PRODUCTION SHARING CONTRACT
ON COAL BED METHANE GAS OPERATIONS
IN PORTIONS OF PETROLEUM EXPLORATION
AREAS
NEMEGT-VI AND BORZON-VII
BETWEEN
THE PETROLEUM AUTHORITY OF MONGOLIA
AND
STORM CAT ENERGY CORPORATION
dated February 26,
2004
PRODUCTION SHARING
CONTRACT
This is a Product Sharing
Contract signed by the Petroleum Authority of Mongolia, on the one
side (hereinafter "PAM"), and Storm Cat Energy Corporation, on the
other (hereinafter the "Contractor") on the day of February 26,
2004.
GENERAL
PROVISIONS
The purpose of this
Contract is to establish regulation of relations between the
Contractor and PAM, authorized by the Government of Mongolia to
enter on its behalf into Contract related to Coal Bed Methane gas
(CBM) Operations in the territory of Mongolia, and exercise
supervision over implementation thereof.
The Contractor shall have
exclusive rights for conducting Coal Bed Methane gas (CBM)
Operations in the Contract Area for Exploration as described in
Annexes, attached hereto and made the integral part of the present
Contract .
The land, except that
privately owned by Mongolian citizens, as well as the subsoil shall
be the property of the State. Mongolia in the interest of all its
people may allow foreign nationals, legal persons to lease land and
exploit natural resources for a specified period of time, purpose,
under conditions and procedures as provided for by law.
NOW, THEREFORE, have
agreed as follows:
ARTICLE I
REPRESENTATIVES
1.1
DESIGNATION OF
REPRESENTATIVES
a)
The Government of
Mongolia hereby designates Mr. O. Davaasambuu, the Chairman of the
PAM, or any other authorized person, as its representative (the
"Government Representative") under this Contract.
b)
The Contractor hereby
designates Mr. Craig Steinke, Manager of Acquisition of Storm Cat
Energy Corporation, as its representative (the "Contractor
Representative") under this Contract
c)
The Government
Representative or the Contractor Representative may be changed by
notice to the other party in accordance with Article XXIII
hereof.
1.1
GOVERNMENT
REPRESENTATIVE'S RIGHT OF ACCESS
a)
The Government
Representative (or any other person assigned and authorized by the
Government Representative) shall have access to the Contract Area
and to all Operations, and the Contractor shall provide all
possible assistance to the Government Representative to exercise
such right of access.
b)
The local administrative
organizations of Mongolia shall visit the site of the Contractor's
Operations only to gain access.
c)
Any legally authorized
person has right to access and exercise supervision over
implementation.
ARTICLE
II
DEFINITIONS
2.
DEFINED
TERMS
Page 1
If there is not
explanation for certain case, the defined terms and understandings,
forms originating hence shall have the meanings set forth in this
Article 2:
Coal Bed Methane gas
ICBM) means
Natural Gas (mainly Methane) contained in coal or bituminous
lignite beds, shales and tight sands under reservoir condition and
extracted there from during CBM Operations.
"Petroleum"
means liquid petroleum
and different compounds of hydrocarbons occurring under the surface
of the earth and which may be extracted in liquid, gaseous or solid
state individually or in combination.
"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-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
hydrocarbon.
"Petroleum
Law" means the
Petroleum Law of Mongolia, which entered into force on February 13,
1991 and any Laws amending or in substitution for, or in lieu of
such law.
"Regulation for
Implementing the Petroleum Law" means the Regulation for Implementing
the Petroleum Law of Mongolia adopted by Government of
Mongolia/Resolution No.204/ in 1991.
"Rules"
mean rules, issued by the
Petroleum Authority of Mongolia in accordance with the Article 5 of
the Regulation for Implementing the Petroleum Law of Mongolia
should be followed compulsory in the process of carrying out CBM
Operations.
"Coal Bed Methane gas
(CBM) Operations" mean operations related to the
exploration, development, protection, production, processing,
transportation, storage and marketing of CBM in scope of this
Contract.
"PAM"
means the Petroleum
Authority of Mongolia authorized by the Government of Mongolia to
enter on its behalf into Contract related to CBM Operations in
connection with operations in the territory of Mongolia, and
exercise supervision over implementation thereof.
"Laws"
means any applicable
Mongolian laws, or any other legal acts, whether now existing or
hereafter enacted.
