract Area by other Persons, subject to (a) the consent of the Contractor, which consent shall not be unreasonably withheld, and (b) the submission of technical data by the Government demonstrating that such lines shall not interfere with the Petroleum Operations of the Contractor.

 

(4) 

On termination or expiration of this Contract or surrender of part of the Contract Area, the Contractor shall remove the above-ground plant, appliances and installations from the Contract Area or the part surrendered other than those that are situated in or related to a Development Area or, at the option of the Minister, the Contractor shall transfer ownership thereof, at no cost, to the Government, in the condition that they are then in, in which latter case the Government shall be responsible for operating, maintaining, abandoning and decommissioning of such plants, appliances and installations.

 

(5) 

When the rights of the Contractor in respect of a Development Area terminate, expire or are surrendered, the Contractor shall transfer ownership thereof to the Government, at no cost, the plant, appliances and installations that are situated in the Development Area or that are related thereto, unless such plant, appliances and installations are or may be utilised by the Contractor in Petroleum Operations under this Contract, but the Government may require the Contractor to remove the surface installations at the cost of the Contractor.

 

13. LOCAL EMPLOYMENT, TRAINING AND COMMUNITY DEVELOPMENT PROJECT

 

(1) 

The Contractor, its contractors  and  sub-contractors  shall,  where  possible, employ Kenya citizens in the Petroleum Operations, and until expiry or termination of this Contract, shall train those citizens. The training programme shall be established with the  consultation of the Minister.

 

(2)          In addition to the obligation under sub-clause 13(1) and commencing on the Effective Date, the Contractor shall for the purposes of section 11 of the Act

 

 

 

 

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contribute or hold to the order of the Ministry a minimum of:

 

 

(i)

One Hundred and Seventy Five Thousand United States Dollars (USD 175,000.00) per year  during the Initial Exploration Period towards the Ministry Training Fund

 

 

(ii)        One Hundred and Seventy Five Thousand United States Dollars

(USD 175,000.00) per  year   during the  First Additional  E x p l o r a t i o n

Period towards the Ministry Training Fund.

 

(iii)      One Hundred and Seventy Five Thousand United States Dollars

(USD 175,000.00) per year  during the Second Additional E x p l o r a t i o n

Period towards the Ministry Training Fund.

 

(iv)     The Contractor's obligation hereunder shall be further increased to a minimum of Two Hundred Thousand United States Dollars

(USD200,000.00) per year  commencing with the adoption of the first

Development Plan under sub-clause 20(3).

 

(3)

The Contractor shall by way of direct payments contribute a minimum of United States Dollars Fifty Thousand (USD 50,000.00)  per year towards the local community development projects.

 

14. DATA AND SAMPLES

 

(1) 

The Contractor shall keep logs and records of the drilling, deepening, plugging or abandonment of boreholes and wells, in accordance with good international petroleum industry practice and containing particulars of -

 

(a) The strata and sub-soil through which the borehole or well was drilled;

 

(b) The casing, tubing and down-hole equipment and alterations thereof, inserted in a borehole or well;

 

(c) Petroleum, water, workable mineral or mine workings encountered; and

 

(d) Any other matter related to the Petroleum Operations that is reasonably required by the Minister.

 

(2) 

The Contractor shall record, in an original or reproducible form of good quality, and on seismic tapes where relevant, all geological and geophysical information and data relating to the Contract Area obtained by the Contractor and shall deliver a copy of that information and data, the interpretations thereof and the

 

 

 

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logs and records of boreholes and wells, to the Minister, in a reproducible form, as soon as practicable after that information, those interpretations and those logs and records come into the possession of the Contractor.

 

 (3)  

The  Contractor  may  remove,  for  the  purpose  of  laboratory  examination  or analysis, petrological specimens or samples of petroleum or water encountered in a borehole or well and, as soon as practicable shall, without charge, give the Minister a representative part of each specimen and sample removed, but no specimen or sample shall be exported from Kenya without prior notification to the Minister.

