<PAGE>
EXHIBIT 10.39
PRODUCTION SHARING CONTRACT FOR
THE EXPLOITATION OF COALBED METHANE RESOURCES
FOR THE SHOUYANG AREA IN
SHANXI PROVINCE, QINSHUI BASIN,
THE PEOPLE'S REPUBLIC OF CHINA
BETWEEN
CHINA UNITED COALBED METHANE CORPORATION LTD.
AND
PHILLIPS CHINA INC.
BEIJING, CHINA
APRIL 16, 2002
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TABLE OF CONTENTS
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ARTICLE
PAGE
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<C>
ARTICLE 1:
DEFINITIONS.........................................................................
1
ARTICLE 2: OBJECTIVE OF THE
CONTRACT...........................................................
5
ARTICLE 3: CONTRACT
AREA.......................................................................
5
ARTICLE 4: CONTRACT
TERM.......................................................................
5
ARTICLE 5: RELINQUISHMENT OF THE
CONTRACT AREA.................................................
7
ARTICLE 6: MINIMUM EXPLORATION WORK
COMMITMENT AND EXPECTED MINIMUM EXPLORATION EXPENDITURES...
8
ARTICLE 7: MANAGEMENT ORGANIZATION AND
ITS FUNCTIONS...........................................
10
ARTICLE 8:
OPERATOR............................................................................
14
ARTICLE 9: ASSISTANCE PROVIDED BY
CUCBM........................................................
17
ARTICLE 10: WORK PROGRAM AND
BUDGET.............................................................
18
ARTICLE 11: DETERMINATION OF COMMERCIALITY OF
CBM.............................................. 19
ARTICLE 12: FINANCING AND COST
RECOVERY.........................................................
21
ARTICLE 13: CBM PRODUCTION AND
ALLOCATION.......................................................
23
ARTICLE 14: QUALITY, QUANTITY, PRICE, AND
DESTINATION OF CBM.................................... 26
ARTICLE 15: PREFERENCE FOR THE EMPLOYMENT OF
CHINESE PERSONNEL, GOODS AND SERVICES.............. 29
ARTICLE 16: TRAINING OF CHINESE PERSONNEL AND
TRANSFER OF TECHNOLOGY............................ 29
ARTICLE 17: OWNERSHIP OF ASSETS AND
DATA........................................................
31
ARTICLE 18: ACCOUNTING, AUDITING AND PERSONNEL
COSTS............................................ 31
ARTICLE 19:
TAXATION............................................................................
33
ARTICLE 20:
INSURANCE...........................................................................
34
ARTICLE 21:
CONFIDENTIALITY.....................................................................
35
ARTICLE 22:
ASSIGNMENT..........................................................................
36
ARTICLE 23: ENVIRONMENTAL PROTECTION AND
SAFETY.................................................
37
ARTICLE 24: FORCE
MAJEURE.......................................................................
37
ARTICLE 25: CONSULTATION AND
ARBITRATION........................................................
38
ARTICLE 26: EFFECTIVENESS AND TERMINATION OF
THE CONTRACT....................................... 39
ARTICLE 27: THE APPLICABLE
LAW..................................................................
40
ARTICLE 28: LANGUAGE OF CONTRACT AND WORKING
LANGUAGE........................................... 40
ARTICLE 29:
MISCELLANEOUS.......................................................................
40
ANNEX II: ACCOUNTING
PROCEDURE................................................................
43
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<PAGE>
PREAMBLE
This Production Sharing Contract ("the
Contract") is entered into in Beijing on
this 16th day of April, 2002 by and between
China United CBM Corporation Ltd.
(hereafter abbreviated as "CUCBM"), a
company organized and existing under the
laws of the People's Republic of China,
having its headquarters domiciled in
Beijing, the People's Republic of China as
one part; and Phillips China Inc., a
company organized and existing under the
laws of Liberia, having its
headquarters domiciled in Beijing
(hereinafter referred to as the "Foreign
Contractor" or "Contractor") as the other
part.
WITNESSETH
WHEREAS, all Coalbed Methane resources
under the territory and internal waters
of the People's Republic of China and
within the limits of national jurisdiction
of the People's Republic of China are owned
by the People's Republic of China;
and
WHEREAS, CUCBM shall be responsible for
business matters in respect of the
exploitation of Coalbed Methane resources
in cooperation with foreign
enterprises, and for negotiating, entering
into and implementing contracts for
the exploitation of Coalbed Methane
resources in cooperation with foreign
enterprises and has the exclusive right to
explore for, develop and produce
Coalbed Methane in cooperation with foreign
enterprises in areas approved by the
State Council for exploitation of Coalbed
Methane resources in cooperation with
foreign enterprises and the exclusive
authority to enter into this Contract as
authorized by the State Council of the
People's Republic of China; and
WHEREAS, the Foreign Contractor desires and
agrees to provide funds, and apply
its appropriate and advanced technology and
managerial experience to cooperate
with CUCBM for the exploitation of Coalbed
Methane resources within the Contract
Area and agrees to be subject to the laws,
decrees, and other rules and
regulations of the People's Republic of
China with respect to the implementation
of the Contract.
NOW, THEREFORE, IT IS MUTUALLY AGREED as
hereafter set forth:
ARTICLE 1: DEFINITIONS
The following words and terms used in the
Contract shall have, unless otherwise
specified herein, the following
meanings:
1.1 "Coalbed Methane" or "CBM"
means any gas mainly consisting of methane
stored in
coal seams and/or adjacent strata (including in the overlying
and underlying
strata) within the Contract Area.
1.2 "Coalbed Methane Products"
or "CBM Products" means any or all of Coalbed
Methane,
methanol, electricity generated by a coalbed methane-fired
generation
facility, and other Coalbed Methane derivatives or products
including
water and any other product of production.
1.3 "Coalbed Methane Discovery"
or "CBM Discovery" means a potential Coalbed
Methane
reservoir which, in accordance with Article 11 hereof, is worth
further
evaluation by exploration within the Contract Area.
1.4 "Coalbed Methane Field" or
"CBM Field" means an accumulation of Coalbed
Methane
within the Contract Area which has been determined to be of
commercial
value and for which it has been decided to proceed with
development. The accumulation may be bounded by but is not limited
to
geologic
structures such as fault blocks, coal discontinuities or
topographical features. Fields may also be designated as areas of
similar
geologic
characteristics including but not limited to coal thickness,
drill
depths, and gas content.
1.5 "Coalbed Methane Operations"
or "CBM Operations" means the Exploration
Operations, Development Operations, Production Operations, and
other
activities
related to these Operations carried out under the Contract.
1
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1.6 "Liquid Hydrocarbons" means
any liquid hydrocarbons extracted from CBM.
1.7 "Exploration Operations"
means operations carried out for the purpose of
discovering and evaluating CBM bearing areas by means of
geological,
geophysical, geochemical and other methods including exploratory
well
drilling;
all the work undertaken to determine the commerciality of areas
in which
CBM has been discovered including core drilling, modeling, area
selection,
feasibility studies, Pilot Development (including production
therefrom), formulation of the Overall Development Program; and
activities
related to
all such operations including negotiation and signing of
longterm
transportation and sales contracts.
1.8 "Development Operations"
means operations carried out during the
development period for the realization of CBM production from the
date of
approval
of the Overall Development Program for any CBM Field, including
planning,
design, construction, installation, drilling, developing
transportation systems and markets, and the related research work
as well
as
production activities, carried out before the Date of Commencement
of
Commercial
Production.
1.9 "Production Operations"
means operations and all activities related
thereto
carried out during the production period for CBM production of
each CBM
Field from the Date of Commencement of Commercial Production,
including,
but not limited to extraction, injection, stimulation,
treatment,
storage, transportation and lifting, etc.
1.10 "Contract Area " means a surface
area demarcated with geographic
coordinates for the cooperative exploitation of CBM resources, and
in the
Contract,
means the surface area stipulated in Article 3.1 hereof.
1.11 "Exploration Area" means the
surface area within the Contract Area which
has not been relinquished and
which is not included in a Development Area
or
Production Area before the expiration of the exploration period
hereof
and in
which Development Operations and Production Operations have not
begun.
1.12 "Development Area" means a portion
of the Contract Area covering a CBM
Field
which has been designated for development. The Development
Area(s)
shall be
proposed by the Operator, demarcated by the Joint Management
Committee
("JMC") and delineated as such in the Overall Development
Program
submitted for approval and approved by the Department or Unit.
1.13 "Production Area" means a surface
area within any Development Area for the
purpose of
the performance of the Production Operations within said
Development Area. The Production Area proposed by the Operator
and
approved
by JMC shall be submitted to CUCBM for approval before the Date
of
Commencement of Commercial Production.