"Legal
Person" means
a corporation, company or other entity recognized as such by the
Laws.
"Production Sharing
Contract" means this Contract executed by the
PAM and the Contractor for conducting CBM Operations in the
Contract Area and approved by the Government of
Mongolia.
"Effective
Date" means
the date on which this Contract is approved by the Government of
Mongolia.
"Exclusive right for
conducting CBM Operations " means only the Contractor conduct
exercise special rights provided for in this Contract only for CBM
Operations when it is in effect.
"Subcontractor"
means any legal person or
individual, which concluded a Contract with the Contractor to carry
out certain portions of the CBM Operations.
"Contract
Area" means
the area shown on and described in Annexes herein from the
Effective date as such area shall have been reduced from time to
time by relinquishments made in accordance with Article
Vll.
"Block
Unit" means an
area equal to multiplied ten (10) minutes latitude by ten (10)
minutes of longitude.
"Contract
Year" means
any period of twelve (12) consecutive Calendar Months counted from
the Effective Date of this Contract or from the anniversaries of
such Effective Date.
"Appraisal
Area" means
one or more geological structure(s) or occurrence(s) that the
Contractor determines to be worthy of being appraised by an
Appraisal Program.
Field
means an Area containing
one or more natural reservoirs discovered on one or more wells, and
similar in geological structure and stratigraphy, determined to be
worthy of being developed.
"Appraisal
Program" means
a work program, submitted by the Contractor, including a Budget,
for the purpose to evaluate and delineate a Commercial
Discovery.
"Discovery
Well" means a
well by which Contractor discovers the existence of a CBM
reservoir, which is determined to require further evaluation for
the purpose of determining whether such reservoir could constitute
a Commercial Discovery.
"Commercial
Discovery" means a discovery of a reserves of
CBM which the PAM and Contractor determine to be capable of being
developed commercially, based on consideration of all pertinent
geological and geophysical data, development costs, transportation
and marketing costs, available markets and other technical and
economic factors deemed relevant.
"Operating
Costs" means
all costs and expenses except Exploration Costs and Development
Costs.
"Development
Area" means an
area authorized by the Government of Mongolia for CBM Development
within the Contract Area containing a Commercial
Discovery.
"Appraisal
Development" means a well development during
appraisal, as international CBM industry, in purpose to determine
Discovery Well or Commercial Discovery Well.
"Development
Costs" means all costs and expenses
(except Operating Costs and Exploration Costs) incurred in respect
of Development Operations.
"Development
Operations" means all operations in respect of
one or more Commercial Discoveries, including:
1.
drilling and producing of
development and delineation wells, and constructing and operating
pipelines, terminals and other facilities;
2.
separating, treating,
dehydrating, compressing, liquefying, storing, flaring,
transporting and otherwise processing and handling CBM ;
and
3.
re-pressuring, recycling,
and conducting pressure maintenance, secondary, tertiary and other
enhanced recovery activities.
"Development
Period" means
the period during which Development Operations will be carried out
in accordance with this Contract, as specified in Article
5.5
"Development
Plan" means a
program of work, including a Budget, for Development Operations in
respect of a Commercial Discovery.
"Exploration
Operations" means such operations as:
1.
activities in respect of
aerial and satellite mapping, geological, geophysical and
geochemical surveys; drilling and production of exploration and
appraisal wells; petrologic, mineralogical and paleontological
studies, interpretations of data preparing reports on exploration
activities;
2.
discovering one or more
reservoirs which have not then been proved to be within a
Commercial Discovery; and
3.
carrying out an Appraisal
Program.
"Exploration
Period" means
the period during which Exploration Operations will be carried out
in accordance with this Contract.
"Exploration
Costs" means
all costs and expenses (except Operating Costs and Development
Costs) incurred in respect of Exploration Operations.
"Contract
CBM" means CBM
which is produced and saved from the Contract Area pursuant to this
Contract; and for purpose of this definition, "produced" means
caused or allowed to rise to the surface and to pass through
Production Sharing Measurement facilities, and "saved" means made
available to be taken and disposed of by a party hereto and
not:
1.
injected into a
subsurface stratum within the Contract Area; or
2.
used for filling up
transferring pipe; or
3.
lost through flaring,
venting shrinkage, evaporation or otherwise during
Operations.