 

  (4) 

The Contractor shall keep records of any supply information concerning the Petroleum Operations, reasonably requested by the Minister, if the data or information necessary to comply with the request are readily available.

 

15. REPORTS

 

(1) 

The Contractor shall supply to the Minister daily reports on drilling operations and production operations, and weekly reports on geophysical operations.

 

(2)         The  Contractor  shall  report  in  writing  to  the  Minister  the  progress  of  the Petroleum Operations according to the following schedule -

 

(a)  Within  one  (1)  month  of  the  last  day  of  March,  June, September and December, covering the previous three (3) months;

 

(b) Within three (3) months of the last day of December, covering the previous year;

 

(c) Within three (3) months of the date of expiry or termination of this Contract.

 

(3)  

A report under sub-clause 15 (2) shall contain, in respect of the period which it covers -

 

(a) Details of the Petroleum Operations carried out and the factual information obtained;

 

(b) A description of the area in which the Contractor has operated;

 

(c) An account of the expenditure on Petroleum Operations in accordance with the Accounting Procedure;

 

(d) A map indicating all boreholes, wells and other Petroleum Operations;

 

 

 

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(e) On expiry or termination of this Contract details of the Petroleum Operations including all the matters described in paragraphs (a) to (d); and

 

(f) All information required by clause 14 not hitherto supplied.

 

PART IV RIGHTS AND OBLIGATIONS OF THE GOVERNMENT AND THE MINISTER

 

16. RIGHTS OF THE GOVERNMENT

 

(1)

The Government may acquire a part of the Contract Area for a public purpose other than searching for or extracting Petroleum but not to the extent that will prevent the carrying out of Petroleum Operations within the Contract Area, and the Government shall not, without good cause, acquire a part of the Contract Area on which Petroleum Operations are in progress.

 

       The Contractor shall not carry out Petroleum Operations on such an acquired part but may:-

 

(a) Enter upon that part but not materially interfere with the public purpose;

 

(b) Carry out directional drilling from an adjacent part.

 

(2)  

The Minister, or a Person authorized by him in writing, may at all reasonable times inspect any Petroleum Operations, and any records of the Contractor relating thereto, and the Contractor shall provide, where available, facilities similar to those applicable to its own or to sub-contractors' staff for transport to the Petroleum Operations, subsistence and accommodation and pay all reasonable expenses directly connected with the inspection.

 

(3)

If there is a breach of an obligation due to be performed under this Contract, the Minister may require the Contractor to perform any obligation under this Contract by giving reasonable written notice, and if the Contractor fails to comply with the notice, the Minister may execute any necessary works for which the Contractor shall pay forthwith. The Minister may give notice to execute works at any time but not later than three (3) months after the termination or expiry of this Contract or the surrender of a part of the Contract Area.

 

17. OBLIGATIONS OF THE GOVERNMENT

 

 

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(1)

The Government may at the request of the Contractor, make available to the Contractor such land as the Contractor may reasonably require for the conduct of Petroleum Operations and -

 

(a) Where the land is Trust Land, the Government may, subject to sub-clause 17(2) set apart such Trust Land in the Contract Area or outside the Contract Area in accordance with the Trust Land Act;

 

(b) Where the land is private land, the Government may, subject to section 10 of the Act, acquire the land in accordance with the applicable laws;

 

(c) The Contractor shall pay or reimburse the Government any reasonable compensation that may be required for the setting apart, use or acquisition of any land for the Petroleum Operations as settled by an Expert Determination.

 

(2) 

Where the Contractor has occupied Trust Land for the purpose of the Petroleum Operations before that land has been set apart, the Contractor shall notify the Minister in writing of the need to set apart such land.

 

(3)

The Government shall grant or cause to be granted to the Contractor, its contractors and sub-contractors such way-leaves, easements, temporary occupation or other permissions within and without the Contract Area as are necessary to conduct the Petroleum Operations and in particular for the purpose of laying, operating and maintaining pipelines and cables, and passage between the Contract Area and the Delivery Point of petroleum.