1.14 "Date of Commencement of
Commercial Production" means the date of
commencement and delivery of the production of CBM from any CBM
Field
proposed
and announced by JMC in accordance with the provisions in
Article
7.2.5
hereof.
1.15 "Calendar Year" means a period of
twelve (12) consecutive Gregorian months
under the
Gregorian Calendar, beginning on the first day of January and
ending on
the thirty-first day of December in the same year.
1.16 "Contract Year" means a period of
twelve (12) consecutive Gregorian months
under the
Gregorian Calendar, within the term of the Contract, beginning
on the
Date of Commencement of the Implementation of the Contract or
any
anniversary thereof.
1.17 "Production Year" means in respect
of each CBM Field, a period of twelve
(12)
consecutive Gregorian months under the Gregorian Calendar,
beginning
on the
Date of Commencement of Commercial Production of such CBM Field
or
any
anniversary thereof.
2
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1.18 "Calendar Quarter" means a period
of three (3) consecutive Gregorian
months
under the Gregorian Calendar, beginning on the first day of
January,
the first day of April, the first day of July, or the first day
of
October.
1.19 "Exploratory Well" means any well
drilled within the Contract Area during
the
exploration period for the purpose of searching and evaluating for
CBM
accumulations, including wells drilled for the purpose of
obtaining
geological
and geophysical parameters, any dry hole(s) and discovery
well(s).
1.20 "Pilot Development" means the
installation and operation of necessary
equipment
within the Contract Area (including wells) aiming at
evaluating,
through
pilot production of Coalbed Methane, the potential commercial
value of
the Coalbed Methane in a specific area.
1.21 "Development Well" means a well
drilled after the date of approval of the
Overall
Development Program for a CBM Field for the purpose of
producing
CBM, increasing
production or accelerating extraction of CBM, including
production
wells, injection wells and dry holes.
1.22 "Work Program" means all types of
plans formulated for the performance of
the CBM
Operations, including but not limited to plans for exploration,
development, production, transportation and sales.
1.23 "Overall Development Program"
means a plan prepared by the Operator for
the
development of a CBM Field or part of a CBM Field (phased
development)
which has been reviewed and
adopted by JMC, confirmed by CUCBM and
approved
by the Department or Unit, and such plan shall include, but not
be limited
to, recoverable reserves, the Development Well pattern, master
design,
production profile, economic analysis and time schedule of the
Development Operations.
1.24 "Deemed Interest" means interest
accruing on the development costs
calculated
in accordance with the rate of interest stipulated in Article
12.2.3.2
hereof when the development costs incurred in each CBM Field
within the
Contract Area are recovered by the Parties.
1.25 "CBM Field Straddling a Boundary"
means a CBM Field extending from the
Contract
Area to one or more other contract areas and/or areas in
respect
of which
no CBM contracts have been signed.
1.26 "Annual Gross Production of CBM"
means the total amount of CBM produced
from each
CBM Field within the Contract Area considered separately in
each
Calendar
Year, less the amount of CBM used for CBM Operations in such
CBM
Field
within the Contract Area and the amount of losses, which is
saved
and
measured by a measuring device at the Delivery Point as specified
in
Article
14.3.1 hereof.
1.27 "Annual Gross Production of Liquid
Hydrocarbons" means the total amount of
Liquid
Hydrocarbons produced from each CBM Field within the Contract
Area
considered
separately in each Calendar Year, less the amount of Liquid
Hydrocarbons used for CBM Operations in such CBM Field within the
Contract
Area and
the amount of losses, which is saved and measured by a
measuring
device at
the Delivery Point as specified in Article 14.3.1 hereof.
1.28 "Basement" means igneous rocks,
metamorphic rocks or rocks of such nature
which, or
formations below which, could not contain CBM deposits in
accordance
with the knowledge generally accepted in the international
Coalbed
Methane industry and shall also include such impenetrable rock
substances
as salt domes, mud domes and any other rocks which make further
drilling
impracticable or economically unjustifiable by the modern
drilling
technology normally utilized in the international Coalbed
Methane
industry.
1.29 "Contractor" means the Foreign
Contractor specified in the Preamble
hereto,
including any assignee(s) pursuant to an assignment made in
accordance
with Article 22 hereof.
3
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1.30 "Parties" means CUCBM and the
Contractor.
1.31 "Party" means either of the
Parties.
1.32 "Operator" means the entity
responsible for the performance of the CBM
Operations
under the Contract.
1.33 "Subcontractor" means any entity
which provides the Operator with goods or
services
for the purpose of the Contract.
1.34 "Third Party" means any individual
or entity except CUCBM, the Contractor
and any of
their Affiliates.
1.35 "Chinese Personnel" means any
citizen of the People's Republic of China,
including
CUCBM's personnel and Chinese citizens employed by the
Contractor
and/or the Subcontractor(s) involved in Coalbed Methane
Operations
under the Contract.
1.36 "Expatriate Employee" means any
person employed by the Contractor,
Subcontractor(s), or CUCBM who is not a citizen of the People's
Republic
of China.
Overseas Chinese who reside abroad and have the nationality of
the
People's Republic of China and other Chinese abroad, when they
are
employed
by the Contractor, Subcontractor(s) or CUCBM, shall also be
deemed to
be Expatriate Employees within the scope of the Contract.
1.37 "Affiliate" means:
(a)
any entity in
which CUCBM or any company comprising Contractor
directly or indirectly holds fifty percent (50%) or more of the
voting rights carried by its share capital; or
(b)
any entity which
directly or indirectly holds fifty percent (50%) or
more of the aforesaid voting rights of CUCBM or any company
comprisingthe Contractor; or
(c)
any other entity
whose aforesaid voting rights are held by an entity
mentioned in (b) above in an amount of fifty percent (50%) or
more;
1.38 "Delivery Point" means a point or
points agreed upon by the Parties for
the
delivery of CBM or Liquid Hydrocarbons located within or outside
the
Contract
Area and specified in the Overall Development Program.
1.39 "Department or Unit" means the
department or unit which is authorized by
the State
Council of the People's Republic of China to be responsible for
administration of the Coalbed Methane industry of the People's
Republic of
China.
1.40 "Date of Commencement of the
Implementation of the Contract" means the
first day of the month following
the month in which the Contractor has
received
notification from CUCBM of the approval of the Contract by the
Ministry
of Foreign Trade and Economic Co-operation of the People's
Republic
of China.
1.41 "Pre-Contract Costs" means those
costs and expenditures incurred by CUCBM
in respect
of the exploration of the Contract Area and prior to the Date
of
Commencement of the Implementation of the Contract. Pre-Contract
Costs
are agreed
to be Two Million Eight Hundred Forty Thousand U.S. dollars
(US$2,840,000). Pre-Contract Costs shall be recovered by CUCBM
pursuant to
the
provisions of Article 13 hereof.
4
<PAGE>
ARTICLE 2: OBJECTIVE OF THE CONTRACT
2.1 The objective of the
Contract is to explore for, develop, produce and sell
Coalbed
Methane, Liquid Hydrocarbons or Coalbed Methane Products that
may
exist in
the Contract Area, including all activities necessary to
transport
and market CBM, CBM Products and Liquid Hydrocarbons from the
Contract
Area.
2.2 The Contractor shall apply
its appropriate and advanced technology and
assign its
competent experts to perform the Coalbed Methane Operations.
2.3 During the performance of
the CBM Operations, the Contractor shall, as far
as
practicable and appropriate, transfer its technology used in
CBM
Operations
hereunder to allow the Chinese Personnel to utilize said
technology
and to train such personnel in accordance with Article 16
hereof.
2.4 The Contractor shall bear
all the exploration costs required for the
Exploration Operations. In the event that any CBM Field is
discovered
within the
Contract Area, the development costs of such CBM Field shall be
borne by
the Parties in proportion to their participating interests:
thirty
percent (30%) by CUCBM and seventy percent (70%) by the
Contractor.
In the
event that CUCBM opts to participate at a level less than
thirty
percent
(30%) of the participating interests, or not to participate in
the
development of the CBM Field, the Contractor shall bear the
remaining
development costs necessary for the development of the CBM Field
in
accordance
with Article 12.1.2 hereof.
2.5 If any CBM Field is
discovered within the Contract Area, the CBM and/or
Liquid
Hydrocarbons produced therefrom shall be allocated in
accordance
with
Articles 12 and 13 hereof.
2.6 Nothing contained in the
Contract shall be deemed to confer any right on
the
Contractor other than those rights expressly granted hereunder.
