FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number: 0 - 7261
CHAPARRAL RESOURCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
------------------------------ ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16945 Northchase Drive, Suite 1440
Houston, Texas 77060
--------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
As of November 15, 1999, the Registrant had 977,954 shares of its common
stock, par value $0.0001 per share, issued and outstanding.
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Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 21,000 $ 121,000
Restricted cash 626,000 756,000
Accounts receivable 30,000 25,000
Prepaid expenses 87,000 76,000
Current portion of note receivable -- 420,000
------------ ------------
Total current assets 764,000 1,398,000
Note receivable 1,060,000 589,000
Oil and gas properties and investments - full cost method
Republic of Kazakhstan (Karakuduk Field)--
Not subject to depletion: 36,187,000 32,261,000
Furniture, fixtures and equipment 100,000 93,000
Less accumulated depreciation (33,000) (17,000)
------------ ------------
67,000 76,000
------------ ------------
Total assets $ 38,078,000 $ 34,324,000
============ ============
See accompanying notes to financial statements
2
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Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------ ------------
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 762,000 $ 223,000
Accrued interest payable 195,000 --
Accrued liabilities 417,000 522,000
Short-term notes payable, net of discount 6,094,000 940,000
------------ ------------
Total current liabilities 7,468,000 1,685,000
Accrued compensation 210,000 210,000
Redeemable preferred stock - cumulative, convertible,
Series A, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,438,000 redemption value 5,113,000 4,850,000
Stockholders' equity:
Common stock - authorized, 100,000,000 shares
at September 30, 1999 and December 31, 1998, of
$.0001 par value; issued and outstanding,
977,954 and 972,980 shares at
September 30, 1999 and December 31, 1998 -- --
Capital in excess of par value 48,210,000 47,611,000
Unearned portion of restricted stock awards (495,000) (56,000)
Preferred stock - 1,000,000 shares authorized,
75,000 shares designated Series A -- --
Stock subscription receivable (506,000) (506,000)
Accumulated deficit (21,922,000) (19,470,000)
------------ ------------
Total stockholders' equity 25,287,000 27,579,000
------------ ------------
Total liabilities and stockholders' equity $ 38,078,000 $ 34,324,000
============ ============
See accompanying notes to financial statements
3
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Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------------------------
Revenue:
Oil and gas sales $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation 5,000 4,000 16,000 10,000
General and administrative 379,000 572,000 1,636,000 2,203,000
----------- ----------- ----------- -----------
384,000 576,000 1,652,000 2,213,000
----------- ----------- ----------- -----------
Loss from operations (384,000) (576,000) (1,652,000) (2,213,000)
Other income (expense):
Interest income 451,000 355,000 1,308,000 805,000
Interest expense (143,000) (126,000) (309,000) (189,000)
Heartland Settlement -- -- 34,000 --
Equity loss from investment (475,000) (534,000) (1,570,000) (1,223,000)
----------- ----------- ----------- -----------
(167,000) (305,000) (537,000) (607,000)
----------- ----------- ----------- -----------
Loss before extraordinary items (551,000) (881,000) (2,189,000) (2,820,000)
----------- ----------- ----------- -----------
Extraordinary loss
Loss on extinguishment of debt -- (236,000) -- (236,000)
Net loss $ (551,000) $(1,117,000) $(2,189,000) $(3,056,000)
----------- ----------- ----------- -----------
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (25,000) (25,000) (75,000) (75,000)
Discount accretion
Series A Redeemable Preferred Stock (63,000) -- (188,000) --
=========== =========== =========== ===========
Net loss available to common stockholders $ (639,000) $(1,142,000) $(2,452,000) $(3,131,000)
=========== =========== =========== ===========
Basic and diluted earnings per share:
Net loss per share $ (.65) $ (1.22) $ (2.51) $ (3.58)
Weighted average number of shares
Outstanding 977,954 935,717 977,752 873,815
See accompanying notes to financial statements
4
<PAGE>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30, September 30,
1999 1998
------------ ------------
Cash flows from operating activities
Net loss $ (2,189,000) $ (3,056,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Equity loss from investment 1,570,000 1,223,000
Depreciation 16,000 10,000
Bad debt expense 14,000 --
Stock issued for services and bonuses 277,000 691,000
Amortization of note discount 34,000 145,000
Extraordinary loss on extinguishment of debt -- 236,000
Expired warrants (117,000) --
Changes in assets and liabilities:
Accounts receivable (19,000) (147,000)
Prepaid expenses (11,000) 8,000
Notes receivable (51,000) (1,009,000)
Accounts payable and accrued liabilities 629,000 360,000
------------ ------------
Net cash used in operating activities 153,000 (1,539,000)
Cash flows from investing activities
Additions to property and equipment (7,000) (80,000)
Investment in and advances to foreign oil and gas
properties (5,496,000) (10,413,000)
------------ ------------
Net cash used in investing activities (5,503,000) (10,493,000)
Cash flows from financing activities
Payment of notes payable (1,095,000)
Proceeds from notes payable 5,120,000 2,045,000
Restricted cash 130,000 (800,000)
Proceeds from sale of stock -- 12,450,000
------------ ------------
Net cash provided by financing
activities 5,250,000 12,600,000
------------ ------------
5
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Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Net increase (decrease) in cash and
cash equivalents (100,000) 568,000
Cash and cash equivalents at beginning
of period 121,000 3,423,000
---------- ----------
Cash and cash equivalents at end of period $ 21,000 $3,991,000
========== ==========
Supplemental cash flow disclosure
Interest paid $ 65,000 $ 44,000
See accompanying notes to financial statements
6
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
Management has elected to omit substantially all notes to the Company's
financial statements. Reference should be made to the notes to the financial
statements in the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1998.
