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Turkmenistan Model Production Sharing Agreement
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Model Production Sharing Agreement for Petroleum Exploration and Production in Turkmenistan (Part 1)

Ashgabat - March 20, 1997

Annexes

Annex “A” - Description of Contract Area
Annex “B” - Map of Contract Area
Annex “C” - Exploration Licence
Annex “D” - Accounting Procedure
Annex “E” - Bank Guarantee
Annex “F” - Social and Infrastructure Project




THIS AGREEMENT, made and entered into this _______ day of _______, 199__ by and between:

(A) The Competent Body of Turkmenistan as state entity duly organised and existing under the laws of Turkmenistan; and/or

State Concern _____, a State entity duly organised and existing under the laws of Turkmenistan, hereinafter referred to as “Concern”, on the one side;

and

(B) ________, a company duly organised and existing under the laws of _________, and

________, a company duly organised and existing under the laws of _________, and

________, a company duly organised and existing under the laws of _________, and

________ _________

contracting jointly and severally, hereinafter referred to collectively as “Contractor” and each individually as “Contracting Company”, on the other hand,

each of Competent Body, Concern, Contractor and each Contracting Company, together with their respective assigns being individually referred to as “Party” and collectively as “Parties”.


WITNESSETH

WHEREAS, title to Petroleum in or under any land or water within the territory of Turkmenistan is vested in the Government and all rights related to petroleum operations belong exclusively to the Government;

WHEREAS, the Petroleum Law of Turkmenistan dated Dec. 30, 1996 (the “Law”) makes provision with respect to exploring for and producing Petroleum and entitles Competent Body to grant Exploration and Production Licences, separately or in combination as the case may require, to any Person subject to certain limitations and conditions;

WHEREAS, the Law entitles Competent Body and (or) Concern to enter into an agreement with any Person with respect to the terms and conditions of, and related to, the grant of a licence under the Law;

WHEREAS, Contractor intends to apply for an Exploration and/or Production Licence, as the case may require, over the area described in Annex A and shown on the map in Annex B (the “Contract Area”), and the Competent Body, in accordance with the provisions of the Law, is willing to grant the said Licence(s);

WHEREAS, Contractor is willing, on certain terms and conditions, to undertake Petroleum Operations in the Contract Area and has for that purpose the necessary financial capability, technical competence and professional skill to carry out such Operations; and

WHEREAS, Competent Body represents and warrants that the Contract Area is free from any encumbrance and burden under the grant of any previous licence to any third party not being a Party hereto.

NOW, THEREFORE, the Parties hereto agree as follows:


ARTICLE 1
DEFINITIONS

In this Agreement, unless the context otherwise requires, the following words and phrases shall have the meaning ascribed to them below:

1.1 “Accounting Procedure” means the procedures for accounting, financial record keeping and control, and financial reporting as set out in Annex “D” hereto.

1.2 “Affiliate”, “Affiliated Company” means:

(a) in relation to any Contracting Company, either:

(i) a company, corporation or other legal entity in which such Contracting Company holds directly or indirectly shares carrying more than fifty percent (50%) of the votes at a general meeting of such company, corporation or other legal entity; or

(ii) a company, corporation or other legal entity holding directly or indirectly shares carrying more than fifty percent (50%) of the votes at a general meeting of such Contracting Company; or

(iii) a company, corporation or other legal entity of which shares carrying more than fifty percent (50%) of the votes at a general meeting of such company, corporation or other legal entity are held directly or indirectly by a company, corporation or other legal entity which also holds directly or indirectly shares carrying more than fifty percent (50%) of the votes at a general meeting of such Contracting Company; and

(b) in relation to Competent Body and Concern, any entity or enterprise in which they have an interest and the right to control, manage or direct the action thereof.