ARTICLE 3: CONTRACT AREA
3.1 The Contract Area as of the
date of signature of the Contract covers a
total area
of one thousand nine hundred sixty two and eight tenths square
kilometers
(1,962.80 km(2)), as marked out by the geographic location and
the
coordinates of the connecting points of the boundary lines shown
on
Annex I
attached hereto.
The said
total area of the Contract Area shall be reduced in accordance
with
Articles 4, 5 and 11 hereof.
Associated
with the Contract Area and included in the grants of rights
hereunder
will be a pipeline right-of-way, if required, from the Contract
Area to an
interconnection or Delivery Point.
3.2 Except for the rights as
expressly provided by the Contract, no right is
granted in
favor of the Contractor to the surface area, subsurface area,
lake bed,
stream bed, subsoil and any bodies of water or any natural
resources
or aquatic resources other than CBM, CBM Products and Liquid
Hydrocarbons, existing therein and any things under the surface
within the
Contract
Area.
ARTICLE 4: CONTRACT TERM
4.1 The term of the Contract
shall include an exploration period, a
development period and a production period.
4.2 The exploration period,
beginning on the Date of Commencement of the
Implementation of the Contract, shall be divided into three (3)
phases and
shall
consist of five (5) consecutive Contract
5
<PAGE>
Years,
unless the Contract is sooner terminated, or the exploration
period
is
extended in accordance with Article 24 hereof and Article 4.3
herein.
The three
(3) phases shall be as follows:
the first
phase of one (1) Contract Years (the first Contract Year) for
reconnaissance;
the second
phase of two Contract Years (the second Contract Year through
the third
Contract Year) for core testing
the third
phase of two Contract Years (the fourth Contract Year through
the fifth
Contract Year) for Pilot Development.
4.3 If the time remaining in the
exploration period when a CBM discovery is
made
within the Contract Area is not reasonably sufficient to complete
the
Pilot
Development, or the time period for the Pilot Development of a
CBM
discovery
extends beyond the expiration of the exploration period under a
Pilot
Development Work Program approved by JMC in accordance with
Article
11 hereof,
subject to CUCBM's approval the exploration period under
Article
4.2 hereof shall be extended to the extent necessary to
complete
the Pilot
Development.
If there
are no channels for transportation or market access or
consuming
facilities, or if the Parties have not concluded a long-term
transportation and sales contract in respect of the CBM, CBM
Products
and/or
Liquid Hydrocarbons during the exploration period or during the
extended
exploration period as provided for above, Contractor shall be
granted an
additional extension to the exploration period. The period of
extension
shall be approved by CUCBM and shall be for a reasonable five
(5) year period
in order to complete such long-term transportation and
sales
contract and allow transportation and market access and
consuming
facilities
to develop. If a long-term transportation and sales contract is
not
concluded within the reasonable five (5) year extension to the
exploration period, the Contract shall be terminated.
Any
extension to the exploration period granted under this Article
4.3
shall be
for a period of time reasonably required to complete the above
mentioned
work and to develop transportation and market access and
consumption facilities and for the Parties to negotiate
long-term
transportation and sales contracts in respect of CBM, CBM Products
and/or
Liquid
Hydrocarbons in order to enable JMC to make a decision on the
commerciality of the said CBM discovery in accordance with Article
11
hereof and
submit an acceptable Overall Development Program to the
Department
or Unit for approval.
4.4 The development period of
any CBM Field within the Contract Area shall
begin on
the date of approval of the Overall Development Program of the
said CBM
Field, and end on the date of the entire completion of the
Development Operations set forth in the Overall Development Program
(which
may
continue beyond the Date of Commencement of Commercial
Production),
excluding
the time for carrying out other additional development projects
during the
production period in accordance with Article 11.10 hereof.
4.5 The production period of any
CBM Field within the Contract Area shall be a
period
beginning on the Date of Commencement of Commercial Production
of
the said
CBM Field up to the Date of the expiration of the production
period as
specified in the approved Overall Development Program. However,
the
production period shall be extended for so long as there exist
commercially recoverable reserves of CBM from the CBM Field. The
extension
of the
production period shall not exceed the term of this Contract
set
forth
under Article 4.7 herein.
Under such
circumstances as where the construction of a CBM Field is to be
conducted
on a large scale, and the time span required therefore is long,
or where
separate production of each of the multiple CBM producing zones
of an CBM
Field is required, or under other special circumstances, the
production
period thereof shall, when it is necessary, be properly
extended
with the approval of the Department or Unit.
6
<PAGE>
4.6 Suspension or
abandonment of production of a CBM Field.
4.6.1 Suspension of production
from a CBM Field within the production period
In the event that the Parties agree to suspend temporarily
production
from a CBM Field which has entered into commercial production,
the
Production Area covered by the CBM Field shall be retained within
the
Contract Area. In no event shall the period of such retention
extend
beyond the date of the expiration of the production period of that
CBM
Field. The duration of the relevant period of production suspension
and
the arrangement for the maintenance operations during the
aforesaid
period of suspension shall be proposed by the Operator, and shall
be
decided by JMC through discussion. With respect to the aforesaid
CBM
Field which has been suspended and retained within the Contract
Area, in
the event that production is restored during the period of such
retention, the production period of that CBM Field shall be
extended
correspondingly. In the event that the Parties fail to reach an
agreement on the restoration of production by the expiration of
the
production suspension period decided by JMC through discussion,
the
Party who wishes to restore production shall have the right to
restore
production solely. The other Party may later elect to participate
in
production by paying to the other Party its participating interest
share
of the costs incurred in restoring such production, but shall have
no
rights or obligations in respect of such CBM Field for the
production
during such solely restored production period.
In any event, the obligation for abandonment and site restoration
shall
rest solely with the Party(s) which participate in the restored
production; which shall indemnify and hold harmless any
non-participating Party from any costs, expenses or claims arising
out
of such obligation.
4.6.2 Abandonment of production
from a CBM Field within the production period.
4.6.2.1 During the production period,
either Party to the Contract may propose
to abandon production from any CBM Field within the Contract
Area,
provided, however, that prior written notice shall be given to the
other
Party to the Contract. The other Party shall make a response in
writing
within ninety (90) days from the date on which the said notice
is
received. If the other Party also agrees to abandon production from
the
said CBM Field, then abandonment costs shall be paid by the Parties
in
proportion to their participating interests in such CBM Field.
The
Parties shall abandon such CBM Field in accordance with procedure
agreed
on by the Parties. From the date on which the abandonment is
completed,
the production period of such CBM Field shall be terminated and
such CBM
Field shall be excluded from the Contract Area.
4.6.2.2 If the Contractor notifies CUCBM in
writing of its decision to abandon
production from a CBM Field while CUCBM decides not to abandon
production from said CBM Field, then from the date on which the
Contractor receives CUCBM's written response of its aforesaid
decision
(the "Abandonment Date"), all of the Contractor's rights and
obligations
under the Contract in respect of said CBM Field, including, but
not
limited to, any obligation with respect to abandonment and site
restoration in respect of such CBM Field, shall be transferred to
CUCBM
and terminated automatically with respect to Contractor, provided
that
the Contractor shall not transfer to CUCBM any of the
Contractor's
debts, existing liabilities and obligations in respect of the said
CBM
Field. In addition, the Contractor shall undertake its existing
liabilities and obligations under the Contract prior to the
Abandonment
Date. From the Abandonment Date, the said CBM Field shall be
excluded
from the Contract Area.
4.7 The term of the
Contract shall not go beyond thirty (30) consecutive
Contract Years from the Date of Commencement of the Implementation
of
the Contract, unless otherwise stipulated hereunder.
ARTICLE 5: RELINQUISHMENT OF THE CONTRACT
AREA
5.1 The Contractor
shall relinquish a portion or portions of the Contract
Area
in accordance with the following provisions:
7
<PAGE>
5.1.1 In any of the following cases, the
Contractor shall relinquish the
remaining
Contract Area, except for any Development Area, a possible or
proposed
Development Area and/or Production Area:
(a)
at the
expiration of the last phase of the exploration period
(including extensions) as mentioned in Article 4.2 hereof; or
(b)
at the
expiration of the said exploration phase if the Contractor
exercises its option under Article 6.3 (b) hereof; or
(c)
at the
expiration of the extended period, in the event that the
exploration period is extended in accordance with Article 4.3
or
Article 24 hereof.
5.1.2 In the execution of Article 5.1.1
herein, a Production Area and/or
Development Area or any area proposed by Contractor corresponding
to a CBM
Discovery
with a possibility of or potential for Pilot Development or
awaiting
Pilot Development and/or under a Pilot Development or included
in
an Overall
Development Program awaiting approval, shall not be regarded as
an area to
be relinquished.