2. Unaudited Information
The information furnished herein was taken from the books and records of
the Company without audit. However, such information reflects all adjustments,
which are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
any future interim period or for the year.
3. Going Concern
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As of September
30, 1999, substantially all of the Company's assets are invested in the
development of the Karakuduk Field, an oil field in the Central Asian Republic
of Kazakhstan, which will require significant additional funding in the future.
The Company has incurred recurring operating losses and lacks operating
assets to generate sufficient cash to fund its operating and capital
requirements. The Company's current cash reserves and cash flow from operations
are not sufficient to meet the capital spending requirements necessary to
develop the Karakuduk Field through fiscal 1999. Should the Company not meet its
capital requirements, the Company's rights to develop the Karakuduk Field may be
terminated, and if terminated, the Company's investment in the Karakuduk Field
will most likely be lost. There is no assurance that additional financing will
be available, or if available, that it will be timely or on terms favorable to
the Company. The Company's continued existence as a going concern is dependent
upon the successful financing and development of the Karakuduk Field.
On November 1, 1999, the Company entered into a loan agreement ("the Loan")
with Shell Capital Services Limited ("Shell"), to provide up to $24.0 million in
financing for the development of the Karakuduk Field. Central Asian Petroleum,
Inc. ("CAP-D"), Central Asian Petroleum (Guernsey), Ltd. ("CAP-G"), and Closed
Type JSC Karakuduk Munay ("KKM") also executed the Loan as co-obligors. The
consummation of the Loan is subject to a number of significant conditions,
including, without limitation, (i) an equity infusion of at least $9.0 million,
(ii) obtaining political risk insurance, (iii) obtaining transportation risk
insurance, (iv) the hedging of a significant portion of the Company's future oil
production, and (v) the retirement or conversion of all of the Company's and
KKM's outstanding indebtedness, excluding current trade payables.
The Company is currently working to satisfy the conditions required to
obtain funding under the Loan. In this regard, the Company is i) seeking
stockholder approval to convert existing indebtedness of $9.1 million (See Notes
6 and 9 of Item 1), plus accrued interest, into the Company's common stock at a
conversion price of $1.86 per share, and ii) raise at least $9.0 million through
the sale of the Company's unsecured 8% Non-negotiable Convertible Promissory
Notes, which are convertible into the Company's common stock at a conversion
price of $1.86 per share (the "Notes") and through a dutch auction format rights
offering granted proportionally to the Company's stockholders. The Company has
not determined the record date for the rights offering as of the filing of this
report.
7
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Going Concern (continued)
If the Company is not successful in raising the additional $9.0 million of
equity required by the Loan, the Company will be required to obtain a standby
letter of credit for any deficiency prior to initial funding under the Loan. The
letter of credit would be in favor of the lender; provided, however, the lender
would not be permitted to draw upon the standby letter of credit unless the
Company fails to raise such deficit amount prior to March 31, 2000. The Company
is currently negotiating the terms of the letter of credit. The Company can give
no assurances that the standby letter of credit can be obtained, or if obtained,
will be obtained on terms and conditions favorable to the Company.
The Company's ability to timely satisfy these conditions raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of such
uncertainties.
4. Restricted Cash
As of September 30, 1999, the Company held $626,000 cash on hand, as
collateral for loans made by the Chase Bank of Texas, N.A. ("Chase") to KKM for
the acquisition of tangible equipment used in the Karakuduk Field.
5. Notes Receivable
On September 30, 1999, the Company had an outstanding note receivable for
$1,009,000, plus accrued interest, from a third-party drilling contractor,
Challenger Oil Services, PLC ("Challenger"). On March 17, 1999, the Company
amended the terms of the note to extend the repayment period from 12 to 24
months, beginning with the first payment made to Challenger for drilling
services provided to KKM in 1999. Under the revised terms of the note, the
Company would receive principal payments of approximately $42,000 per month,
plus accrued interest, through approximately February 2001. As of September 30,
1999, however, the Company had not received any payments on the note.
In April 1999, the owner of the drilling rig operated by Challenger in the
Karakuduk Field, Oil & Gas Exploration Company Cracow, Ltd. ("OGECC"),
terminated its contract with Challenger. As a result of the termination of the
contract between Challenger and OGECC, KKM terminated the drilling contract
between KKM and Challenger, and arbitration proceedings have been instituted in
accordance with the terms of such drilling contract. In the arbitration,
Challenger has claimed that it is entitled to $9.8 million in damages. The
Company and KKM intend to vigorously defend the arbitration claim made by
Challenger. In the opinion of Management, the probable amount payable to
Challenger with respect to such arbitration will be significantly less than the
amount claimed by Challenger. Drilling in the Karakuduk Field has been suspended
temporarily until the arbitration is resolved or until another drilling rig can
be procured. KKM is currently exploring strategic alternatives to continue its
drilling program.