 

(4) 

The Government shall at all times give the Contractor the right of ingress to and egress from the Contract Area and the facilities wherever located for the conduct of Petroleum Operations.

 

(5)

Subject to the usual national security requirements and the Immigration Act and   Regulations   of   Kenya   in   particular,   the   Government   shall   not unreasonably refuse to issue and/or renew entry visas or work permits for employees, technicians and managers employed in the Petroleum Operations by the Contractor or its sub-contractors and their dependants.

 

PART V WORK PROGRAMME, DEVELOPMENT AND PRODUCTION

 

18. EXPLORATION WORK PROGRAMME

 

(1)

The Contractor shall submit and orally present to the Minister one (1) month after the Effective Date, a detailed statement of the exploration work programme and budget for the first Contract Year.

 

 

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(2)

The Contractor shall submit and orally present to the Minister three (3) months before the end of each Contract Year, a detailed statement of the exploration work programme and budget for the next Contract Year.

 

(3)

The Minister may submit to the Contractor, within thirty (30) days of the receipt of the annual exploration work programme and budget, suggested modifications and revisions thereof. The Contractor shall consider the inclusion of such suggested modifications and revisions in light of good international petroleum industry practice and shall provide the Minister with the exploration work programme and budget which the Contractor has adopted.

 

(4)

After the adoption of the annual exploration work programme and budget, the Contractor may make changes to that annual exploration work programme and budget if those changes do not materially affect the original objectives of that exploration work programme and budget, and shall state the reasons for those changes to the Minister.

 

19. DISCOVERY AND EVALUATION WORK PROGRAMME

 

(1) 

The Contractor shall in accordance with section 9(b) of the Act, notify theMinister of a Discovery and shall report to the Minister all relevant information.

 

(2)

If the Contractor considers that the Discovery merits Evaluation, it shall submit and orally  three (3) months present to the Minister a detailed statement of the Evaluation work programme and budget which shall provide for the expeditious Evaluation of the Discovery and the provisions of sub-clauses 18(3) and 18(4) shall apply to the Evaluation work programme and budget.

 

(3)         After  the  Evaluation work  programme  and budget  have  been adopted,  the Contractor shall diligently evaluate the Discovery without undue interruption.

 

(4)

In the event of a Discovery in the last year of the Second Additional Exploration Period, the Minister shall, at the request of the Contractor, extend the term of the Second Additional Exploration Period in respect to the prospective area of the Discovery and for the period of time reasonably required to expeditiously complete the adopted Evaluation work programme and budget with respect to such Discovery and to determine whether or not the Discovery is commercial but in any event, such extension to the Second  Additional Exploration Period shall not exceed twelve (12) months.

 

(5)

The Contractor shall, not more than three (3) months after the Evaluation or Market Evaluation Report is completed, report to the Minister the commercial prospects of the Discovery, including all relevant technical and economic data.

 

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(6)

If  the  Contractor  reports  under  sub-clause  19(5)  that  the  Discovery  is  a Commercial Discovery, a Development Plan shall be submitted to the Minister within six (6) months of the completion of the Evaluation work programme or Market Evaluation Report unless otherwise agreed, and upon written application of the Contractor, the term of this Contract shall be extended by the Minister, if necessary, in respect of the area of that Commercial Discovery, provisionally established in accordance with the adaptation of a Development Plan.

 

20. DEVELOPMENT PLAN AND DEVELOPMENT WORK PROGRAMME

 

(1) 

The Contractor shall prepare, in consultation with the Minister, the Development Plan based on sound engineering and economic principles and in accordance with  good  international  petroleum  industry  practice  and  considering  the Maximum Efficient Rate of production appropriate to the Commercial Discovery.