5.1.3 At the expiration of the production
period of any CBM Field as specified
in Article
4.5 hereof, such CBM Field within the Contract Area shall be
excluded
from the Contract Area.
5.2 Within ninety (90) days
prior to the date of relinquishment of the
Contract
Area, the Contractor shall submit to CUCBM a report on its
completed
Exploration Operations on the areas proposed to be
relinquished,
including
a map showing the proposed areas to be relinquished with the
geographic
location and the coordinates of the connecting points of the
boundary
lines.
5.3 In the exploration period,
the Contractor shall bear the fee for CBM
exploration rights of the Contract Area to be paid in accordance
with the
relevant
laws and regulations of the People's Republic of China. In the
development period and production period, CUCBM and the Contractor
shall,
in
proportion to their respective participating interests, bear the
fee
for CBM
mining rights of the Development Area and Production Area paid
in
accordance
with relevant laws and regulations of the People's Republic of
China. The
fees for CBM exploration and mining rights shall be paid and
are cost
recoverable pursuant to Article 5.2.20 of Annex II hereof.
ARTICLE 6: MINIMUM EXPLORATION WORK
COMMITMENT AND EXPECTED MINIMUM EXPLORATION
EXPENDITURES
6.1 The Contractor shall begin
to perform the Exploration Operations within
six (6)
months after the Date of Commencement of the Implementation of
the
Contract,
unless otherwise agreed upon by the Parties.
6.2 The Contractor shall fulfill
the minimum exploration work commitment and
expected
minimum exploration expenditures for each phase of the
exploration period in accordance with the following provisions:
6.2.1 During the first phase of the
exploration period, the Contractor shall:
Drill one (1) Exploration Well with footage totaling seven
hundred
(700) meters estimated to cost three hundred fifty thousand
U.S.
dollars (US$350,000), or acquire an equivalent amount of
seismic
equal to the estimated cost of drilling one (1) exploration
well.
6.2.2 During the second phase of the
exploration period, the Contractor shall:
(a)
Drill two (2)
Exploration Wells with footage totaling one thousand
four hundred (1,400) meters;
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(b)
Spend seven
hundred thousand (US$700,000) U.S. dollars as its
expected minimum exploration expenditures for such Exploration
Operations.
6.2.3 During the third phase of the
exploration period, the Contractor shall:
(a)
drill and
complete one (1) Pilot Development consisting of six (6)
wells; and
(b)
spend one
million eight hundred thousand (US$1,800,000) U.S. dollars
as its expected minimum exploration expenditures for such
Exploration Operations.
6.2.4 With respect to the minimum
exploration work commitment for each phase of
the
exploration period committed by the Contractor in accordance
with
Articles
6.2.1, 6.2.2 and 6.2.3 herein, when calculating whether the
minimum
exploration work commitment has been fulfilled, the number of
Exploration Wells and Pilot Development Wells shall be the basis of
such
calculation.
6.3 At the expiration of the
first and second phases of the exploration
period,
the Contractor has options (a), (b), or (c) and at the
expiration
of the
third phase of the exploration period options (b) or (c) as
follows:
(a)
to enter the
next phase and continue exploration; or
(b)
to conduct
Development Operations and Production Operations only on
any CBM discoveries in accordance with the procedures under
Article
11 hereof provided, however, that the minimum exploration work
commitments up to the date of such expiration of the said
exploration phase have been fulfilled and the areas specified
in
Article 5 hereof have been relinquished; or
(c)
to terminate the
Contract.
6.4 At the expiration of any
phase of the exploration period, if the actual
exploration work fulfilled by the Contractor is less than the
minimum
exploration work commitment set forth for the said exploration
phase, and
if the
Contractor opts to enter the next phase and continue
exploration
under
Article 6.3 (a) herein, the Contractor shall give reasons to
CUCBM
for the
underfulfillment. The unfulfilled balance of the said phase
shall
be added
to the minimum exploration work commitment for the next
exploration phase.
At any
time within the exploration period, if there is any potential
CBM
discovery,
JMC shall, at the request of any Party to the Contract, discuss
the
possibility of amending the exploration work. Any Exploration
Wells
added by
any such amendment shall be deducted from and/or credited
against
the
minimum exploration work commitment.
6.5 Where the Contractor has
fulfilled ahead of time the minimum exploration
work
commitment for any phase of the exploration period, the duration
of
such
exploration phase stipulated in Article 4.2 hereof shall not be
shortened
thereby, and if the exploration work actually fulfilled by the
Contractor
exceeds the minimum exploration work commitment for the said
exploration phase, the excess part shall be deducted from and/or
credited
against
the minimum exploration work commitment for the next
exploration
phase.
6.6 If any addition or deduction
is made under Article 6.4 or Article 6.5
herein in
regard to the minimum exploration work commitment for any phase
of the
exploration period, the increased or reduced exploration work
shall
become the
new minimum exploration work commitment for the Contractor to
fulfill in
the said phase.
6.7 At the expiration of any
phase during the exploration period, if the
exploration work actually fulfilled by the Contractor is less than
the
minimum
exploration work commitment for such phase
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or less
than the new minimum exploration work commitment in Article 6.6
herein,
and if, regardless of whether the expected minimum exploration
expenditures are fulfilled or not fulfilled, the Contractor opts
to
terminate
the Contract under Article 6.3 (c) herein, or if the said phase
is the
last exploration phase, subject to the approval of the
Department
or Unit
the Contractor shall be allowed to transfer its unfulfilled
minimum
exploration work commitment to another Contract Area as agreed
by
the
Contractor and CUCBM, or the Contractor shall, within thirty (30)
days
from the
date of the decision of its election to terminate the Contract
or
within
thirty (30) days from the date of the expiration of the
exploration
period,
pay CUCBM only any unfulfilled balance of the minimum
exploration
work
commitment ( or of the new such commitment) in U.S. dollars after
it
has been
converted into a cash equivalent using the method provided in
Annex
II-Accounting Procedure hereto. However, if the minimum
exploration
work
commitment for the exploration period is fulfilled while its
expected
corresponding minimum exploration expenditures are not fulfilled,
the
unfulfilled part shall be deemed as a saving and shall not be paid
to
CUCBM.
6.8 Contractor shall be allowed
the flexibility to transfer all or any part of
the
minimum exploration work commitment under this Contract to
another
contract
area and vice versa. The minimum exploration work commitment
transferred from another contract area to this Contract and vice
versa
shall be credited toward the
satisfaction of the aggregate exploration
work
commitments for both this Contract Area and to the contract area
from
which the
minimum exploration work commitment was transferred. Nothing
herein
contained shall be construed or interpreted to allow any
reduction
in the
aggregate minimum exploration work commitment for any phase of
the
exploration period for this Contract or the contract area from
which the
exploration work commitment was transferred.
ARTICLE 7: MANAGEMENT ORGANIZATION AND ITS
FUNCTIONS
7.1 For the purpose of the
proper performance of the CBM Operations in the CBM
Fields,
the Parties shall establish a Joint Management Committee (JMC)
within
forty-five (45) days from the Date of Commencement of the
Implementation of the Contract.
7.1.1 CUCBM and the Contractor shall each
have the right to appoint an equal
number of
representatives (two to five each) to form JMC, and each Party
to the
Contract shall designate one of its representatives as its
chief
representative. The representative of the Operator among the
companies
comprising
the Contractor shall be the chief representative of the
Contractor. Either Party may replace any of its representatives,
or
designate
another representative as its chief representative, by a
written
notice to
the other Party, pursuant to Article 29.2 hereof. All the
aforesaid
representatives shall have the right to present their views on
the proposals at
the meetings held by JMC. When a decision is to be made
on any
proposal, the chief representative from each Party to the
Contract
shall be
the spokesman on behalf of the Party to the Contract.
The
Chairman of JMC shall be the chief representative designated by
CUCBM,
and the
Vice-Chairman shall be the chief representative designated by
the
Contractor. The Chairman of JMC shall preside over meetings of JMC.
In his
absence,
one representative present at the meeting from CUCBM shall be
designated
to act as the Chairman of the meeting. In the absence of the
Vice-chairman of JMC, one representative present at the meeting
from the
Contractor
shall be designated to act as the Vice-chairman of the meeting.
The
Parties may, according to need, designate a reasonable number
of
advisers
who may attend, but shall not be entitled to vote at JMC
meetings.
7.1.2 A regular meeting of JMC shall be
held at least once a Calendar Quarter,
and other
meetings, if necessary, may be held at any time at the request
of any
Party to the Contract, upon giving reasonable notice to the
other
Party of
the date, time and location of the meeting and the items to be
discussed.