"Cost CBM"
means a quantity of
Contract CBM for recovering the Contractor's costs and expenses
pursuant to Article 8.3.
"Production Sharing
CBM" means the
remaining part of Contract CBM after deducting the Royalty and Cost
CBM.
"Production Sharing
measurement" is as in Article 11.1.
"Royalty"
means payment in
accordance with the Petroleum Law of Mongolia for utilization of
the natural non-renewable resources of Mongolia. Royalty shall be
calculated with respect to total production of Contract CBM at the
wellhead.
"Calendar
Month" means
one (1) of the twelve (12) calendar months according to the
Gregorian Calendar, starting on the first day of such month and
ending on the last day of such month, inclusive.
"Calendar
Quarter" means
a calendar quarter according to the Gregorian Calendar, being
either the Calendar Months (i) January, February and March, (ii)
April, May and June, (iii) July, August and September, or (iv)
October, November, and December.
"Calendar
Year" means a
year according to the Gregorian Calendar starting on January I and
ending on December 31, inclusive.
"Budget"
means an estimate of
income and expenditures.
"Accounting
Procedure" means procedures and reporting
requirements set forth in Annex.
"Tax"
means a non-refundable
capital entering to the State or Local budget, by determined
percent calculated to income, estate, goods, service of citizens
and enterprises for certain period, as stated in
legislations.
Page 4
"Fee"
means a capital received
by authorized entity for its each service for citizen and
enterprises, and entering to the State or Local budget, as stated
in legislations.
"Payment"
means a capital entering
to the State or Local budget and special funds, from citizen and
enterprises for utilization of a State property (land except
privatized to citizens, underground, its reserve, forest, water
resource and others).
"Land Surface
Rental" non-refundable payment to
representative of the Government by size of a contract area as
stated in "Regulation for Implementing the Petroleum Law" for
Contractor's exclusive right only for CBM Operation in the contract
area.
"Relinquishment of
Areas" means
relinquishment by Contractor voluntarily or in accordance with
Contract some parts of Contract Area at the certain phase of
exploration work.
ARTICLE III
RIGHTS AND OBLIGATIONS OF
GOVERNMENT REPRESENTATIVE AND CONTRACTOR
3.1
GOVERNMENT
REPRESENTATIVE'S RIGHTS
The Government
Representative shall have the following rights:
a)
to inspect CBM Operations
of the Contractor;
b)
to possess all the
original copies of geology, geophysics, petrochemistry geochemistry
and other related fields data;
c)
to possess copies of
documents related to all the Contractors operations, machinery,
equipment, technical definitions, houses, constructions, its drafts
and others;
d)
to exercise the right to
request the Contractor to supply its share of CBM for Mongolia's
internal consumption, at fair market value, if Contractors wishes
price of the CBM shall be paid in foreign currency;
e)
to use or sell the it's
share of Production Sharing CBM;
f)
to exercise other rights
provided for in this Contract
3.2
GOVERNMENT
REPRESENTATIVE'S OBLIGATIONS
The Government
Representative shall assume the following
responsibilities:
a)
to support CBM operations
conducted by Contractor;
b)
to inspect and supervise
implementation of Mongolian legislation related to CBM
Operations;
c)
to exercise other rights
provided for in this Contract
3.3
CONTRACTOR 'S
RIGHTS
a)
The Contractor shall have
the exclusive rights to conduct CBM Operations within the Contract
Area;
b)
The Contractor shall have
a right to requisite approvals, to construct pipelines, bridges,
roads, storage facilities, houses, landing fields, radio towers and
communication facilities;
c)
The Contractor shall have
a right to use or sell (both within the Mongolia and abroad) the
Contractor's share of Production Sharing CBM;
d)
The Contractor shall have
a right to assign, transfer, or otherwise convey of all or part of
its rights and interests under this Contract to any third party
with the prior
written consent of the
Government Representative, which will not be unreasonably
withheld;
3.4
CONTRACTOR S
OBLIGATIONS
During the conduct the
CBM Operations the Contractor shall assume the following
responsibilities:
a)
comply with Petroleum Law
of Mongolia, Regulation for Implementing the Petroleum Law of
Mongolia, which ratified by the authorized body and all applicable
laws of Mongolia;
b)
CBM Operations will be
conducted in accordance with the standards and regulations that
shall comply with the universal practices accepted in the
international CBM industry. It is also understood that the
execution of the CBM Operations shall be exercised so as not to
conflict with obligations imposed on the Government of Mongolia by
international treaties;
c)
be responsible for the
timely preparation and execution of the CBM Operations, the
technology, techniques and equipments are to be used for efficient
development of CBM and shall comply with the best practices
accepted in the international CBM industry;
d)
conduct an environmental
impact assessment in accordance with current applicable Laws prior
to the beginning of Contractor's activities
e)
to take the following
measure necessary to protect human, animals, nature, national
resource, land surface:
1.