 

(2)         The Development Plan submitted by the Contractor to the Minister shall contain–

 

(a) Details of the proposed Development Area, relating to the Commercial Discovery which shall correspond as closely as possible to the extension of the discovered accumulation in the Contract Area, as determined by the analysis of all the relevant available information;

 

(b) Proposals relating to the spacing, drilling and completion of the wells and the facilities and installations required for the production, storage and transportation of petroleum;

 

(c) A production forecast and an estimate of the investment and expenses involved; and

 

(d) An estimate of the time required to complete each phase of the Development Plan.

 

(3)

The Minister and the Contractor shall jointly consider the Development Plan within sixty (60) days  of submission thereof and the Minister may within that period, unless otherwise agreed, submit suggested modifications, justifications and revisions thereof. The Contractor shall consider the inclusion of such suggested  modifications  and  revisions  in  the  light  of  good  international petroleum industry practice, and the Development Plan shall be adopted by mutual agreement.

 

 

Where the Minister proposes no modifications and revisions, the Development Plan of the Contractor shall be adopted sixty (60) days after its submission unless it is adopted by mutual agreement of the Parties before that period has elapsed.

 

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(4)

After a Development Plan has been adopted, the Contractor shall use its best efforts to proceed, promptly and without undue interruption, to implement the Development Plan in accordance with good international petroleum industry practice. Development work shall commence six (6) months from the date of adoption of the Development Plan.

 

 

In connection therewith, the Contractor shall submit and orally present to the Minister, prior to the first day of October of each year following the adoption of the Development Plan, a detailed statement of the annual development work programme and budget for the next Calendar Year and the provisions of sub- clauses 18(3) and 18(4) shall apply to the Development Plan and to the annual development work programme and budget.

 

(5)

Where the development operations result in an extension to the area to which the Commercial Discovery relates within the Contract Area, the Minister shall adjust the relevant Development Area to include that extension as determined by the analysis of all the relevant available information.


21. UNITISATION

 

(1)

Where the recoverable reserves of a Commercial Discovery extend into an area adjacent to the Contract Area, the Minister may require the Contractor to produce Petroleum therefore in co-operation with the Contractor of the adjacent area. Where non-commercial deposits of Petroleum in the Contract Area if exploited with deposits in an area adjacent to the Contract Area, would be commercial, the Minister may make a similar requirement to the contractor of that adjacent area.

 

(2)

If the Minister so requires, the Contractor shall in co-operation with the contractor of the adjacent area, submit within six (6) months, unless otherwise agreed by the Parties, a proposal for the joint exploitation of the deposits, for the approval of the Minister. The reasonable costs of preparing the proposal shall be divided equally between the Contractor and the adjacent contractor.

 

(3)

If the proposal is not submitted or approved, the Minister may prepare his own proposal, in accordance with good international petroleum industry practice, for the joint exploitation of the recoverable reserves. The Minister's proposal may be adopted by the Contractor, subject to sub-clause 21(4), and subject to the adjacent contractor's acceptance of the same proposal.

 

(4)

The  provisions  of  the  proposal  for  joint  exploitation  shall  prevail  over  this Contract, where those provisions do not reduce the financial benefits to the parties under this Contract.

 

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22. MARGINAL AND NON-COMMERCIAL DISCOVERIES

 

(1)

Where the Contractor determines that oil or Natural Gas Discovery is marginal or non-commercial, the Contractor may propose a modification to this Contract, based on an alternative economic evaluation and after consideration the Minister may accept or reject the proposed modification.

 

Upon making a marginal Discovery of Natural Gas, the Contractor and the Government shall commence good faith negotiations of revisions to Clause 27 that would be necessary in order to provide the Contractor with project economics that will provide a reasonable Rate of Return.

 

(2)

The parties agree that unless otherwise agreed, if the Contractor fails to commence the Evaluation of a Petroleum Discovery within Twelve (12)  Months following the notice of Discovery, or if within Twelve (12) Months following the completion of an Evaluation work programme, and the Contractor considers the Crude Oil Discovery does not merit development, the Minister may request the Contractor to surrender the area corresponding to such Crude Oil Discovery and the Contractor shall forfeit any rights relating to any production there from. The area subject to such surrender shall not exceed the extension of the discovered accumulation as determined by the structural closure of the prospective horizon and all other relevant available information. Any such surrender by the Contractor shall be credited in accordance with sub-clause 3(3) hereof.