7.2 The Parties shall empower
JMC to:
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7.2.1 Review and approve the Work
Programs and budgets proposed by the
Operator and subsequent amendments thereto;
7.2.2 Determine the potential
commerciality of each Coalbed Methane Discovery
that has been made in accordance with the Operator's Pilot
Development
report and report its decision to CUCBM for confirmation;
7.2.3 Review and approve the
Overall Development Program and budget for each
CBM Field and the amendments to the budget;
7.2.4 Approve or confirm the
following items of procurement and expenditures:
(a)
approve procurement of any item within the budget with a unit
price exceeding Five Hundred Thousand U.S. dollars (U.S.
$500,000) or any single purchase order of total monetary value
exceeding Two Million U.S. dollars (U.S. $2,000,000);
(b)
approve a lease of equipment, or an engineering subcontract or
a
service contract within the budget of a monetary value
exceeding
Two Million U.S. dollars (U.S. $2,000,000); and
(c)
confirm excess expenditures pursuant to Article 10.2.1 hereof
and the expenditures pursuant to Article 10.2.2 hereof;
7.2.5 Propose and announce the
Date of Commencement of Commercial Production
of each CBM Field within the Contract Area;
7.2.6 Determine the type and scope
of information and data provided to any
Third Party in accordance with Article 21.5 hereof;
7.2.7 Approve the boundaries of
the Development Area and the Production Area
of each CBM Field;
7.2.8 Review and approve the Joint
Operating Agreement in accordance with
Article 8.8 hereof;
7.2.9 Review and approve the
insurance program proposed by the Operator and
emergency procedures on safety and environmental protection;
7.2.10 Review and approve personnel
training programs;
7.2.11 Review and approve minutes and/or
resolutions of JMC meetings, and
discuss, review, decide and approve other matters that have
been
proposed by either Party to the Contract or submitted by the
expert
groups pursuant to Article 7.4.2 hereof or by the Operator; and
7.2.12 Review and examine matters
required to be submitted to relevant
authorities of the Chinese Government and/or CUCBM for approval
or
confirmation.
7.3 Decisions of JMC
shall be made unanimously through consultation. All
decisions made unanimously shall be deemed as formal decisions and
shall
be equally binding upon the Parties. When matters upon which
agreement
cannot be reached arise, the Parties may convene another meeting in
an
attempt to find a new solution thereto based on the principle of
mutual
benefit.
7.3.1 During the exploration
period, the Parties shall endeavor to reach
agreement through consultation on exploration programs and
annual
exploration Work Programs. If the Parties fail to reach
agreement
through consultation within thirty (30) days of first being
considered
by JMC, the Contractor's proposal shall prevail, provided that
such
proposal is not in conflict with the relevant provisions in
Articles 4,
5 and 6 hereof.
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7.3.2 If it is considered by the
chairman and/or the vice chairman or their
nominees that a matter requires urgent handling or may be
decided
without convening a meeting, JMC may make decisions through
facsimiles
or the circulation of documents.
7.4 JMC shall
establish the following subordinate bodies:
7.4.1 Secretariat
The secretariat shall be a permanent organization consisting of up
to
two (2) secretaries. One secretary shall be appointed by each of
the
Parties or they may share one. The secretaries shall not be members
of
JMC, but may attend meetings of JMC to perform the following
duties:
(a)
to keep minutes of meetings;
(b)
to prepare summaries of the resolutions for JMC meetings;
(c)
to draft and transmit notices of meetings; and
(d)
to receive and transmit proposals, reports or plans submitted
by
the Operator and/or proposed by any Party to the Contract, that
require discussion, review or approval by JMC.
7.4.2 Expert Groups
Advisory expert groups shall be established in accordance with
the
requirements of the Coalbed Methane Operations in various periods.
Each
expert group shall consist of an equal number of CUCBM Personnel
and the
Contractor's employees, and, with the agreement of JMC, any
other
personnel. JMC shall discuss and decide upon their establishment
or
dissolution, size, tasks, location of their work and the
appointment of
their leaders in accordance with the requirements of their work.
The
expert groups which should be of a reasonable size and number shall
have
the following functions:
(a)
to discuss and study matters assigned to them by JMC and
submitted by the Operator to JMC for its review and approval
and
any other matter assigned to them by JMC and to make
constructive suggestions to JMC;
(b)
to have access to and observe and investigate the Coalbed
Methane Operations conducted by the Operator without affecting
such Operations at Operator's office and operating sites as
work
requires and to submit relevant reports to JMC; and
(c)
to attend meetings of JMC as observers at the request of JMC.
7.5 When any of the
companies comprising the Contractor acts as the
Operator, CUCBM shall have the right to assign mutually
acceptable
qualified professional representatives to the Operator's
administrative
and technical departments which are related to the CBM Operations.
These
professional representatives from CUCBM shall have specific job
duties
and responsibilities in relation to the CBM Operations.
The professional representatives of CUCBM shall have access to
the
centers of research, design, and data processing related only to
the
execution of the Contract and to the operating sites to observe all
the
non-proprietary activities and study all the information with
respect to
the CBM Operations. Whether to provide such access to the
aforesaid
centers outside the People's Republic of China shall be decided by
JMC
through discussion. If the decision is made, such access shall
be
arranged by the Operator and the Operator shall use all
reasonable
endeavors to assist the professional representatives to have access
to
Third Parties' sites. The work of professional representatives of
CUCBM
shall be arranged by the manager(s) of the departments of the
Operator
in which professional representatives work.
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<PAGE>
Professional representatives of CUCBM, except for CUCBM's
procurement
professional representatives who shall undertake their functions
in
accordance with
Article 7.6 herein, shall not interfere in the decision
making on relevant matters by departmental manager(s) of the
Operator.
However, such professional representatives shall have the right to
make
proposals and comments to departmental manager(s) of the Operator
or to
report directly to CUCBM's representatives in JMC.
7.5.1 On the principle of mutual
cooperation and coordination, the Operator
shall provide the professional representatives with necessary
facilities
and assistance to perform office work and to observe the
operating
sites.
7.5.2 The number of professional
representatives, which shall be a reasonable
number and consistent with accepted international CBM industry
practice
and sound economic practice, shall be decided by JMC through
consultations. All professional representatives shall abide by
Operator's health, safety, and environmental guidelines and
policies.
7.6 When any of the
companies comprising the Contractor acts as the
Operator, in respect of the items listed in the procurement plan,
the
procedures and provisions hereunder shall be followed:
7.6.1 The procurement department
of the Operator shall inform the procurement
professional representatives appointed by CUCBM of all the items
of
procurement and specifications relating thereto.
7.6.2 The Operator shall be
subject to Articles 15.1 and 15.3 hereof and reach
agreement through consultation with the procurement
professional
representatives of CUCBM when preparing the procurement plan in
accordance with the Work Program and budget. The Operator and
the
procurement professional representatives of CUCBM shall work out
an
inventory listing the equipment and materials which can be made
and
provided in China and a list of manufacturers, engineering and
construction companies and enterprises in China which are qualified
and
can provide acceptable services and undertake subcontracting
work.
7.6.3 Unless otherwise agreed upon
by the Parties, the Operator shall, in
general, make procurement by means of calling for bids and shall
notify
at the same time qualified manufacturers and enterprises concerned
both
inside and outside China, and the work of calling for bids shall be
done
within the territory of China.
7.6.4 When any procurement is to
be made by means of calling for bids, the
manufacturers and enterprises in China applying for bidding which
the
Parties agree are qualified and are included in a list delivered
in
advance to the Operator by the procurement professional
representatives
of CUCBM shall be invited to submit bids. The Parties will
identify
proposed bidders that are subsidiaries or affiliates of the
Parties. The
procurement professional representatives of CUCBM shall have the
right
to take part in the work of calling for bids, including examination
of
the list of bidders to be invited, preparing and issuing
bidding
documents, opening bids, evaluation and normalization of bids, and
shall
have the right to consult with the Operator on the determination
of
award of contracts and
to participate in negotiations for various
contracts.
The professional representatives of CUCBM involved with
procurement
shall have the proper authority to evaluate and make decisions on
behalf
of CUCBM. When the evaluation of bids and decisions based thereon
is not
unanimous, the evaluation of the Operator shall prevail and
decisions
shall be based thereon. The foregoing shall be handled in an
expeditious, efficient and timely manner.
7.6.5 With respect to the items of
procurement by means other than calling for
bids, the Operator and the procurement professional representatives
of
CUCBM shall, in accordance with the provisions
13
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specified in Article 7.6.2 herein, define those items which are to
be
procured in the People's Republic of China and those items which
are to
be procured abroad.