to prevent hazards to
environment, human life or health and property of others during the
conduct of CBM Operations;
2.
prior to the Contract
expiration or termination, or relinquishment or abandonment of any
part of the Contract Area, remove all equipment and installations
from the area in a manner acceptable to the Government
Representative, and perform all necessary site restoration
activities in accordance with applicable Laws and regulations of
Mongolia;
3.
linclude in the annual
Budget estimates of the anticipated abandonment and site
restoration costs for each exploratory well;
4.
If the Contract Area is
located near forbidden for CBM Operations Area take the necessary
precautions for protection of ecological systems, and
prevent pollution of the Contract Area;
f)
submit to all original
geological, geophysical, geochemical, drilling, production data,
laboratory analysis results and other data and reports as it may
compile during the term hereof ;
g)
assist the Government
Representative in preparing and carrying out plans and programs for
training and education of Mongolian nationals;
h)
be responsible for the
damages causes by violation of CBM Operations
Regulations.
ARTICLE IV
COSTS AND EXPENSES
Except as otherwise
provided herein, the Contractor shall bear all costs and expenses
necessary to conduct CBM Operations. If such CBM Operations result
in a Commercial Discovery of CBM, the Contractor may recover such
costs ("CBM Costs") and 40 (forty) percent of CBM will be used for
cost recovery. Neither party hereto guarantees that any such
discovery will be made, or if made, that it will be Commercial
Discovery. Accordingly, there shall be no guarantee that the
Contractor will achieve any reimbursement of any costs and expenses
incurred hereunder.
Page 6
ARTICLE V
TERM OF EXPLORATION OPERATIONS
5.1
EXPLORATION
PERIOD
a)
The Exploration Period
shall begin on the Effective Date. The Exploration Period shall be
up to five (5) years duration and shall consist of three phases.
The Government Representative might require shortening this term to
be less than five (5) years, depending on the type, amount and cost
of minimum work obligations proposed by the Contractor.
b)
The duration of the first
phase of the Exploration Period shall be one (I) Calendar Year, the
duration of the second phase shall be two (2) Calendar Years and
the duration of the third phase shall be two (2) Calendar Years
respectively.
5.2
EXTENSION OF
EXPLORATION PERIOD
a)
The Government
Representative shall consider granting an extension of the
Exploration Period, if the Contractor, at least thirty (30) days
prior to the expiration of any phase of the Exploration Period
gives written notice to the Government Representative of the
Contractor's desire to extend the Exploration Period.
b)
If the Contractor has
fulfilled exploration work programs, Budgets and minimum work obli
tions as specified below for the phase of the Exploration Period,
the Government Representative may, subject to the agreement with
the Contractor, extend the Exploration Period two (2) times for two
(2) years duration each. The Government Representative shall verify
exploration work programs and Budgets in order to extend the
Exploration Period.
c)
If on the date on which
the third Exploration Period would otherwise expire a Discovery
Well exists in respect of which no determination has then been made
as to whether such discovery is a Commercial Discovery, the
Exploration Period shall continue in effect in respect of the
Appraisal Area for such Discovery Well until the first to occur of
the following:
i)
such Discovery Well is
determined to be a Commercial Discovery;
ii)
such Discovery Well is
determined not to be a Commercial Discovery;
iii)
additional extension
shall not be more than one year.
5.3
DISCOVERY AND
APPRAISAL OPERATIONS
a)
If a well is determined
to be a Discovery Well, the Contractor shall within fifteen (15)
days notify in written the Government Representative and the date
of such notice shall be deemed to be the date of such Discovery
Well.
b)
Within ninety (90) days
after the date of each Discovery Well, the Contractor shall provide
to the Government Representative for approval in respect thereof;
an Appraisal Program and Budget; and maps and other descriptions of
the area to be appraised (the "Appraisal Area"); and after
Government Representative's approval shall begin to implement the
Appraisal Program.