 

23. NATURAL GAS

 

(1)

Where Natural Gas is discovered and the Contractor and the Minister agree that it may be economically processed and utilised other than in secondary recovery operations, that processing and utilisation shall follow a Development Plan approved in accordance with clause 20.

 

(2)

The Contractor shall return associated Natural Gas , not required for use in Petroleum Operations or sold, to the subsurface structure, but if such Natural Gas  cannot  be  economically  used  or  sold  or  returned  to  the  subsurface structure, the Contractor shall, after expiry of sixty (60) days' notice to the Minister giving reasons why such Natural Gas cannot be economically used or sold or returned to the subsurface structure, be entitled to flare such associated Natural Gas in accordance to good international petroleum industry practice. Notwithstanding anything in this clause to the contrary Natural Gas may be flared at any time if necessary for the conducting of well and production tests and during any emergency.

 

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(3)

Where the Contractor does not consider that it is economical to process and utilise associated Natural Gas and where that Natural Gas is not required for use in Petroleum Operations, the Minister may at the field separator, process and utilise that Natural Gas without compensation but the Government shall pay for all costs and expenses related thereto which shall include, but not be limited to, any engineering studies, new fixtures, equipment and installations required for the gathering, transport, processing and utilisation thereof and the operation and maintenance of same shall be at the sole risk, cost and expense of the Government.

 

(4)

Where the Contractor considers that it is economical to produce Natural Gas, the Contractor agrees to sell Natural Gas to the Government to the volume calculated in accordance with sub-clause 29(6) below with other terms of sale, including price, to be agreed.

 

24. PRODUCTION LEVELS AND ANNUAL PRODUCTION PROGRAMME

 

(1)

The Contractor shall produce Petroleum at the Maximum Efficient Rate in accordance with good international petroleum industry practice.

 

(2)

Prior to the first day of October of each year following the commencement of Commercial Production, the Contractor shall submit and orally present to the Minister, a detailed statement of the annual production programme and budget for the next Calendar Year, and the provisions of sub-clause 18(3) and (4) shall apply to the annual production programme and budget.

 

(3)

The Contractor shall endeavour to produce in each Calendar Year the forecast quantity estimated in the annual production programme.

 

(4)

The Crude Oil shall be run to storage (constructed, maintained and operated by the Contractor) and Petroleum shall be metered or otherwise measured as required to meet the purpose of this Contract in accordance with clause 25.

 

25. MEASUREMENT OF PETROLEUM

 

(1)

The volume and quality of Petroleum produced and saved from the Contract Area shall be measured by methods and appliances customarily used in good international petroleum industry practice and approved by the Minister.

 

(2)

The Minister may inspect the appliances used for measuring the volume and determining the quality of Petroleum and may appoint an inspector to supervise the measurement of volume and determination of quality.

 

(3)

Where the method of measurement, or appliances used therefore, have caused an overstatement or understatement of a share of the production, the error shall

 

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be presumed to have existed since the date of the last calibration of the measurement devices, unless the contrary is shown, and an appropriate adjustment shall be made for the period of error.

 

(4)

The Minister and the Contractor shall determine the measurement point at which production shall be measured and the respective shares of Petroleum allocated.

 

26. VALUATION OF CRUDE OIL AND NATURAL GAS

 

(1)

The  value  of  Crude  Oil,  for  all  purposes  under  this  Contract,  shall  be denominated in United States dollars and shall be calculated each Calendar Quarter as follows -

 

(a) if there have been sales of Crude Oil produced from the Contract Area to third parties at arm's length during that Calendar Quarter, the value shall be the weighted average per unit price actually paid in those sales, at the F.O.B. point of export or at the point that title and risk pass to the buyer, adjusted for grade, gravity and quality of such Crude Oil as well as for transportation costs and other appropriate adjustments for grade, gravity, and quality of such Crude Oil transaction where the seller and the buyer are independent of one another and do not have, directly or indirectly, any common interest;