8
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Notes Payable
On September 30, 1999, the $975,000 note between Chase and the Company was
amended. The revised note requires the Company to make a principal payment of
$250,000 on November 15, 1999, and a principal payment of $725,000 on November
30, 1999. The note accrues interest at a variable prime rate, as determined by
Chase. As of September 30, 1999, the stated prime rate on the note was 8.25%. As
collateral for the Chase loan to the Company, Whittier Ventures, LLC
("Whittier") put in place a $1.0 million standby letter of credit in exchange
for a senior security interest in the capital stock of CAP-G owned by the
Company (the "Whittier Security Interest").
During March 1999, the Company issued two promissory notes to Whittier of
$500,000 each (aggregate amount of $1,000,000), bearing interest at 8% per annum
and due and maturing on August 31, 1999. On March 31, 1999, the Company issued a
term promissory note to Allen & Company Incorporated ("Allen") in the principal
amount of $2,769,978, bearing interest at a rate of 8% per annum and maturing on
August 31, 1999.
On June 3, 1999, the Company issued a an additional promissory note to
Allen in the principal amount of $1.0 million, bearing interest at a rate of 8%
per annum and maturing on September 3, 1999.
On August 27, 1999, the Company restructured its indebtedness with Allen,
whereby John McMillian, the Co-Chairman and Chief Executive Officer of the
Company, acquired a portion of such indebtedness. In connection with such stock
restructuring, (i) Allen surrendered its promissory notes and the Company issued
two replacement promissory notes, bearing interest at a rate of 8% per annum, in
the principal amount of $2,494,978, maturing on August 31, 1999, and in the
principal amount of $900,000, maturing on September 3, 1999, respectively, and
(ii) the Company issued two promissory notes to Mr. McMillian, bearing interest
at 8% per annum, in the principal amount of $275,000, maturing on August 31,
1999, and in the principal amount of $100,000, maturing on September 3, 1999,
respectively. On August 27, 1999, the Company also issued two demand promissory
notes, bearing interest at a rate of 8% per annum, in the principal amount of
$180,0000 to Allen and in the principal amount of $20,000 to Mr. McMillian,
respectively.
On August 31, 1999, the Company issued a demand promissory note, bearing
interest at a rate of 8% per annum, in the principal amount of $100,000 to
Allen.
As collateral for the promissory notes the Company issued to Whittier,
Allen, and Mr. McMillian, each holder received a non-exclusive junior security
interest in all of the capital stock of CAP-G owned by the Company. The junior
security interest in the CAP-G shares is subordinate to the Whittier Security
Interest.
The promissory notes issued by the Company to Whittier, Allen, and Mr.
McMillian permit each holder to elect to exchange the outstanding balance of the
notes, together with accrued interest, for any convertible securities issued by
the Company on or before March 31, 2000, including any debt or equity instrument
convertible into the Company's common stock. The number of convertible
securities potentially to be issued will be determined by dividing the
outstanding principal balance of the loans, together with accrued but unpaid
interest, by the issue price of the convertible securities.
Upon maturity, the promissory notes to Whittier, Allen, and Mr. McMillian
were not repaid, and such holders of such promissory notes have exercised their
rights to exchange the original promissory notes for new indebtedness of the
Company. See Note 9 of Item 1.
9
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Common Stock and Related Common Stock Warrants
On January 15, 1999, the Company granted Dr. Jack A. Krug, the President
and Chief Operating Officer of the Company, 16,667 shares of the Company's
common stock, of which 3,334 shares vested immediately and 13,333 shares will
vest ratably over the next four years. The Company recorded the common stock at
its intrinsic value of $719,000, which is being amortized over the vesting
period of the common stock.
Certain warrants to purchase the Company's common stock expired relating to
a 1998 legal settlement. The Company recognized the fair value of the warrants
on the date of grant, $34,000, as other income in 1999.
On April 21, 1999, the Company effected a 1 for 60 reverse stock split. The
voting and economic rights of the shareholders of Common Stock and the Series A
Redeemable Preferred Stock were not affected by the reverse stock split. The
financial statements included herein retroactively reflect the adjustments to
shares outstanding as a result of the reverse stock split and reincorporation.
Since there were no shares of the Company's Series B Preferred Stock and the
Series C Preferred Stock issued or outstanding, they were eliminated in the
reincorporation.
On April 30, 1999, warrants expired to purchase 12,500 shares of the
Company's common stock at an exercise price of $16.80 per share.
8. Series A Redeemable Preferred Stock
During 1998, the Company accrued the $250,000 annual dividend payable on
its Series A Redeemable Preferred Stock in the fourth quarter of 1998. For
fiscal year 1999, the Company has accrued the $250,000 dividend payable on its
Series A Redeemable Preferred Stock on a quarterly basis.
9. Subsequent Events
On October 25, the Company borrowed $2.0 million from Allen and $1.0
million from seven non-affiliated investors, in exchange for the Company's
unsecured Notes, which are convertible into the Company's common stock at a
conversion price of $1.86 per share. The conversion provision of the Notes is
subject to the approval of the Company's stockholders. The failure of the
stockholders to approve the conversion provisions of the Notes will result in an
increase of the annual interest rate payable to the lesser of 25% or the maximum
rate allowed by applicable law and a due date for repayment of all outstanding
principal and accrued interest on October 31, 2001. The Notes are fully
subordinated to the Loan. The Company will most likely issue additional Notes to
satisfy the conditions to consummation of the Loan.