5.4
COMMERCIAL
DISCOVERIES
a)
If on the basis of
reserves estimates one or more discoveries made by one or more
Discovery Wells are determined to be a Commercial Discovery, the
Contractor shall notify in writing the Government Representative
within fifteen (15) days, and the date of such notice shall be
deemed to be the date of such Commercial Discovery.
b)
Within one hundred eighty
(180) days after the date of each Commercial Discovery, the
Contractor shall provide to the Government Representative for
approval in respect thereof: a Development Plan and Budget; and
maps, reserves estimates and other
Page 7
descriptions of the area
to be developed (the "Development Area"); Petroleum Administration
shall inspect revise all the documents within thirty (30) days and
if decides no amendments, no changes shall be made then within
ninety (90) days shall approve such Plan. Petroleum Administration
shall have a right to extend the approval period for one hundred
eighty (180) days if decides that all documents shall be amended
and changed.
c)
within ninety (90) days
after Government Representative's approval shall commence
Development Operations to implement such Development
Plan
5.5
COMMERCIAL
DISCOVERY, TESTING. DEVELOPMENT PERIOD
a)
the Commercial Discovery
establishment period shall be included in Appraisal
Program;
b)
the period for Testing
the Commercial Discovery establishments shall be continued for one
hundred eighty (180) days.
c)
Development Period in
respect of each Commercial Discovery shall take effect on the date
of such Commercial Discovery and shall continue for a period of up
to twenty (20) years.
5.6
REVISIONS OF
APPRAISAL PROGRAMS, APPRAISAL AREAS,
DEVELOPMENT PLANS AND DEVELOPMENT AREAS
Subject to Government
Representative's approval, the Contractor may, on the basis of
additional information or evaluation, revise any Appraisal Program,
Appraisal Area, Development Plan and Development Area; provided,
however, that no such revision will add to an Appraisal Area or
Development Area any parts of the Contract Area that have already
been relinquished under Article VII prior to such
revision.
5.7
EXTENSION
OF DEVELOPMENT
PERIOD
The Government
Representative may, upon mutual agreement with the Contractor,
extend the Development Period two (2) times, with each extension
being up to five (5) years in duration. The Government
Representative shall consider granting an extension of the
Development Period, if the Contractor, at least sixty (60) days
prior to the expiration of the Development Period gives written
notice to the Government Representative of the Contractor's desire
to extend the Development Period.
ARTICLE VI
EXPLORATION OPERATIONS
6.1
MANDATORY WORK AND
OBLIGATIONS
a)
Within one hundred eighty
(180) days from the Effective Date the Contractor shall commence
the Exploration Operations. The Contractor shall be obliged to
perform mandatory work and undertake minimum work obligation in an
amount as specified in Annex C. If the Contractor did not spend
such amount, then the Contractor shall pay the difference to the
Government Representative within thirty days after the end of the
Contract Year of the Exploration Period being
undertaken.
b)
Should the Contractor
undertakes more work than minimum work obligation, the excess
expenditures shall be carried forward to the next Contract Year of
the Exploration Period.
c)
In the event the contract
is terminated by the Contractor, the only obligation for the
Contractor to spend the minimum work obligation amount for that
Contract Year is the subject of the payment pursuant to the Article
6.1.a.
Page 8
6.2
DRILLING
METHODS
Any exploration well
which the Contractor becomes obligated to drill under this
paragraph 1 of Article VI shall be drilled in accordance with
generally accepted methods used in the international CBM industry
and shall be deemed drilled upon the first to occur of the
following:
a)
it reaches the projected
depth;
b)
it becomes a Discovery
Well;
c)
it reaches basement rock;
or
d)
it encounters
impenetrable substance or excessive geothermal
gradients.