1.3 “Agreement” means this instrument and the Annexes attached hereto, including any extensions, renewals or amendments thereof agreed to in writing by the Parties.
1.4 “Appraisal”, “Appraisal Programme” means appraisal work (being part of Exploration) and a programme carried out following a Discovery of Petroleum for the purpose of delineating the Petroleum Reservoir to which that Discovery relates in terms of thickness and lateral extent and estimating the quantity of recoverable Petroleum therein, and shall include, but not be limited to, geological, geophysical, aerial and other surveys, stratigraphic tests, the drilling of shot holes, core holes, Appraisal Wells and other related holes and wells, and the purchase or acquisition of supplies, materials and equipment therefor.

1.5 “Appraisal Well” means any well drilled for the purposes of an Appraisal Programme.

1.6 “Assets” means the property whether real or personal owned or acquired by Contractor in connection with Petroleum Operations under this Agreement, the Exploration Licence and any Production Licence granted hereunder.

1.7 “Associated Gas” means Natural Gas which is produced in association with Crude Oil, and includes solution gas or gas-cap gas from a Petroleum Reservoir recovered as gas at the surface by separation or other primary field processes.

1.8 “Barrel” means a quantity consisting of forty-two (42) US gallons, liquid measure, corrected to a temperature of sixty degrees (60) Fahrenheit.

1.9 “Calendar Month” means any of the twelve (12) months of a Calendar Year.

1.10 “Calendar Quarter” means a period of three (3) consecutive Calendar Months commencing with first day of January, April, July and October of each Calendar Year.

1.11 “Calendar Year” means a period of twelve (12) Calendar Months according to the Gregorian Calendar, starting with January 1st and ending with December 31st.

1.12 “Commercial Discovery” means a Discovery that can be developed and produced commercially after consideration of all pertinent operating and financial data collected during performance of the relevant Appraisal Programme and otherwise including any long term testing considered necessary by Contractor, including but not limited to Crude Oil and/or Natural Gas recoverable reserves, sustainable production levels, transportation and other relevant technical and economic factors.

1.13 “Commercial Production” means Production of Crude Oil or Natural Gas or both and delivery of the same at the Delivery Point under a program of regular production and sale.

1.14 “Competent Body” has the meaning ascribed to it under Article 1 of the Law.

1.15 “Concern” has the meaning ascribed to it under Article 1 of the Law.
1.16 “Contract Area” means (a) on the Effective Date, the area described in Annex A and shown on the map in Annex B; and (b) thereafter, the whole or any part of such area which, at any particular time, remains subject to the Exploration Licence granted to Contractor pursuant to the Law and/or subject to a Production Licence granted to Contractor pursuant to said Law.

1.17 “Contractor” means, _______, _______, _______ and includes any other Person to whom the said company(ies) or any of their assignees or successors assign directly or indirectly their Participating Interest in whole or in part under any Exploration Licence, Production Licence and this Agreement.

1.18 “Contract Expenses” means Exploration Expenditures, Development Expenditures, Production Expenditures, Operating Expenses and Interest Charges incurred by Contractor in conducting Petroleum Operations hereunder, including costs associated with the winding up of such operations.

1.19 “Contract Revenues” means the proceeds earned by Contractor from the sale or other disposition of its entitlement share of all Petroleum produced and saved and not used in Petroleum Operations hereunder.


1.20 “Crude Oil” means any hydrocarbon which:

(a) at atmospheric pressure and temperature of sixty degrees (60) Fahrenheit is in a liquid state at the well head or gas/oil separator or which is extracted from Natural Gas in a plant, including distillate and condensate; and

(b) has been produced from the Contract Area.

1.21 “Date of Commencement of Commercial Production” means the date as of which the Management Committee determines that Commercial Production is first achieved in the Contract Area.

1.22 “Delivery Point” means the point at which Petroleum produced and saved hereunder enters the Main Pipeline in Turkmenistan for delivery to land or seaboard terminal point of export, or such other point within Turkmenistan as may be agreed to in writing by the Parties.

1.23 “Development” shall include, but not be limited to, all activities pursuant to this Agreement with respect to the drilling and completion of wells to produce and recover Petroleum or to inject gas, and the design, construction, installation, connection and initial testing of equipment, lines, systems, facilities, plants and related activities necessary for producing, taking and saving, treating, handling, storing and transporting Petroleum.