7.7 All salaries,
costs and expenses with respect to the staff members of
the Parties in the subordinate bodies of the JMC established in
accordance with Article 7.4 herein, those with respect to the
professional representatives referred to in Article 7.5 herein,
and
those with respect to the representatives of JMC referred to in
Article
7.1.1 herein while attending JMC meetings, shall be paid by the
Operator
and charged respectively to the exploration costs, development
costs and
operating costs in accordance with Annex II- Accounting
Procedure
hereto. During the exploration period, all salaries, costs and
expenses
with respect to the staff members of CUCBM in the subordinate
bodies of
JMC, the CUCBM professional representatives and the CUCBM
representatives of JMC shall be paid by the Operator in accordance
with
Annex III - Personnel Costs hereto. All salaries, costs and
expenses
with respect to the above mentioned personnel to be paid and
charged
during the development period and production period shall be
determined
by the Parties through consultation. It is understood no salary
duplication for any individual shall be allowed. In the event
any
individual occupies more than one chargeable position, then the
higher
applicable salary shall be charged to the Joint Account for the
period
during which the higher position is occupied.
7.8 The specific
responsibilities and working procedures within JMC shall be
proposed by the Parties, and discussed and determined by JMC in
accordance with the relevant provisions herein.
ARTICLE 8: OPERATOR
8.1 The Parties
agree that Phillips China Inc. shall act as the Operator for
the CBM Operations within the Contract Area, unless otherwise
stipulated
in Article 8.8 herein and Article 29.4 hereof.
8.2 For the
implementation of the Contract, each company comprising the
Contractor shall register with the State Administration for
Industry and
Commerce of the People's Republic of China, or if any such company
is
already registered, such company shall amend its registration to
include
the Contract in accordance with the relevant provisions of the
State
Administration for Industry and Commerce. CUCBM shall, at the
request of
the Contractor, provide assistance for this purpose.
The person designated by Operator to be in charge of CBM
Operations
shall have the full right to represent the Contractor in respect of
the
performance of the CBM Operations. The names, positions and resumes
of
the staff and organization chart of the Operator shall be submitted
in
advance to CUCBM and the appointment of the Operator's senior staff
must
be subject to the consent of CUCBM.
The parent corporation of each company comprising the Contractor
which
is not itself a parent corporation shall, at the request of
CUCBM,
provide CUCBM with a written performance guarantee acceptable to
CUCBM.
8.3 The Operator
shall have the following obligations:
8.3.1 To apply the appropriate and
advanced technology and business managerial
experience of the Contractor or its Affiliates to perform the
CBM
Operations reasonably, economically and efficiently in accordance
with
sound international practice.
8.3.2 To prepare Work Programs and
budgets related to the CBM Operations and
to carry out the approved Work Programs and budgets.
8.3.3 To be responsible for
procurement of installations, equipment, and
supplies and entering into subcontracts and service contracts
related to
the CBM Operations, in accordance with the approved Work Programs
and
budgets and the applicable provisions of Articles 7.2.4, 7.6 and
10.2
hereof.
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8.3.4 To prepare in advance, in
accordance with Article 16 hereof, a personnel
training program and budget before the commencement of the
Exploration
Operations, Development Operations and Production Operations
respectively, and, in accordance with the said program and budget,
to be
responsible for preparing an annual personnel training program
and
budget and carrying out the annual program and budget after
approval by
JMC.
8.3.5 To establish an insurance
program, and to enter into and implement the
insurance contracts in accordance with Article 20 hereof.
8.3.6 To issue cash-call notices to all
the Parties to the Contract to raise
the required funds based on the approved budgets and in accordance
with
Article 12 hereof and Annex II - Accounting Procedure hereto.
8.3.7 To maintain complete and
accurate accounting records of all costs and
expenditures of the CBM Operations in accordance with the
provisions of
Annex II - Accounting Procedure hereto and to keep the accounting
books
secure and in good order.
8.3.8 To make necessary
preparation for regular meetings of JMC, and to submit
in advance to JMC necessary information related to the matters to
be
reviewed and approved by JMC.
8.3.9 To inform directly or
indirectly all the Subcontractors which render
services for the CBM Operations in China and all the Expatriate
Employees of the Operator and of Subcontractors who are engaged in
the
CBM Operations in China that they shall be subject to the laws,
decrees,
and other rules and regulations of the People's Republic of
China.
8.3.10 To report its work to JMC as
provided in Article 7.2 hereof.
8.3.11 To research and conduct a CBM
transportation and market study to
underpin any determination of commerciality made pursuant to the
terms
and provisions of Article 11 hereof. Such costs incurred to perform
and
complete such CBM transportation and market study shall be charged
to
the joint account and shall be cost recoverable under the terms of
this
Contract.
8.4 In the course of
the performance of the CBM Operations, any direct
losses, arising strictly out of the gross negligence or willful
misconduct of the Operator, (excluding personnel specified in
Article
1.2 of Annex III-Personnel Costs, hereto) shall be solely borne by
the
Operator. Losses arising from any cause other than strictly out of
the
gross negligence or willful misconduct of the Operator shall be
borne by
the Parties in accordance with their respective participating
interest.
The Operator shall use reasonable endeavors in accordance with
international CBM industry practice to include provisions similar
to
this Article 8.4 herein in related subcontracts and service
contracts.
For the purposes of this Article 8.4 "gross negligence" means
the
willful and wanton disregard for harmful, avoidable, and
foreseeable
consequences.
8.5 In the course of
the performance of the CBM Operations, the Operator
shall handle the information, samples and reports in accordance
with the
following provisions:
8.5.1 The Operator shall provide
CUCBM with various information, samples and
data in accordance with relevant regulations and Annex IV - Data
Control
hereto except for proprietary information and data of Operator.
The
ownership of all the information, samples and data shall vest in
CUCBM;
and the Operator shall have the right to use and handle such
information, samples and data in accordance with Annex IV - Data
Control
hereto. The information and data shall be reported to CUCBM at the
same
time that the Operator reports them to its parent corporation.
Upon
receipt by the Operator of any report from its parent
corporation
concerning such information and data, a copy of such report shall
be
furnished to CUCBM as soon as practicable.
15
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8.5.2 The Operator shall furnish
CUCBM in a timely manner with reports on
safety, environmental protection and accidents related to the
CBM
Operations and with financial reports prepared in accordance with
the
provisions of Annex II - Accounting Procedure hereto.
8.5.2.1 The Operator shall conduct regular
environmental, health and safety
audits of systems, facilities, seismic, drilling, and
production
operations as determined by JMC to ensure compliance with
Operator's and
industry standards. All costs for such regular audits shall be
charged
to the joint account.
8.5.3 The Operator shall provide
the non-Operator(s) of the Contractor with
copies of the relevant data and reports reasonably required by
non-Operator(s)
and referred to in Articles 8.5.1 and 8.5.2 herein.
8.5.4 The Operator shall, at the
request of any Party to the Contract, furnish
that Party to the Contract with the following:
8.5.4.1 Procurement plans for purchasing
equipment and materials, inquiries,
offers, orders, construction and service contracts;
8.5.4.2 Technical manuals, technical
specifications, design criteria, design
documents (including design drawings), construction records and
information, consumption statistics, equipment inventory, and
spare
parts inventory;
8.5.4.3 Technical investigation and cost
analysis reports; and
8.5.4.4 Other information relating to the
CBM Operations in the Contract Area
already acquired by the Operator in the performance of the
Contract.
8.6 In the course of
performing the CBM Operations, the Operator shall abide
by the laws, decrees, standards and other rules and regulations
with
respect to environmental protection and safety of the People's
Republic
of China and shall endeavor in accordance with the international
CBM
industry practice to:
8.6.1 Minimize the damage and
destruction caused by the CBM Operations to the
human and ecological environment;
8.6.2 Control blowouts promptly
and prevent or avoid waste or loss of CBM
discovered in or produced from the Contract Area;
8.6.3 Prevent land, forests,
vegetation, crops, buildings and other
installations from being damaged and destroyed; and
8.6.4 Minimize the danger to
personnel safety and health by developing and
implementing effective systems, policies and procedures.
8.7 Project
Management Team
In any CBM Field within the Contract Area where CUCBM has a
participating interest in the development of the said Field, a
project
management team (hereafter referred to as "PMT") shall be
established
for the development of such CBM Field in the organization of
the
Operator within thirty (30) days from the date of approval of
the
Overall Development Program for the said Field. All subsequent
CBM
Fields within the Contract Area in which CUCBM has a
participating
interest shall be developed by a PMT.
16
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PMT shall comprise those personnel designated by the Parties and
the
number of CUCBM's personnel shall be no less than one third (1/3)
of the
total number of personnel within PMT. The Contractor shall
designate a
person acting as the manager of PMT, and CUCBM shall designate a
person
acting as the deputy manager of PMT.