6.3
EXPLORATION WORK
PROGRAMS AND BUDGETS
Within sixty (60) days
after the Effective Date, and thereafter at least forty five (45)
days prior to the beginning of each Contract Year, the Contractor
shall prepare detailed exploration work programs and Budgets
setting forth the Exploration Operations which the Contractor
proposes to conduct during such Contract Year in the Contract Area,
and provide such work programs and Budgets for approval to the
Government Representative. At least thirty (30) days prior to the
beginning of such Contract Year, the Contractor and Government
Representative shall meet to review and discuss such exploration
work program and Budget. If the Contractor thereafter intends to
revise such approved work program and Budget, the Contractor shall
promptly provide copies of such revision to the Government
Representative and within fifteen (15) working days following the
receipt thereof the Contractor and the Government Representative
shall again meet to review and discuss such changes.
ARTICLE VII
RELINQUISHMENTS
7.1
MANDATORY
RELINQUISHMENTS
The
Contractor:
a)
may relinquish within
thirty (30) days after the expiration of the first phase of the
Exploration Period, a total of twenty five (25) to fifty (50)
percent of the original Contract Area;
b)
may relinquish within
thirty (30) days after the expiration of the second phase of the
Exploration Period, a total of twenty (20) to thirty (30)
percent of the original Contract Area; and
c)
may relinquish at or
prior to the expiration of the Exploration Period, all remaining
portions of the original Contract Area, except Appraisal Areas and
Developments Areas.
d)
is obliged to restore the
surface, clean the polluted area, water, remove all machinery and
equipment of any part of the original Contract Area into its
original form prior to relinquishment.
7.2
VOLUNTARY
RELINQUISHMENTS
a)
the Contractor may
voluntarily relinquish all or any part or parts of the Contract
Area under paragraph 1 of Article VI , and any such voluntary
relinquishments shall be credited toward the mandatory
relinquishments under paragraph 1 of Article VII;
b)
the Contractor shall make
no voluntary relinquishment for the purpose of reducing or
rescinding a minimum work obligation, which the Contractor
shall
Page 9
have then already become
obligated to under paragraph lof Article VI hereof. The Contractor
shall pay to the Government Representative within thirty
(30) days before the relinquishment.
7.3
APPRAISAL
AREAS
If, after the conduct of
an Appraisal Program, the Contractor determines that the Appraisal
Area does not constitute a Commercial Discovery, the Contractor
shall relinquish such Appraisal Area. If Contractor wishes
voluntary relinquish the Appraisal Area, which has not conducted
its mandatory work and obligations, in accordance with Appraisal
Program the Contractor shall pay to the Government Representative
within thirty (30) days before relinquishment.
ARTICLE VIII
ROYALTY AND PRODUCTION SHARING
8.1
ROYALTY
1.
The Contractor shall pay
the Royalty based upon the price of the Contract CBM for each
Calendar Quarter. The Royalty shall be equal to seven and one half
(7.5) percent calculated with respect to total production of
CBM.
2.
The Royalty payment shall
be determined pursuant to paragraph 5 of Article VIII and such
Royalty payment shall be made before the last day of the last Month
of each Calendar Quarter, or as otherwise approved by the
Government Representative.
8.2
MARKETING OF
CBM
a)
The Contractor shall have
right to market all CBM produced and saved from the Contract
Area.
b)
If the Government of
Mongolia decides to take any of its portion of CBM by calculating
in currency from marketed CBM, or in kind from produced and saved
CBM it shall so advise the Contractor in writing not less than
thirty (30) days prior to the commencement of each Calendar Quarter
specifying the quantity which it decides to take.
8.3
COST
CBM
a)
The Contractor shall have
the right to take and dispose of the certain quantity of Contract
CBM for each Calendar Month (herein referred to as "Cost CBM") for
the purpose of recovering its costs and expenses incurred in
respect of CBM Operations. The quantity of Cost CBM which the
Contractor shall have the right to take and dispose of in any
Calendar Month shall be equal to that quantity of Contract CBM
which has a value equal to the aggregate of all CBM Costs incurred
by the Contractor and allowed to be recovered pursuant to this
Contract; provided, however, that the Contractor shall be entitled
to take Cost CBM not exceeding 40 percent of all Contract CBM for
any Calendar Month. All Operation Costs of the Contractor that
remain unrecovered hereunder shall be carried forward until fully
recovered in the succeeding Calendar Months.
b)
The Parties shall agree
on the planning and accounting model for the CBM Operations and
shall submit to the Government Representative a copy of accounts
for CBM Costs. The Contractor shall notify the Government
Representative of the amount of the CBM Costs and the method of
their recovery.