 

(b) if there have been no sales of Crude Oil produced from the Contract Area to third parties at arm's length during that Calendar Quarter, the value shall be the "fair market value" determined as the average per unit prevailing market price, actually paid during that Calendar Quarter in arm's length sales for export under term Contracts of at least ninety (90) days between unrelated purchasers and sellers, for Crude Oil produced in Kenya and for Crude Oil of comparable quality produced in the nearest major Crude Oil producing and exporting country, and adjusted for grade, gravity and quality of such Crude Oil as well as for transportation costs and any other appropriate adjustments.

 

If necessary, a value of Crude Oil shall be determined separately for each Crude Oil or Crude Oil mix and for each point of delivery.

 

The value of Crude Oil shall be mutually agreed at the end of each Calendar Quarter and applied to all transactions that took place during the quarter.

 

If the Minister and the Contractor cannot reach agreement on the value of Crude Oil within thirty (30) days of the end of any Calendar Quarter, such dispute may be submitted for an Expert Determination.

 

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(2)

Pending the determination of the value of Crude Oil for a Calendar Quarter, the value of Crude Oil determined for the preceding Calendar Quarter will be provisionally applied to make calculation and payment during such Calendar Quarter until the applicable value for that Calendar Quarter is finally determined pursuant to sub-clause 26(1).  Any adjustment to provisional calculation and payment, if necessary, will be made within thirty (30) days after such applicable value is finally determined.

 

 

(3)

Natural Gas shall be valued based on the actual proceeds received for sales, provided that, for sales of Natural Gas between the Contractor and any Affiliate, the value of such Natural Gas shall not be less than the then prevailing fair market value for such sales of Natural Gas taking into consideration, to the extent possible, such factors as the markets, the quality and quantity of Natural Gas and other relevant factors reflected in natural gas pricing.  For sales of Natural Gas into the domestic market, the price shall be set in accordance with the provisions of sub-clause 23(5).

 

PART VI   COST RECOVERY, PRODUCTION SHARING, MARKETING AND PARTICIPATION

 

27. COST RECOVERY, PRODUCTION SHARING, WINDFALL AND INCOME TAX

 

(1)

Subject to the auditing provisions under clause 30, the Contractor shall recover the Petroleum Costs, in respect of all Petroleum Operations, incurred and paid by the Contractor pursuant to the provisions of this Contract and duly entered in the Joint Account, by taking and separately disposing of an amount equal in value to a maximum of Sixty (60%) Percent of all Crude Oil produced from the Contract Area during that Fiscal Year and not used in Petroleum Operations. Such cost recovery Crude Oil is hereinafter referred to as "Cost Oil".

 

(2)         Petroleum Costs may be recovered from Cost Oil in the following manner:

 

(a) Petroleum Costs, with the exception of capital expenditures, incurred in respect of the Contract Area, shall be recoverable either in the Fiscal Year in which these costs are incurred and paid or  the Fiscal Year in which Commercial Production occurs, whichever is the later; and

 

(b) capital expenditure incurred in respect of each Development Area shall be recoverable at a rate of 20%  based on amortization at that rate starting either in the Fiscal Year in which such capital expenditure are incurred and paid or the Fiscal Year in which Commercial Production from that Development Area commences, whichever is the later.

 

For the purpose of this clause, "capital expenditure" shall mean the qualifying  expenditure,  other  than  "intangible  drilling  costs",  that  is

 

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expenditure that has no salvage value, including expenditure on labour, fuel, repairs, maintenance, hauling, mobilization and supplies and materials, other than supplies and materials for well casings or other well fixtures, which is for or incidental to drilling, cleaning, deepening, completing or abandoning wells and is incurred in respect of –

 

(i) The determination of well locations, geological and geophysical studies, and topographical and geographical surveys preparatory to drilling;

 

(ii) The drilling, shooting, testing, and cleaning of wells; and

 

(iii) The clearing, draining and levelling of land, road-building and laying of foundations.