1.24 “Development Area” means an area within the Contract Area encompassing the areal closure of a Petroleum bearing Reservoir(s) outlined following Appraisal and delineated in a Development Plan.

1.25 “Development Expenditures” means Contract Expenses borne by Contractor in connection with Development.

1.26 “Development Plan” means a plan for the implementation of Development as further detailed in paragraph 12.4 hereunder.

1.27 “Discovery” means any discovery of Petroleum which has been effected in the Contract Area and may be considered for Appraisal to ascertain whether it is a Commercial Discovery.

1.28 “Effective Date” means the date on which this Agreement, after being signed by all Parties hereto, becomes effective pursuant to the provisions of Article 33 hereunder.

1.29 “Exploration” shall include, but not be limited to, such geological, geophysical, aerial and other surveys as may be contained in an approved Work Programme and Budget, and the drilling of such shot holes, core holes, stratigraphic tests, wells for the discovery of Petroleum and other related holes and wells, and the purchase, hire or acquisition of such supplies, materials and equipment therefor, all as may be contained in approved Work Programmes and Budgets.

1.30 “Exploration Expenditures” means Contract Expenses borne by Contractor in connection with Exploration.

1.31 “Exploration Licence” means a Petroleum exploration licence granted pursuant to the Law and the provisions of this Agreement.

1.32 “Exploration Period” means the Initial Exploration Period, First Renewal Period and/or Second Renewal Period referred to in paragraph 3.2 hereunder.

1.33 “Exploration Well” means a well, other than an Appraisal Well, drilled in the course of Exploration operations conducted hereunder.

1.34 “First Renewal Period” has the meaning ascribed to it in paragraph 3.2.2 hereunder.

1.35 “Government” means the President and the Cabinet of Ministers of Turkmenistan.

1.36 “Initial Exploration Period” has the meaning ascribed to it in paragraph 3.2.1 hereunder.

1.37 “Interest Charges” means the interest, calculated at the applicable LIBOR rate, actually incurred and supported by documentary evidence on loans raised to finance Development Expenditures.

1.38 “Law” means the Petroleum Law of Turkmenistan
1.39 “LIBOR” means the one (1) Calendar Year US Dollar London Interbank Offer Rate, as quoted by the London Financial Times, on the date of calculation of interest charges provided for under paragraph 13.6(c).

1.40 “Main Pipeline” has the meaning ascribed to it under Article 39 of the Law.

1.41 “Market Price” has the meaning ascribed to it in paragraph 14.1 hereunder.

1.42 “Maximum Efficient Rate” means the maximum rate of production of Crude Oil, without excessive decline of production or excessive loss of reservoir pressure, in accordance with international good oil-field practice and the provisions of paragraph 6.1.2(p) hereunder.

1.43 “Natural Gas” means both Associated and Non-Associated Gas and all its constituent elements produced from any well in the Contract Area, other than liquids extracted therefrom, and all non-hydrocarbon substances therein.

1.44 “Non-Associated Gas” means Natural Gas other than Associated Gas.

1.45 “Operating Expenses” means direct and indirect running costs borne by Contractor in connection with such work as the operation, maintenance and servicing of all types of facilities required for Petroleum Operations. Operating Expenses shall include workover, repair and maintenance of assets, but shall not include side tracking, re-drilling and changing the status of a well, replacement of assets or part of an asset, additions, improvements, renewals or major overhauling that extend the life of the asset, the latter costs being categorised under the relevant Contract Expenses, other than Operating Expenses.

1.46 “Operator” means the Contracting Company designated to conduct the Petroleum Operations on behalf and in the interest of Contractor pursuant to the provisions of Article 10.

1.47 Participating Interest” means, in relation Contractor or any Contracting Company, as the case may be, , an undivided and unencumbered interest in the rights and obligations under the Licence and this Agreement.