Page I0
c)
Contractor will classify
CBM Cost into Exploration Cost, Operation Cost and Development
Cost, without double concerning. Those CBM Costs will be recovered
by the following stages
1.
Exploration
Cost,
2.
Operation Cost
and
3.
Development
Cost
For clarification, it is
approved possibility that Development Cost can occur within
Exploration Period and Exploration Cost within Development
Period.
d)
Notwithstanding the
foregoing, the Royalty to be paid under paragraph 1 of Article VIII
and the bonuses and other payments to be paid under Article X shall
not be recoverable and shall not be included in Cost CBM under this
paragraph 3 of Article VIII.
8.4
PRODUCTION SHARING
CBM
a)
After reduction by the
Royalty and the quantity of Cost CBM for each Calendar Month, the
remaining quantity of Contract CBM (herein referred to as
"Production Sharing CBM") shall be allocated between the Government
of Mongolia and the Contractor in proportion to the percentages set
forth below, based upon the average daily quantity of Contract CBM
for a given Calendar Month:
1.
If average daily quantity
of Contract CBM for any Calendar Month is less than 1.000.000 m
3 :
Government of
Mongolia
20 %
Contractor
80 %
2.
If average daily quantity
of Contract CBM for any Calendar Month equals to or exceeds
1.000.001 m 3 but is less than 2.000.000 m 3
:
Government of
Mongolia
25 %
Contractor
75 %
3.
If average daily quantity
of Contract CBM for any Calendar Month equals to or exceeds
2.000.001 m 3 but is less than 3.000.000 m 3
:
Government of
Mongolia
30 %
Contractor
70 %
4.
If average daily quantity
of Contract CBM for any Calendar Month equals to or exceeds
3.000.001 m 3 but is less than 4.000.000 m 3
:
Government of
Mongolia
35 %
Contractor
65 %
5.
If average daily quantity
of Contract CBM for any Calendar Month equals to or exceeds
4.000.001 m 3 :
Government of
Mongolia
40 %
Contractor
60 %
If the balance of
unrecovered CBM Costs is less then the forty (40) percent of the
total quantity of Contract CBM, such the difference between the
forty (40) percent of the total quantity of Contract CBM and the
balance of unrecovered CBM Costs shall be calculated as a
Production Sharing CBM.
c)
The average daily
quantity of Contract CBM for any Calendar Month shall be calculated
by dividing the total quantity of Contract CBM for each such
Calendar Month by the total number of days of such Calendar
Month.
d)
The value of the share of
Government of Mongolia of Production Sharing CBM shall be
determined pursuant to paragraph 5 of Article VIII and the payment
of the share of Government of Mongolia of Production Sharing CBM
shall be made to the Government Representative within thirty (30)
days from the end of each Calendar Quarter.
8.5
VALUATION OF
CONTRACT CBM
a)
For purposes of
determining the value of Royalty to be paid to the Government of
Mongolia pursuant to Article 8.1 and the value of Cost CBM and
Production Sharing CBM to be allocated between the Government of
Mongolia and the Contractor pursuant to paragraph 3 of Articles
VIII and paragraph 4 of Article VIII, a Contract CBM shall be
determined at the world market price (each Calendar
Month).
b)
The exact procedure of
determining the value of Contract CBM shall be adopted by mutual
agreement between Government Representative and Contractor prior to
conclusion of any agreements with third parties with regard to
marketing of Contract CBM.
c)
In every Calendar Months
Contract CBM price will be calculated by arms-length method price
of the Contractor. Transportation costs shall be agreed by
Government Representative and Contractor with respect to the
international rates and shall be included to the Contract CBM
price.
8.6
FORECASTS OF
PRODUCTION
a)
For each Commercial
Discovery, not less than thirty (30) days prior to the beginning of
each Calendar Quarter the Contractor shall furnish to the
Government Representative a forecast setting out the total maximum
possible quantity of CBM that the Contractor estimates to produce
and market, price and other relevant factors according to practices
in the international CBM industry.
b)
The Contractor's forecast
shall include estimates of Royalty, Cost CBM and the respective
entitlements of the Government of Mongolia and the Contractor to
Production Sharing CBM during such Calendar Quarter. The Contractor
shall endeavor to produce the forecasted quantities.