As discussed in Note 3, on November 1, 1999, the Company entered into the
Loan with Shell, to provide up to $24.0 million in financing for the development
of the Karakuduk Field. CAP-D, CAP-G, and KKM also signed the Loan as
co-obligors. The consummation of the Loan is subject to a number of significant
conditions, including, without limitation, (i) an equity infusion of at least
$9.0 million, (ii) obtaining political risk insurance, (iii) obtaining
transportation risk insurance, (iv) the hedging of a significant portion of the
Company's future oil production, and (v) the retirement or conversion of all of
the Company's and KKM's outstanding indebtedness, excluding current trade
payables.
10
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Subsequent Events (continued)
The Company is currently working to satisfy the conditions required to
obtain funding under the Loan. In this regard, the Company is i) seeking
stockholder approval to convert existing indebtedness of $9.1 million (See Notes
6 and 9 of Item 1), plus accrued interest, into the Company's common stock at a
conversion price of $1.86 per share, and ii) raise at least $9.0 million through
the sale of the Company's unsecured Notes, which are convertible into the
Company's common stock at a conversion price of $1.86 per share, and through a
dutch auction format rights offering granted proportionally to the Company's
stockholders. The Company has not determined the record date for the rights
offering as of the filing of this report.
If the Company is not successful in raising the additional $9.0 million of
equity required by the Loan, the Company will be required to obtain a standby
letter of credit for any deficiency prior to initial funding under the Loan. The
letter of credit would be in favor of the lender; provided, however, the lender
would not be permitted to draw upon the standby letter of credit unless the
Company fails to raise such deficit amount prior to March 31, 2000. The Company
is currently negotiating the terms of the letter of credit. The Company can give
no assurances that the standby letter of credit can be obtained, or if obtained,
will be obtained on terms and conditions favorable to the Company.
Upon completion of all of the outstanding conditions precedent to closing
the Loan and compliance with a number of covenants, the Company will be allowed
to drawdown the Loan in minimum increments of $2.0 million to meet the capital
and operational requirements of KKM, finance costs required under the Loan,
premiums due under the political and transportation risk insurance policies, and
payments required to hedge a portion of KKM's future production. The Loan is
available for drawdown until the earlier of September 30, 2001 or "Project
Completion".
Project Completion occurs when various conditions are met by the Company
and KKM, including, but not limited to, the production of an average of 13,000
barrels of oil per day from the Karakuduk Field for a period of 45 consecutive
days, receipt by the lender of an independent engineer's reserve report
evidencing proven developed reserves of at least 30 million barrels in the
Karakuduk Field, and various other financial and technical milestones detailed
further in the Loan.
Prior to Project Completion, any borrowed amounts accrue interest at an
annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest
rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project
Completion, a de-minimus interest amount, approximating 4.125% on an annual
basis, is payable quarterly to the lender. The remaining unpaid interest is
capitalized to the Loan at the end of each quarter. After Project Completion,
all quarterly interest on the outstanding Loan is fully due and payable by the
Company at the end of each calendar quarter.
Principal payments, including any capitalized interest, are due on
quarterly reduction dates ("Reduction Dates"), beginning on the earlier of the
first calendar quarter ending at least 60 days following the earlier of Project
Completion or December 31, 2001. Minimum principal payments, based upon
percentages of the principal outstanding as of Project Completion, are set out
in the Loan and ensure full settlement of the Loan by September 30, 2004, the
final maturity date. Mandatory prepayments of principal outstanding are required
on each Reduction Date out of any excess cash flow available after consideration
of the Company's and KKM's permitted budgeted expenditures for the following 45
days and all fees, interest, and principal payments scheduled on such Reduction
Date.
Pursuant to the terms of the Loan, the Company will grant to the lender a
security interest in substantially all of its assets, including its interest in
the Karakuduk Field. Consequently, if an event of default occurs under the Loan
and such event of default is not timely cured, the lender is entitled to certain
remedies, including the right to accelerate repayment of the Loan and obtain
possession of the assets over which it has a security interest.
11
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Subsequent Events (continued)
In connection with the Loan, the Registrant will issue to the lender a
warrant to purchase up to 15% of the Registrant's outstanding Common Stock. The
warrant will be non-transferable and will not be exercisable for a period of
approximately 18 months after its initial issuance. Additionally, it will
contain registration rights provisions. The warrant exercise price will be
determined by reference to the average closing price of the Common Stock for the
90-day period immediately preceding November 1, 1999, subject to certain
anti-dilution provisions.
On November 1, 1999, KKM entered into a Crude Oil Sale and Purchase
Agreement ("Offtake Agreement") with Shell Trading International Limited ("Shell
Trading") for the purchase of 100% of the oil production from the Karakuduk
Field. The Offtake Agreement requires KKM to sell 100% of its oil production to
Shell Trading on the export market for a price per barrel based upon a quoted
spot rate for North Sea Brent Crude. The Company expects KKM to obtain a
substantially higher return from oil sales under the Offtake Agreement than
would otherwise be obtainable from oil sales on Kazakhstan's local market. The
Offtake Agreement will become effective upon consummation of the Loan.