PMT shall be located at the Operator's office within the
Chinese
territory or as determined by JMC. The working location(s) of
the
members of PMT shall be decided according to the need of the
work.
The specific organization, staffing and working system of PMT
and
responsibilities and competence of various positions, including
those of
CUCBM's personnel assigned to PMT, shall be determined by the
Parties
through consultation prior to the approval of the Overall
Development
Program for the said CBM Field. The PMT shall exist for the period
of
the development
of said CBM Field.
8.8 Performance of
CBM Operations
8.8.1 No later than one (1) year
prior to the projected date on which all
development costs and the Deemed Interest thereon have been
recovered
("Cost Recovery Date"), the Parties shall commence good faith
negotiations on a joint operating agreement and the organization
thereof
in accordance with the Overall Development Program for the first
CBM
Field within the Contract Area, the expenses for which shall be
charged
to operating costs.
8.8.2 It is the intent of the
Contractor and CUCBM that effective no later
than said Cost Recovery Date, all CBM Operations within the
Contract
Area shall be conducted jointly by the Contractor and CUCBM as
Operators
in accordance with such joint operating agreement.
8.9 The expenses
incurred in the transfer and takeover of the CBM Operations
to CUCBM and Contractor as joint Operator shall be approved as
budget
items and charged to the operating costs in accordance with Annex
II-
Accounting Procedure.
8.10 With a view to
efficiently conducting Work Programs approved by the JMC,
the Operator shall have the right to use or occupy the land within
or
outside the Contract Area, including the right to use or acquire
road
transit rights and the right to use or to obtain CBM pipeline
rights of
way, inside or outside the Contract Area, subject to promulgated
Chinese
laws and
regulations.
ARTICLE 9: ASSISTANCE PROVIDED BY CUCBM
9.1 To enable the
Contractor to carry out expeditiously and efficiently the
CBM Operations, CUCBM shall have the obligation to assist the
Contractor
at its request to:
9.1.1 Obtain the approvals or
permits needed to open accounts with Bank of
China;
9.1.2 Handle foreign exchange
formalities;
9.1.3 Obtain office space, office
supplies, transportation and communication
facilities and make arrangements for accommodations as required,
all at
reasonable rates;
9.1.4 Handle customs
formalities;
9.1.5 Obtain entry and exit visas
and residence permits for Expatriate
Employees who will come to China for the performance of the
Contract,
and
for their dependents who will visit them or reside in China,
and
provide assistance for their transportation and moving as well
as
medical services and travel in China;
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9.1.6 Obtain necessary permission
to send abroad, if necessary, documents,
data and samples for analysis or processing during the performance
of
the CBM Operations; and
9.1.7 Maintain liaison with
central and local governments, and contact and
coordinate with departments engaged in fishing, aquatic plants,
stock
raising, agriculture, meteorology, ocean shipping, civil
aviation,
railway, transportation, electric power, communications, and
services
for supply bases, for relevant matters and otherwise assist the
Contractor in obtaining on a timely basis all approvals necessary
for
the conduct of the CBM Operations under the Contract;
9.1.8 Lease or use warehouses,
yards, terminal facilities, barges, aircraft,
pipelines and land, etc., in the implementation of the CBM
Operations;
and
9.1.9 Facilitate the Contractor's
and Subcontractors' registration in China.
9.1.10 CUCBM shall assist in the
development of transportation and marketing
information.
9.2 In accordance
with Article 15 hereof, CUCBM shall, at the request of the
Contractor, assist the Contractor with the recruitment of
Chinese
Personnel.
9.3 CUCBM shall, at
the request of the Contractor, provide the Contractor
with data and samples, if any, from the Contract Area within
CUCBM's
and/or its Affiliates' control, at reasonable rates and in
accordance
with any relevant rules and regulations, and CUCBM shall also
assist the
Contractor to arrange the purchase of any other data including but
not
limited to environmental, hydrological, topographical and
meteorological
data at reasonable rates.
9.4 CUCBM shall, at
the request of the Contractor, also assist the
Contractor with matters other than those under Articles 9.1, 9.2
and 9.3
herein, including, but not limited to, the acquisition, at
reasonable
costs where applicable, of any rights of way necessary for
transportation infrastructure, and the facilitation or bringing
about of
the granting of all approvals, permits and licenses related to the
CBM
Operations.
9.5 All expenses
incurred in the assistance provided by CUCBM in accordance
with this Article 9 shall be paid by the Contractor. Such
yearly
Assistance Fees shall not exceed the amounts set forth in
Article
5.2.14.3(b) and (c) of the Accounting Procedure and shall be
handled in
accordance with the provisions of Annex II-Accounting Procedure
hereto.
ARTICLE 10: WORK PROGRAM AND BUDGET
10.1 After the Date of
Commencement of the Implementation of the Contract,
the Operator shall propose and submit to JMC the annual Work
Program and
budget for the remainder of the same Calendar Year at the first
regular
meeting of JMC. Before the fifteenth (15th) day of September of
each
Calendar Year, the Operator shall complete and submit to JMC for
its
review an annual Work Program and budget for the next Calendar
Year
except as otherwise agreed by CUCBM. JMC shall either adopt the
annual
Work Program and budget as submitted or make such modifications
agreed
by the Parties. The adopted annual Work Program and budget shall
be
submitted to CUCBM for review and approval within one (l) month as
of
the date on which they are submitted to JMC. Within fifteen (15)
days
following the receipt of the annual Work Program and budget, CUCBM
shall
notify JMC in
writing of its approval or disapproval or any
modifications thereto with its detailed reasons. If CUCBM requests
any
modifications to the aforesaid annual Work Program and budget,
the
Parties shall promptly hold meetings to make modifications and
any
modifications agreed upon by the Parties shall be effected
immediately.
In case CUCBM fails to notify JMC in writing of its approval or
disapproval or any modification within fifteen (15) days, the
annual
Work Program and budget adopted by JMC shall be deemed to have
been
approved by CUCBM. The Operator shall make its best efforts to
perform
the CBM Operations in accordance with the approved annual Work
Program
and budget. For reviewing Work Program and budget by JMC, the
Operator
shall provide to JMC the supporting data when requested. During
the
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exploration period, the budgets so approved by CUCBM shall be
sufficient
to allow the Operator to fulfill the Work Programs and its
obligations
under the Contract.
10.2 The Operator may, in
accordance with the following provisions, incur
excess expenditures or expenditures outside the budget in carrying
out
the Work Program and budget, provided that the objectives of
the
approved Work Program and budget are not changed.
10.2.1 In carrying out an approved budget
for a single item, such as for the
drilling of a well, the Operator may, if necessary, incur
excess
expenditures of no more than ten percent (10%) of the budgeted
amount
except in the case of emergencies. The Operator shall report
the
aggregate amount of all such excess expenditures to JMC for
confirmation
on a Calendar Quarter basis.
10.2.2 For the efficient performance of
the CBM Operations, the Operator may,
without approval, undertake certain individual projects which are
not
included in the Work Program and budget, for a maximum expenditure
of
One Hundred Thousand U.S. Dollars (U.S.$100,000), but the
Operator
shall, within ten (10) days after such expenditures are incurred,
report
to JMC for confirmation. In case of emergency, the Operator may
incur
emergency expenditures for the amount actually needed but shall
report
such expenditures to JMC as soon as they are made. However, the
said
emergency expenditures shall not be subject to Articles 10.2.3
and
10.2.4
herein.
10.2.3 In the event that the aggregate of
excess expenditures under Article
10.2.1 herein and expenditures under Article 10.2.2 herein incurred
in a
Calendar Year cause the total expenditures of that Calendar Year
to
exceed the approved annual budget, such excess shall not exceed
five
percent (5%) of the approved annual budget for that Calendar Year.
If
the aforesaid excess is expected to be in excess of five percent
(5%) of
the annual budget, the Operator shall present its reasons therefore
to
JMC and obtain its approval prior to incurring such
expenditures.
10.2.4 When JMC confirms the excess
expenditures mentioned in Articles 10.2.1
herein, and the expenditures mentioned in Article 10.2.2
herein:
(a)
if expenditures or excess expenditures are determined to be
reasonable, the Operator may incur such expenditures or excess
expenditures again during the same Calendar Year, subject to
Article 10.2 herein; or
(b)
if expenditures or excess expenditures are determined to be
unreasonable, the Operator shall not incur such expenditures or
excess expenditures again during the same Calendar Year and
such
unreasonable expenditures or excess expenditures shall be dealt
with in accordance with Article 5.4 of Annex II-Accounting
Procedure hereto. However, with respect to the joint operation
conducted by the Contractor and CUCBM specified in Article 8.8
hereof, this provision shall not be applicable.