 

(c) To the extent that, in a Fiscal Year, the Petroleum Costs recoverable according to sub-clauses 27(2) (a) and 27(2)(b) exceed the value of all Cost Oil or Cost Gas for such Fiscal Year, the excess shall be carried forward for recovery by the Contractor in the next succeeding Fiscal Year or Fiscal Years until fully recovered, but in no case after the termination of this Contract.

 

(d) To the extent that, in a Fiscal Year, the Petroleum Costs recoverable according to sub-clauses 27(2)(a) and 27(2)(b) are less than the maximum value of the Cost Oil or Cost Gas as specified in sub-clause 27(1), the excess shall become part of, and be included in the Profit Oil or Profit Gas as provided for in sub-clause 27(3) hereafter.

 

(e) For the purpose of valuation of Cost Oil and Cost Gas, the relevant provisions of clause 26 hereof shall apply.

 

(3) 

The total Crude Oil produced and saved from the Contract Area and not used inPetroleum Operations less the Cost Oil as specified in sub-clauses 27(1) and 27(2), shall be referred to as the Profit Oil and shall be shared, taken and disposed of separately by the Government and Contractor according to increments of Profit Oil as follows:

 

Incremental Production Tranches

Govt. Share

Contractor Share

0-30,000 barrels per day

50%

50%

Next 25,000 barrels per day

60%

40%

Next 25,000 barrels per day

65%

35%

Next 20,000 barrels per day

70%

30%

Above  100,000  barrels  per day

78%

22%

 

 

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(a) For the purpose of this sub-clause, increments of Profit Oil shall be calculated by considering the total Crude Oil produced and saved from the Contract Area less the quantity of Cost Oil required to satisfy recoverable costs, expenses and expenditures according to sub-clauses

27(1) and 27(2).

 

(b) Where two (2) or more reservoirs are sufficiently close so that they utilize the same surface installation, they shall be considered, for the purposes of sub-clause 27(3) (a), as being one (1) Development Area. When making a proposal for the delineation of a Development Area and its associated Development Plan, the Contractor shall consider in priority the option which is the most favourable for the Government in terms of Profit Oil split.

 

(c)         Windfall Profits

 

When the value of crude oil for any calendar quarter calculated in accordance with Clause 26 of the PSC exceeds United States US$ 50 per barrel  FOB Mombasa (hereinafter referred to as the (“Threshold Price”) adjusted for the United States of America’s Consumer Price Index (CPI) whose Effective Date will be from the date of the contract execution then a Second Tier Amount is payable by the Contractor to the Government.

 

The Second Tier Amount will be calculated in respect of each Calendar Quarter according to the following formula:

 

R = CSPO x 26%  x (V – Threshold Price) Where;

 

R is the Second Tier Amount in US Dollars;

 

V is  the  value of  Crude Oil  in  U.S. dollars for  that Calendar Quarter calculated in accordance with Clause 26 and expressed in US$/bbl, provided that V exceeds the Threshold Price; and

 

CSPO is the Contractor Share of Profit Oil for that Calendar Quarter in bbl calculated pursuant to clause 27(3) (a).

(d) The Second Tier Amount will be calculated within thirty (30) days

 

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following the end of the Calendar Quarter for which it is due.  For the purposes of this Contract the Second Tier Amount will be treated as an adjustment to the amount payable as Profit Oil.