On November 2, 1999, Whittier, Allen, and Mr. McMillian all exercised their
rights to exchange their promissory notes for debt with terms and conditions
identical to the Notes. The Company will physically exchange the notes upon
receipt of the original promissory notes issued to each relevant party. The new
Notes will be unsecured and all security interests granted as collateral for the
promissory notes submitted for exchange will be terminated.
On November 2, 1999, the Company's board of directors approved the
formation of an employee stock option plan, which will allow the board's
compensation committee to grant qualified and/or non-qualified stock options to
the directors, employees, and consultants of the Company. The employee stock
option plan would allow the issuance of options grants to acquire up to 15% of
the Company's outstanding common stock, after giving effect to any changes in
the capital stock of the Company contemplated by the conditions necessary to
obtain funding under the Loan.
On November 12, 1999, the Company borrowed $1.0 million from Whittier in
exchange for new Notes, and repaid the Chase loan, releasing the Whittier
Security Interest.
12
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
10. Investments
The results from operations of the Company's equity-based investment in KKM
are summarized below:
<TABLE>
<CAPTION>
Karakuduk-Munay Inc
Statement of Expenses and Accumulated Deficit
For the Nine Month Period Ended September 30, 1999 and 1998
(Amounts in US Dollars)
(Unaudited)
For The Three Months Ended For The Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management service fee $ 151,000 $ 152,000 $ 431,000 $ 427,000
General and administrative expenses 323,000 557,000 1,421,000 1,100,000
Depreciation of fixed assets 150,000 75,000 400,000 225,000
Interest expense 327,000 283,000 887,000 695,000
--------------------------------------------------------------------
Net loss 951,000 1,067,000 3,139,000 2,447,000
Accumulated deficit, beginning of period 9,691,000 5,396,000 7,503,000 4,016,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Accumulated deficit, end of period $10,642,000 $ 6,463,000 $10,642,000 $ 6,463,000
--------------------------------------------------------------------
</TABLE>
As of September 30, 1999, KKM had received net proceeds of approximately
$2.5 million from the sale of hydrocarbons produced from the Karakuduk Field.
Until such time as the production from the Karakuduk Field reaches commercially
viable levels, net proceeds from the sales of hydrocarbons will be accounted for
on a cost recovery basis and will be offset against KKM's oil and gas
investment.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
recurring operating losses and has no operating assets presently generating
enough cash to fund its operating and capital requirements. The Company's
current cash reserves and cash flow from operations are not sufficient to meet
its capital requirements through fiscal 1999.
The only oil and gas interest of the Company is its investment in KKM,
which is owned by the Company through CAP-G. KKM is a closed joint stock company
in the Republic of Kazakhstan and has the right to develop the Karakuduk Field
in western Kazakhstan. As of September 30, 1999, substantially all of the
Company's assets are invested in the development of the Karakuduk Field. The
Karakuduk Field does not currently produce revenues capable of funding the
development of the project, and requires substantial amounts of additional
capital.
On November 1, 1999, the Company entered into a loan arrangement (the
"Loan") with Shell to provide up to $24.0 million in financing for the
development of the Karakuduk Field. The consummation of the Loan is subject to a
number of significant conditions, including, without limitation, (i) an equity
infusion of at least $9.0 million, (ii) obtaining political risk insurance,
(iii) obtaining transportation risk insurance, (iv) the hedging of a significant
portion of the Company's future oil production, and (v) the retirement or
conversion of all of the Company's and KKM's outstanding indebtedness, excluding
current trade debt.
The Company is currently working to satisfy the conditions required to
obtain funding under the Loan. In this regard, the Company is i) seeking
stockholder approval to convert existing indebtedness of $9.1 million (See Notes
6 and 9 of Item 1), plus accrued interest, into the Company's common stock at a
conversion price of $1.86 per share, and ii) raise at least $9.0 million through
the sale of the Company's unsecured Notes, which are convertible into the
Company's common stock at a conversion price of $1.86 per share, and through a
dutch auction format rights offering granted proportionally to the Company's
stockholders. The Company has not determined the record date for the rights
offering as of the filing of this report.
If the Company is not successful in raising the additional $9.0 million of
equity required by the Loan, the Company will be required to obtain a standby
letter of credit for any deficiency prior to initial funding under the Loan. The
letter of credit would be in favor of the lender; provided, however, the lender
would not be permitted to draw upon the standby letter of credit unless the
Company fails to raise such deficit amount prior to March 31, 2000. The Company
is currently negotiating the terms of the letter of credit. The Company can give
no assurances that the standby letter of credit can be obtained, or if obtained,
will be obtained on terms and conditions favorable to the Company.
Upon completion of all of the outstanding conditions precedent to closing
the Loan and compliance with a number of covenants, the Company will be allowed
to drawdown the Loan in minimum increments of $2.0 million to meet the capital
and operational requirements of KKM, finance costs required under the Loan,
premiums due under the political and transportation risk insurance policies, and
payments required to hedge a portion of KKM's future production. The Loan is
available for drawdown until the earlier of September 30, 2001 or "Project
Completion".