1.48 “Person” has the meaning ascribed to it under Article 1 of the Law.

1.49 “Petroleum” means collectively or individually, as the context requires, Crude Oil and Natural Gas as well as those substances produced therewith or derived therefrom.

1.50 “Petroleum Operations” means all Exploration, Development and Production activities, as well as those related to transportation and storage of Petroleum, and other activities related to the performance of this Agreement.

1.51 “Pipeline Company” has the meaning ascribed to it under Article 39 of the Law and paragraph 15.4 hereunder.
1.52 “Production” means every type of operations to produce Petroleum and operate Development wells, and the taking, saving, treating, handling, storing, transporting, metering, marketing and delivering of Petroleum, injection or re-injection, and every other type of operations to obtain primary and enhanced recovery of Petroleum, and transportation, storage and any other work or activities necessary or ancillary to such operations.

1.53 “Production Expenditures” means Contract Expenses borne by Contractor in connection with Production.

1.54 “Production Licence” means a Petroleum production licence granted pursuant to the Law and the provisions of this Agreement.

1.55 “Profit Tax” means the tax upon Contractor’s taxable profit from Petroleum Operations, as provided for in paragraph 16.1 hereunder.

1.56 “R Factor” means, for the purposes of Article 13 hereunder, the ratio of the cumulative sum of the Contract Revenues to the Cumulative sum of the Contract Expenses.

1.57 “Renewal Period” means the First Renewal Period or the Second Renewal Period referred to in paragraphs 4.1.2 and 4.1.3 hereunder.

1.58 “Reservoir” means a porous and permeable stratum capable of producing Petroleum and which must be considered, because of the character of the substances it holds (similitude of physical properties, density, Gas-Oil ratio, viscosity and a pressure relationship) as a unit in regard to its natural exploitation.

1.59 “Second Renewal Period” has the meaning ascribed to it in paragraph 4.1.3 hereunder.

1.60 “Work Programme and Budget” means an itemised statement of Petroleum Operations to be carried out in the Contract Area and a detailed breakdown of the Contract Expenses associated therewith, including both capital and operating budgets.


ARTICLE 2
SCOPE

2.1 The object of this Agreement is to carry out Exploration, Development and Production of Petroleum in the Contract Area.

2.2 Contractor shall be responsible to Competent Body for the execution of Petroleum Operations in accordance with the provisions of the Law and this Agreement.

2.3 Competent Body shall be responsible for securing the regular implementation and conduct by Contractor of the Petroleum Operations contemplated hereunder.

2.4 Contractor shall provide all capital, know-how, technology and manpower necessary to conduct Petroleum Operations, except as otherwise provided for in this Agreement.

2.5 Contractor shall carry out Petroleum Operations at its own costs and risk, except as otherwise provided for in this Agreement. The costs incurred by Contractor in carrying out Petroleum Operations will be recovered by Contractor in accordance with the provisions hereof. If no Commercial Discovery is achieved, or if production of Petroleum is insufficient to reimburse Contractor, the latter shall bear its own losses.

2.6 Without prejudice to the Government’s ownership of all Petroleum in and under the Contract Area, each Contracting Company shall have the right to receive and dispose of its share of the Petroleum produced and saved therein, as a reimbursement of costs incurred and remuneration for services rendered, pursuant to the provisions of this Agreement.


ARTICLE 3
GRANT OF RIGHTS

3.1 Subject to the assumption by Contractor of the obligations imposed on it by the Law and this Agreement, Contractor will be granted an Exploration Licence in the form set forth in Annex “C” over the Contract Area described in Annex “A” and shown on the map in Annex “B” hereof.

3.2 The Exploration Licence term shall consist of:

3.2.1 an initial term of six (6) years (“Initial Exploration Period”) counted from the first day of the first Calendar Month following the Effective Date;

3.2.2 two (2) successive renewals (“First Renewal Period” and “Second Renewal Period”) of two (2) years each upon written application therefor by Contractor, if Contractor so elects, to Competent Body not later than ninety (90) days prior to the expiration date of the Initial Exploration Period or the First Renewal Period, as the case may be, subject to the fulfilment of Contractor’s Minimum Work and Expenditure obligations for the then current Exploration Period, as specified in Article 4 hereunder.