8.7
UNDERLIFTING AND
OVERLIFTING
It is recognized
that any party hereto may, from time to time, fail to take
the full quantity of Contract CBM to which such party is entitled
(such party being called an "Underlifter" herein). When that
occurs, full production may be continued for the benefit of the
other party (such party being called an "Overlifter" herein) and
the Contractor shall maintain records to indicate the quantity of
Contract CBM which the Underlifter may make up in order to be in
correct balance with the Overlifter. The Underlifter shall be
compensated extra quantities of Contract CBM in order to achieve
such balance as soon as practicable; provided, however, that the
Contractor shall make such allocations in such ways so as not to
unduly interfere with orderly operations for production and
sales.
ARTICLE LX
NATURAL GAS, CRUDE OIL A ND OTHER MINERALS
9.1
The Contractor shall
promptly report to the Government Representative the presence of
potentially commercial accumulations of minerals, including Crude
Oil and Natural Gas other than CBM Gas which are not associated
with CBM but are encountered and recognized by the Contractor while
conducting CBM Operations within the Contract Area.
Such minerals, Crude Oil
and Natural Gas shall remain the property of Mongolia.
Page 12
9.2
The Government
Representative and Contractor hereby agree on following:
a)
In case of Crude Oil: -
the Parties shall negotiate on conclusion of a separate Production
Sharing Contract;
b)
In case of Natural Gas
other than CBM new terms shall be agreed as an amendment to the
present Production Sharing Contract;
9.3
Contractor acknowledges
that PAM has retained crude oil and natural gas rights in this
Contract Area during the effective period of this contract except
for CBM as defined in this contract.
ARTICLE
X
BONUSES, INCOME TAXES
AND OTHTR FEES
10.1
SIGNATURE BONUS.
PRODUCTION START-UP BONUS AND
PRODUCTION
BONUSES
a)
The Contractor shall pay
to the Government Representative the sum of sixty thousand US $
(60.000) as a Signature Bonus within 60 days after ratification of
this Contract by the Government of Mongolia.
b)
The Contractor shall pay
to the Government Representative:
i)
the sum of U.S.$ 250,000
(two hundred fifty thousand) as a Production Bonus upon the first
sale of Contract CBM
ii)
the sum of U.S.$ 500,000
(five hundred thousand) as the Production Bonus after average daily
quantity of Contract CBM for any Calendar Month exceeds 1,000,000
meter cubic (m');
iii)
the sum of U.S.$ 750,000
(seven hundred fifty thousand) as the Production Bonus after
average daily quantity of Contract CBM for any Calendar Month
exceeds 2,000,000 meter cubic (m');
iv)
the sum of U.S.$
1,000,000 (one million) as the Production Bonus after average daily
quantity of Contract CBM for any Calendar Month exceeds 3,000,000
meter cubic (m'); and
v)
the sum of U.S.$
1,250,000 (one million two hundred fifty thousand) as a Production
Bonus after average daily quantity of Contract CBM for any Calendar
Month exceeds 4,000,000 meter cubic (m).
10.2
TRAINING
BONUS
The Contractor shall pay
to Government Representative the sum of forty thousand U.S. $
(40,000) per year as a Training Bonus annually within thirty (30)
days after beginning of each Contract Year.
10.3
TAXES
The Contractor shall pay
taxes levied by the Legislations of Mongolia except as prescribed
in Article XVI.
10.4
LAND SURFACE RENTAL
FEE
a)
The Contractor shall pay
to the Government Representative the Land Surface rental fee for
the area within the Contract Area as prescribed in the Petroleum
Law of Mongolia.
Page 13
Contractor shall pay the
following annual surface rentals:
i.
For Contract Area during
the First phase of the exploration period per square kilometer
(excluding Development Areas)
1.00
US $
ii.
For Contract Area during
the Second phase of the exploration period per square kilometer
(excluding Development Areas)
2.00
US $
iii.
For Contract Area during
the Third phase and extension terms of the exploration period per
square kilometer (excluding Development Areas)
4.00 US $
iv.
For the Development Area,
per square kilometer
50.00 US $
b)
The Contractor shall pay
such pledge fees within (90) days from the Effective Date and shall
pay such pledge fees annually within thirty (30) days after
beginning of each Contract Year.
10.5
ADMINISTRATIVE
SERVICE