14
<PAGE>
1. Liquidity and Capital Resources (continued)
Project Completion occurs when various conditions are met by the Company
and KKM, including, but not limited to, the production of an average of 13,000
barrels of oil per day from the Karakuduk Field for a period of 45 consecutive
days, receipt by the lender of an independent engineer's reserve report
evidencing proven developed reserves of at least 30 million barrels in the
Karakuduk Field, and various other financial and technical milestones detailed
further in the Loan.
Prior to Project Completion, any borrowed amounts accrue interest at an
annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest
rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project
Completion, a de-minimus interest amount, approximating 4.125% on an annual
basis, is payable quarterly to the lender. The remaining unpaid interest is
capitalized to the Loan at the end of each quarter. After Project Completion,
all quarterly interest on the outstanding Loan is fully due and payable by the
Company at the end of each calendar quarter.
Principal payments, including any capitalized interest, are due on
quarterly reduction dates ("Reduction Dates"), beginning on the earlier of the
first calendar quarter ending at least 60 days following the earlier of Project
Completion or December 31, 2001. Minimum principal payments, based upon
percentages of the principal outstanding as of Project Completion, are set out
in the Loan and ensure full settlement of the Loan by September 30, 2004, the
final maturity date. Mandatory prepayments of principal outstanding are required
on each Reduction Date out of any excess cash flow available after consideration
of the Company's and KKM's permitted budgeted expenditures for the following 45
days and all fees, interest, and principal payments scheduled on such reduction
date.
Pursuant to the terms of the Loan, the Company will grant to the lender a
security interest in substantially all of its assets, including its interest in
the Karakuduk Field. Consequently, if an event of default occurs under the Loan
and such event of default is not timely cured, the lender is entitled to certain
remedies, including the right to accelerate repayment of the Loan and obtain
possession of the assets over which it has a security interest.
In connection with the Loan, the Registrant will issue to the lender a
warrant to purchase up to 15% of the Registrant's outstanding Common Stock. The
warrant will be non-transferable and will not be exercisable for a period of
approximately 18 months after its initial issuance. Additionally, it will
contain registration rights provisions. The warrant exercise price will be
determined by reference to the average closing price of the Common Stock for the
90-day period immediately preceding November 1, 1999, subject to certain
anti-dilution provisions.
The proceeds of the Loan, along with proceeds from the sale of oil by KKM,
will be used to meet the capital requirements necessary to develop the Karakuduk
Field, pay any financing costs required under the terms of the Loan, pay
premiums due under the political and transportation risk insurance policies, and
pay any costs associated with hedging a portion of KKM's future production. The
additional equity will be used to fund the Company's working capital needs
through September 30, 2001, and to provide additional funding for the
development of the Karakuduk Field. The Company expects the Loan, in conjunction
with the additional $9.0 million in equity infusion, to meet the long-term
capital needs of the Company with regards to developing the Karakuduk Field.
The conditions outstanding to complete the Loan are significant. There can
be no assurances that these conditions will be completed on a timely basis, if
at all, or on terms acceptable to the Company. The costs of capital for foreign
investments in emerging markets, such as the Republic of Kazakhstan, are
significantly higher than for similar investments in the United States and
Europe. If the Company fails to obtain the additional capital required to
complete the Loan and develop the Karakuduk Field, the Company's investment in
the Karakuduk Field will most likely be lost.
If the Company is not able to consummate the Loan, the Company will
consider all financing alternatives available to it at that time. Those
alternatives may include pursuing other sources of financing, the sale of all or
part of its business, or commencing a bankruptcy proceeding under applicable
provisions of the United States Bankruptcy Code. A bankruptcy proceeding brought
under these circumstances could be lengthy, contested, disrupt the Company's
business operations, and shrink or eliminate the value of its assets, including
the potential loss of its investment in the Karakuduk Field.
15
<PAGE>
1. Liquidity and Capital Resources (Continued)
KKM will not meet its license commitments for the year ended December 31,
1999. KKM's revised license requires an expenditure commitment of at least $30.0
million and a work commitment of drilling eight wells as of December 31, 1999.
As of November 11, 1999, KKM has spent approximately $8.3 million and drilled
one well. CAP-G has obtained a letter from the State Investment Agency of the
Republic of Kazakhstan, granting KKM until June 30, 2000, to fulfill the
conditions of KKM's revised license. The letter is not an amendment to KKM's
license. The Company can give no assurances that the letter has any legal effect
within the Republic of Kazakhstan. If practicable, the Company may request KKM
to seek a formal extension of time to meet the expenditure and work commitments
established by the license. No assurances can be given that KKM will be able to
obtain an amendment to the license, or if obtained, the amendment will be on
terms favorable to KKM or the Company. Due to KKM's failure to satisfy its 1999
expenditure requirement and work commitment, KKM's license may be terminated
and, if terminated, the Company's interest in the Karakuduk Field will most
likely be lost.
As of November 11, 1999, KKM has sold 43,000 tons (approximately 314,000
barrels) of crude oil production for total proceeds of approximately $2.5
million, net of transportation costs. On November 1, 1999, KKM entered into the
Offtake Agreement to sell 100% of KKM's crude oil production on the export
market. The Company expects the Offtake Agreement to generate substantially
higher sales revenues for KKM's oil production than would otherwise result from
oil sales on the local and/or regional markets within the former Soviet Union.