 

(e)

The Threshold Price set forth in this sub-clause 27(3) (c) is US$ 50 per barre l  F.O.B  Mombasa  as  of  Effective  Date  and  shall  be adjusted quarterly as set forth below. The Threshold Price during any Calendar Quarter shall be derived by multiplying the Threshold Price, by the number (hereinafter referred to as the "price index") which is the sum of one (1) and the decimal equivalent of the percentage increase in the United States Consumer Price Index, as reported for the first time in the monthly publication "International Finance Statistics" of the International Monetary Fund, between the month of Effective Date  and the month when such valuation is calculated

 

(4)

With respect to sub-clauses 27(1), 27(2) and 27(3), Cost Oil, Cost Gas, Profit Oil and Profit Gas calculations shall be done quarterly on an accumulative basis. To the extent that actual quantities, costs and expenses are not known, provisional estimates of such data based on the adopted annual production work programme and budget under clause 24 shall be used. Within sixty (60) days of the end of each Fiscal Year, a final calculation of Cost Oil, Cost Gas, Profit Oil and Profit Gas based on actual Crude Oil and Natural Gas production in respect of that Fiscal Year and recoverable Petroleum Costs shall be prepared and any necessary adjustments shall be made.

 

(5)

Each Contractor shall be subject to and shall comply with the requirements of the income tax laws in force in Kenya, which impose taxes on or are measured by income or profits.

 

The portion of the Profit Oil or Profit Gas which the Government is entitled to take and receive, and which is calculated under sub-clause 27(3), shall be inclusive of all taxes, present or future, based on income or profits of the Contractor, including specifically tax payable under the Income Tax Act, and dividend tax imposed by Kenya on any distribution of income or profits by the Contractor, but shall exclude the tax paid by the Contractor on behalf of petroleum service sub-contractors.

 

The Government agrees to pay and discharge as and when due such taxes for account of each Contractor and the Minister agrees to furnish each Contractor with proper receipts from the Government evidencing the payment of all such taxes on the Contractor's behalf for each Fiscal Year. Each Contractor shall prepare and file a Kenya income tax return for each Fiscal Year within four (4) months after the close of each Fiscal Year. The receipts furnished by the

 

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Minister evidencing payment of such taxes shall correspond to the amount of taxes payable on behalf of the Contractor by the Government. The receipts shall be issued by the duly constituted authority for the collection of Kenya income taxes and shall be furnished within three (3) months after the date the Contractor files its Kenya income tax return for the Fiscal Year.

 

All taxes paid by the Government in the name and on behalf of the Contractor shall be considered income to the Contractor for the Fiscal Year to which the tax payments relate.

 

(6)

If so directed by the Minister, the Contractor shall be obligated to lift and market part or the entire Government share of Profit Oil, Profit Gas, and any Government or Appointee Participating Interest share of Petroleum in a Development Area.

 

If any Party fails to lift and market their share of Petroleum, the Contractor nominated as operator may lift and market such Party’s share on their behalf.

 

When the Minister elects not to take and receive in kind any part of the Government share of Profit Oil, the Minister shall notify the Contractor three (3) months before the commencement of each Semester of a Calendar Year, specifying the quantity of production and such notice shall be effective for the ensuing Semester. Any sale by the Contractor of the Government share of Profit Oil shall not be for a term of more than one (1) year without the Minister's consent.  The Contractor shall have the right to market the Government’s share at the then prevailing “fair market price”.

 

The price paid by the Contractor for the Government share of Profit Oil, shall be the price established according to clause 26. The Contractor shall pay the Government on a monthly basis, such payments to be made within thirty (30) days after the end of the month in which the production occurred.

 

(7) 

At  a  reasonable  time  prior  to  the  scheduled  date  of  commencement  of Commercial Production, the parties shall agree to procedures covering the scheduling, storage and lifting of Petroleum produced from the agreed upon Point of Sale.

 

(8)

In the event that the Contractor elects to produce a Natural Gas Discovery, the Petroleum Costs incurred by the Contractor and directly attributable to the development and production of such Natural Gas shall be recovered from part thereof.

 

28. GOVERNMENT PARTICIPATION

 

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(1)

The Government may elect to participate in the petroleum operations in any development area and acquire an interest of up twenty per cent (20%) (hereinafter referred to as "Participating Interest") of the total interest in that development area. The Government may participate either directly or through an appointee

 

(2)

If the Government exercises its right to participate in a Development Area, the Government and the Contractor shall enter into either a Participation Agreement of an amendment and novation of the


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