3.3 Upon declaration by Contractor of achievement of a Commercial Discovery, within the Exploration Licence term, and approval thereof by the Management Committee pursuant to the provisions of paragraph 9.3(e), Competent Body will forthwith grant Contractor, upon application by the latter not later than thirty (30) days following the date of said approval, a Production Licence with respect to the area being the subject of such Commercial Discovery for a term of twenty (20) years.

3.4 Competent Body will grant, upon application therefor by Contractor not later than one (1) year prior to the expiration of any such Production Licence, an extension thereof for a five (5) year term. A further extension of up to five (5) years of any Production Licence may be granted, under contractual terms to be mutually agreed to.

3.5 Unless otherwise terminated in accordance with the terms of this Agreement and the Law, this Agreement shall terminate on the date as of which the last Production Licence has expired.

3.6 Contractor shall, subject to the Law and the terms and conditions herein set forth, have the exclusive right to conduct Petroleum Operations within the Contract Area for the term of the Exploration Licence and any Production Licence granted to it in accordance with the Law and the provisions of this Agreement.

3.7 Competent Body reserves the right to grant licences to third parties to prospect for, explore for and mine minerals other than Petroleum within the Contract Area, and further reserves to itself the right to so prospect, explore and mine directly. Contractor shall use its best efforts to avoid obstruction or interference with such licensees’ or Competent Body’s operations and similarly Competent Body shall use its best efforts to ensure that its own operations or those of third parties do not obstruct or interfere with Contractor’s Petroleum Operations within the Contract Area.

3.8 If more than one Person comprises Contractor, the duties and obligations of the Persons constituting Contractor hereunder shall be the joint and several liability of such Persons, save in respect of the payment of Profit Tax.


ARTICLE 4
MINIMUM EXPLORATION WORK PROGRAMME
BANK GUARANTEE

4.1 In discharge of its obligation to carry out Exploration operations in the Contract Area, Contractor shall, in accordance with the provisions of this Article, carry out the Minimum Exploration Work Programmes and shall expend the corresponding Minimum Expenditures as follows:

4.1.1 Initial Exploration Period

Commencing on the day on which the Exploration Licence becomes effective and terminating on the fourth anniversary of such date, the following Exploration work shall be carried out:

(a) Minimum Work Programme:

(i) geological and geophysical work: (to be specified);

(ii) Exploration drilling: the drilling and evaluation of at least ______ (___) Exploration Wells. The drilling programmes shall adequately test the estimated Petroleum bearing horizons.

(b) Minimum Expenditures:

(i) in respect of geological and geophysical work: ____ (__) US dollars;

(ii) in respect of Exploration drilling: _____ (__) US dollars.

4.1.2. First Renewal Period

Commencing on the day on which the first renewal of the Exploration Licence is granted to Contractor pursuant to Article 3 hereof and terminating on the second anniversary of such date:

(a) Minimum Work Programme:

(i) geological and geophysical work: (to be specified);

(ii) Exploration drilling: the drilling and evaluation of at least ___ (___) Exploration Wells. The drilling programmes shall adequately test the estimated Petroleum bearing horizons.

(b) Minimum Expenditures:

(i) in respect of geological and geophysical work: ___ (___) US dollars;

(ii) in respect of exploration drilling: ___ (___) US dollars.

4.1.3 Second Renewal Period

Commencing on the day on which the second renewal of the Exploration Licence is granted to Contractor pursuant to Article 3 hereof and terminating on the second anniversary of such date:

(a) Minimum Work Programme:

(i) geological and geophysical work: (to be specified);

(ii) exploration drilling: the drilling and evaluation of at least ___ (___) Exploration Wells. The drilling programmes shall adequately test the estimated Petroleum bearing horizons.