KKM expects to begin utilizing the Offtake Agreement after consummating the
Loan. KKM cannot sustain current operations and future development of the
Karakuduk Field from proceeds received from oil sales of current levels of
production, even if the crude oil is sold at world market prices.
In April 1999, the owner of the drilling rig operated by Challenger in the
Karakuduk Field, OGECC, terminated its contract with Challenger. As a result of
the termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings have
been instituted in accordance with the terms of such drilling contract. In the
arbitration, Challenger has claimed that it is entitled to $9.8 million in
damages. The Company and KKM intend to vigorously defend the arbitration claim
made by Challenger. In the opinion of Management, the probable amount payable to
Challenger with respect to such arbitration will be significantly less than the
amount claimed by Challenger. Drilling in the Karakuduk Field has been suspended
temporarily until the arbitration is resolved or until another drilling rig can
be procured. KKM is currently exploring strategic alternatives to continue its
drilling program.
On September 30, 1999, the Company requested and received an extension to
December 31, 1999, from the Overseas Private Investment Corp. ("OPIC") for
political risk insurance. OPIC originally granted the Company a binding executed
letter of commitment on September 25, 1996. The Company has a standby facility
for which it has made eight payments of $31,250 plus five additional payments of
$15,625 each. The Company expects to execute the contract as soon as possible,
as it is a condition precedent to completing the Loan. The executed contract
will provide up to $50 million in political risk coverage. The Company expects
annual premiums for the full coverage amount to be approximately $1.0 million
per year, payable on a quarterly basis.
16
<PAGE>
2. Results of Operations
Nine Months Ended September 30, 1999 Compared with the Nine Months Ended
September 30, 1998
The Company's operations during the nine months ended September 30, 1999,
resulted in a net loss of $2,189,000 compared to a net loss of $3,056,000 for
the nine months ended September 30, 1998.
General and administrative costs decreased by $567,000 during the nine
months ended September 30, 1999, as compared to the nine months ended September
30, 1998, due to a reduction in stock based compensation and expiration of
common stock warrants. Without consideration of the stock based compensation, a
non-cash item, general and administrative costs decreased by $153,000, primarily
due to a reduction in the Company's operational personnel in Kazakhstan. The
Company expects overall payroll costs to increase significantly during the
remainder of 1999. The Company's equity loss in KKM increased by $347,000 during
the nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998, primarily due additional financing costs associated with the
loan from CAP-G to KKM, increased depreciation expense on tangible equipment,
and additional overhead incurred relating to production activities in the
Karakuduk Field.
Interest income increased by $503,000 from the nine months ended September
30, 1998, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan.
Interest expense increased by $120,000 during the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998, due
to the Company acquiring additional indebtedness of $5,120,000. The Company had
notes payable of $6,095,000 outstanding as of September 30, 1999.
Three Months Ended September 30, 1999 Compared with the Three Months Ended
September 30, 1998
The Company's operations during the three months ended September 30, 1999,
resulted in a net loss of $551,000, compared to a net loss of $1,117,000 for the
three months ended September 30, 1998.
General and administrative costs decreased by $193,000 during the three
months ended September 30, 1999, as compared to the three months ended September
30, 1998, primarily due to a reduction in the Company's operational personnel in
Kazakhstan. The Company expects overall payroll costs to increase significantly
during the remainder of 1999. The Company's equity loss in KKM decreased by
$59,000 during the three months ended September 30, 1999, as compared to the
three months ended September 30, 1998.
Interest income increased by $96,000 from the three months ended September
30, 1998, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan.
Interest expense increased by $17,000 during the three months ended
September 30, 1999, as compared to the three months ended September 30, 1998,
due to the Company acquiring additional indebtedness of $5,120,000 during 1999.
The Company had notes payable of $6,095,000 outstanding as of September 30,
1999.
17
<PAGE>
3. Commodity Prices for Oil and Gas
The Company's revenues, profitability, growth and value of its oil and gas
properties are highly dependent upon prices of oil and gas. Market conditions
make it difficult to estimate prices of oil and gas or the impact of inflation
on such prices. Oil and gas prices have been volatile, and it is likely that
they will continue to fluctuate in the future. Various factors beyond the
Company's control affect prices for oil and gas, including supplies of oil and
gas available worldwide and in Kazakhstan, the ability of the Organization of
Petroleum Exporting Countries (OPEC) to agree to maintain oil prices and
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.
4. Inflation
On April 5, 1999, the government of the Republic of Kazakhstan decided not
to continue its support of the national currency, the tenge, and allowed it to
float freely against the U.S. dollar. Immediately thereafter, the official
exhange rate declined from 87.5 tenge to the U.S. dollar to 142 tenge to the
U.S. dollar. As of November 11, 1999, the official exhange rate was
approximately 140 tenge to the U.S. dollar. The devaluation decreased the tenge
realizable value of any U.S. dollar or other hard currency denominated monetary
assets held by the Company, and increases the tenge obligation of any U.S.
dollar or other hard currency denominated monetary liabilities held by the
Company. KKM's financial statements are denominated in U.S. dollars, and the
only impact to the Company relates to assets and liabilities denominated in
tenge. The net impact of the tenge devaluation to the Company is not material.