ARTICLE 11: DETERMINATION OF COMMERCIALITY
OF CBM
11.1 If any CBM Discovery
is made within the Contract Area, the Operator
shall promptly report such discovery to JMC. If JMC or the
Contractor
makes a decision that a CBM Discovery is worthy of a Pilot
Development,
the Operator shall submit to JMC a Pilot Development Work Program
which
shall include disposal of any CBM and/or Liquid Hydrocarbons
whether by
sale, flaring or otherwise and a timetable for such CBM Discovery
as
soon as possible. Such Pilot Development Work Program shall be
worked
out no later than ninety (90) days from the date of the
aforesaid
decision made by JMC or the Contractor. The Pilot Development
Work
Program shall, in so far as is practicable, be based on conducting
the
Pilot Development work continuously, with a view to commencing
operations within one hundred and eighty (180) days from the date
of the
aforesaid decision made by JMC or the Contractor.
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11.2 After the approval by
JMC of the Pilot Development Work Program referred
to in Article 11.1 herein, the Operator shall carry out the
operations
as soon as possible without unreasonable delay in accordance with
the
timetable set forth in the approved Pilot Development Work
Program.
11.3 Unless otherwise
specified in the Pilot Development Work Program, within
one hundred and eighty (180) days after the completion of the
Pilot
Development, the Operator shall submit to JMC a detailed report on
the
evaluation of the potential commerciality of the CBM discovery
for
review and discussion. Under special circumstances, the
above-mentioned
period may be reasonably extended upon agreement of the
Parties.
The Pilot Development report shall include an evaluation of
geology,
development, engineering and economics, the Maximum Efficient Rate
(MER)
and the estimated duration of the production period determined
in
accordance with the international CBM industry practice.
11.4 If JMC decides
unanimously that a CBM Discovery is non-commercial, at
the request of the Contractor, the corresponding area covered by
the CBM
Discovery may be retained in the Contract Area during the
exploration
period. But if,
at the expiration of the exploration period, JMC
unanimously still considers the said CBM Discovery to be
non-commercial,
the area covered by the CBM Discovery shall be excluded from
the
Contract Area. The preceding shall not apply to a CBM Field which
in the
opinion of either Party has potential commercial value but which
has not
been developed due to a lack of market, a shortage of consuming
facilities or lack of transportation facilities and/or inability
to
negotiate long-term transportation and/or sales agreements.
Prior to the expiration of the exploration period, if any Party
considers that a CBM Discovery which has been determined to be
non-commercial needs to be reappraised because of various
favorable
factors, the Operator shall work out a new evaluation report on
that CBM
Discovery and submit it to JMC for review and approval.
11.5 If the Contractor,
prior to the expiration of the exploration period,
advises JMC in writing that any CBM Discovery is non-commercial,
the
Contractor shall be deemed to have waived its rights of
participating in
the development of that CBM Field, then, CUCBM shall have the right
to
solely develop such potential CBM Field.
11.6 When the Parties
consider a CBM Discovery to be potentially commercial,
as the Operator, the Contractor shall, within a reasonable amount
of
time determined by JMC, prepare and submit to JMC an Overall
Development
Program for such CBM Discovery. The Parties shall also negotiate
and
enter into a mutually acceptable supplemental agreement in regard
to the
development of such CBM Field in a manner that shall not
unreasonably
interfere with the planned expansion of coal mining operations in
the
relevant coal field. Upon receipt and approval of the Overall
Development Program, JMC shall immediately forward the Overall
Development Program to CUCBM. Within thirty (30) days of the
receipt of
the Overall Development Program, CUCBM shall submit the Overall
Development Program and supplemental agreement to the competent
authorities of the Chinese government for review and approval.
Such
Overall Development Program and supplemental agreement shall be
regarded
as an integral part of the Contract upon the approval of the
competent
authorities of the Chinese government.
11.7 Long-term CBM, CBM
Products and Liquid Hydrocarbons transportation and
sales agreements shall be concluded prior to the Determination
of
Commerciality.
11.8 In the event of a CBM
Field Straddling a Boundary or of a potentially
commercial CBM Discovery straddling a boundary of the Contract
Area,
CUCBM shall organize the Contractor and the neighboring
party(ies)
involved, which may include CUCBM and/or it's Affiliates, to work
out a
unitized or new Overall Development Program for such Field or
Pilot
Development work program for such CBM Discovery. If such area
is
controlled solely by CUCBM and/or its
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Affiliates, then the Contract Area shall be extended to cover the
CBM
Field with the approval of Department or Unit.
11.9 If a CBM Discovery
without commercial value within the Contract Area and
a CBM discovery outside the Contract Area can be most
economically
developed as a commercial CBM Field by common facilities
jointly
constructed; or if a CBM discovery without commercial value within
the
Contract Area can be economically developed as a commercial CBM
Field by
linking it up with existing facilities located outside the
Contract
Area, CUCBM shall organize the Contractor and the neighboring
party(ies)
involved, which may include CUCBM and/or its Affiliates, to work
out an
equitable agreement for construction or utilization and sharing
the
costs relative to said facilities.
11.10 In Article 11 those
procedures which reference the Overall Development
Program shall be applied by analogy in the following
circumstances:
additional development projects referring to the Overall
Development
Program designed either to improve the producing capability of
the
reservoir or to substantially increase the recoverable reserves
therefrom through additional investments. Any extension of the
production period of the CBM Field due to such additional
development
projects shall be subject to the related provision of Article
4.5
hereof.
11.11 Notwithstanding the Date of
Commencement of Commercial Production or
anything else to the contrary herein, the allocation of the
production
from a Pilot Development shall be governed by the principles set
forth
in Articles 12 and 13 hereof.
ARTICLE 12: FINANCING AND COST RECOVERY
12.1 Funds required for the
CBM Operations shall be raised by the Operator in
accordance with Work Programs and budgets determined pursuant to
the
relevant provisions of the Contract, the provisions described in
Annex
II - Accounting Procedure hereto, and the provisions of this
Article
12.1.
12.1.1 All the exploration costs required
for Exploration Operations shall be
provided solely by the Contractor. For purpose of the Contract,
all
costs incurred during the extended period described in Article
4.3
hereof shall be deemed exploration costs and shall be provided
solely by
the Contractor.
12.1.2 The development costs required for
Development Operations in each CBM
Field within the Contract Area shall be provided by CUCBM and
the
Contractor in proportion to their respective participating
interests:
thirty percent (30%) by CUCBM and seventy percent (70%) by the
Contractor, unless CUCBM applies the provisions of the second
paragraph
of this Article 12.1.2 herein.
In the event that CUCBM, at its option, decides not to participate
in
the development of a CBM Field or decides to participate in the
development of such CBM Field to an extent of less than thirty
percent
(30%) of the participating interest, CUCBM shall notify the
Contractor
in writing of its decision of non-participation or a specific
lesser
percentage of the participating interests before the Pilot
Development
report is reviewed by JMC pursuant to Article 11.3 hereof. In such
case,
if CUCBM does not participate in the development of such CBM Field,
the
development costs therein shall be borne solely by the Contractor,
or in
case CUCBM participates in the development of such CBM Field to
an
extent of less than thirty percent (30%) of the participating
interests,
such development costs shall be borne by the Parties in proportion
to
their actual respective participating interests.
12.1.3 The operating costs incurred for
the performance of the Production
Operations of each CBM Field before the Date of Commencement of
Commercial Production shall be considered as development costs.
The
operating costs so incurred after the Date of Commencement of
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Commercial Production shall be paid respectively by CUCBM and
the
Contractor in proportion to their participating interests of the
said
CBM Field.
12.1.4 The Parties, at each other's
request, shall cooperate and assist each
other to facilitate the financing of CBM Operations on the best
terms
and conditions available. For the purpose of implementation of
the
Contract, CUCBM agrees that the Contractor may, when financing, use
the
entitlement of its share of production under the Contract as
security
for loans, provided that the Contractor shall advise CUCBM in
advance
and the loan application therefore shall be examined by CUCBM,
and
provided further that the rights and interests of CUCBM under
the
Contract shall not be impaired thereby. If CUCBM does not object to
the
loan application within thirty (30) days of the receipt thereof,
then
the rights and interests of CUCBM under the Contract shall be
deemed
not impaired thereby.
12.2 All the costs
and Pre-Contract Costs incurred in the performance of CBM
Operations shall be recovered in accordance with Annex II -
Accounting
Procedure hereto and the following provisions:
12.2.1 The operating costs for any
given Calendar Year actually incurred by
CUCBM and the Contractor in respect of each CBM Field pursuant
to
Article 12.1.3 herein, shall be recovered in kind by the
Parties