(b) Minimum Expenditure:

(i) in respect of geological and geophysical work: ___ (___) US dollars;

(ii) in respect of exploration drilling: ____ (___) US dollars.

4.2 For the purposes of this Article, Exploration Wells shall, unless otherwise provided in the drilling program relating thereto, be drilled to the depth necessary for the testing of the geological formation identified by the available data as the objective formation which the standards of international good oil-field practices would require Contractor to attain, unless before reaching the aforementioned target depth:

(a) basement is encountered;

(b) further drilling would present an obvious danger owing to circumstances such as the presence of abnormal pressure;

(c) impenetrable formations are encountered.

In such circumstances, the drilling of any Exploration Well may be terminated at a lesser depth and such Well shall, if the circumstances described in subparagraphs (a), (b) and (c) above occur after Contractor has attained two-thirds of the target depth, be deemed to have satisfied the minimum depth criteria provided for hereunder. In all other circumstances in which a Well is terminated at a lesser depth, a substitute Exploration Well shall be drilled.

4.3 If any category of work carried out by Contractor in the Initial Exploration Period or any Renewal Period thereafter exceeds that required in the Minimum Work Programme relating thereto, the excess work may, at Contractor’s option, count towards the satisfaction of the same category of work required in the Minimum Work Programme(s) for the ensuing Renewal Period(s). It is understood that compliance with the required Minimum Expenditures for each category of work in the Initial Exploration Period, or any Renewal Period thereafter, shall not relieve Contractor of its obligation to comply with the required Minimum Work Programme corresponding thereto for such Initial Exploration Period, or Renewal Period, as the case may be; provided, however, in the event Contractor satisfies the required Minimum Work Programme for the Initial Exploration Period or Renewal Period, as the case may be, having expended less than the Minimum Expenditures corresponding thereto, the obligation to expend such Minimum Expenditures shall be deemed satisfied.

4.4 The Exploration Licence issued to Contractor pursuant to Article 3 and any renewal thereof shall be on terms and conditions relating to Minimum Work Programmes and Expenditures which correspond to the obligations of Contractor under this Article and it is accordingly understood and agreed that any discharge by Contractor of its obligations under this Article in respect of any Exploration Period will discharge for that period the Minimum Work and Expenditure obligations of Contractor in respect of the Exploration Licence.

4.5 (a) Within sixty (60) days of the Effective Date and, where the Exploration Licence is renewed pursuant to paragraph 3.2.2, within thirty (30) days from the starting date of the First and Second Renewal Periods, Contractor shall provide security by means of a bank guarantee, in the form set forth in Annex “E”, equal to the total Minimum Expenditures for each category of work set forth in paragraph 4.1 for the Initial Exploration Period, or for the First or Second Renewal Period, as the case may be. Upon prior confirmation by independent accountants acceptable to both Contractor and Competent Body of the Exploration Expenditures actually incurred in respect of each category of work, such security shall, following each anniversary date of the effectiveness or renewal of the Exploration Licence, as applicable, be reduced in the manner provided for in such bank guarantee by the amount so incurred by Contractor during the preceding twelve (12) month period.

(b) Without prejudice to any other remedies that Competent Body may have under Article 35, if, at the end of the Initial Exploration Period, or any Renewal Period thereafter, Contractor has not fully satisfied the Minimum Exploration Work Programme herein specified, a portion of the security corresponding to the monetary value of unfulfilled part of such Minimum Exploration Programme shall be paid to Competent Body pursuant to such bank guarantee.

4.6 For the purposes of this Article, and without prejudice to their recoverability as Contract Expenses for other purposes under this Agreement, expenditure by Contractor on the following shall not be treated as Minimum Expenditures obligations set out in paragraph 4.1:

(a) any Appraisal Programme pursuant to paragraph 12.2(a) hereunder and paragraph 29.2 of the Law;

(b) the value of stock items listed in inventory;

(c) the training of Turkmenistan nationals pursuant to Article 21 of this Agreement; and


(to be continued)

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