5. Year 2000 Issue
The Company has assessed the Year 2000 issue and does not expect the Year
2000 problem to have a material impact on the Company's operations. However, it
is unclear as to the extent that the government of the Republic of Kazakhstan
and other organizations who provide significant infrastructure services within
the Former Soviet Union have addressed the Year 2000 issue. There is no
guarantee that the systems of the government or other organizations on which the
Company relies will be timely converted and would not have a material adverse
effect on the Company and its systems.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Not Applicable.
18
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings
In April 1999, the owner of the drilling rig operated by Challenger in the
Karakuduk Field, OGECC, terminated its contract with Challenger. As a result of
the termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings have
been instituted in accordance with the terms of such drilling contract. In the
arbitration, Challenger has claimed that it is entitled to $9.8 million in
damages. The Company and KKM intend to vigorously defend the arbitration claim
made by Challenger. In the opinion of Management, the probable amount payable to
Challenger with respect to such arbitration will be significantly less than the
amount claimed by Challenger. Drilling in the Karakuduk Field has been suspended
temporarily until the arbitration is resolved or until another drilling rig can
be procured. KKM is currently exploring strategic alternatives to continue its
drilling program.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's stockholders
during the quarter ended September 30, 1999.
19
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
10.1 Crude Oil Sale and Purchase Agreement dated as of
November 1, 1999, between Closed Type JSC Karakuduk
Munay and Shell Trading International Limited
27 Financial Data Schedule.
(b) Reports on Form 8-K
On November 17, 1999, the Company filed a current report on Form 8-K
reporting the execution of a $24.0 million loan agreement between the Company
and Shell Capital Services Limited on November 1, 1999 and the Company's
issuance of 8% Non-negotiable Convertible Promissory Notes for a total of $4.0
million.
20
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 19, 1999
Chaparral Resources, Inc.
By: /s/ Michael B. Young
---------------------------------------
Michael B. Young, Treasurer, Controller
and Principal Accounting Officer
21
<PAGE>
Exhibit Index
Number Exhibit
------ -------
10.1 Crude Oil Sale and Purchase Agreement dated as of
November 1, 1999, between Closed Type JSC Karakuduk
Munay and Shell Trading International Limited
27 Financial Data Schedule.
22
DATED: 1st November,1999
CRUDE OIL SALE AND PURCHASE AGREEMENT
between
CLOSED TYPE JSC KARAKUDUKMUNAY
and
SHELL TRADING INTERNATIONAL LIMITED.
<PAGE>
THIS AGREEMENT is made this 1st day of November, 1999
Between:
1. CLOSED TYPE JSC KARAKUDUKMUNAY, a company incorporated under the laws of
the Republic of Kazakhstan, and having its principal place of business at
Microregion 3 Build.82, Aktau 466200, Kazakhstan
(hereinafter referred to as "Sellers")
2. SHELL TRADING INTERNATIONAL LIMITED, a company incorporated under the laws
of England, and having its principal office at Shell Centre, London SE1
7NA, acting through its agent SHELL INTERNATIONAL TRADING AND SHIPPING
COMPANY LIMITED ("STASCO"), a company incorporated under the laws of
England and Wales, and having its principal office at Shell-Mex House,
Strand, London WC2R OZA
(hereinafter referred to as "Buyers")
(Sellers and Buyers may be referred to herein individually as a "Party" and
collectively as the "Parties".)
WHEREAS:
A. Sellers are the lawful holders of the Petroleum Licence No. MG #249(Oil)
dated 25 June 1995 (as subsequently amended) granted to Sellers by the
Government of the Republic of Kazakhstan. Chaparral Resources, Inc., as
borrower, and Central Asian Petroleum (Guernsey) Limited, Central Asian
Petroleum, Inc. and Sellers, as co-obligors, have entered into certain
financing arrangements relating to the Field as set out in the Loan
Agreement dated 1 November, 1999 (the "Loan Agreement") with Shell Capital
Services Limited as arrangers, and the Facility Agent and the Lenders, as
defined in the Loan Agreement.
B. Chaparral Resources, Inc. will service and repay advances made under the
Loan Agreement ultimately through investment recovery received from Sellers
who will finance the payment of such investment recovery from the proceeds
of sale of Karakuduk Crude Oil made pursuant to this Agreement.
C. Buyers are engaged, inter alia, in the business of trading and shipping
crude oil.
D. In accordance with and for the duration of this Agreement:
i. until such time as the CPC Pipeline Operational Date, Sellers are
willing to sell and delivery to Buyers and Buyers are willing to buy
and take from Sellers, at certain delivery points, REBCO in quantities
equal to the total quantity of exportable Karakuduk Crude Oil produced
during such period;
ii. unless otherwise agreed between the Parties, upon the CPC Pipeline
Operational Date, Sellers are willing to sell and delivery to Buyers
and Buyers are willing to buy and take from Sellers, FOB CPC Terminal,
the total quantity of exportable Karakuduk Crude Oil produced during
such period.
IT IS HEREBY AGREED AS FOLLOWS:
PART 1
GENERAL TERMS
ARTICLE 1: DEFINITIONS AND INTERPRETATION
1.1 For the purposes of this Agreement and the recitals hereto, unless the
context otherwise requires, the following terms shall have the meanings
ascribed to them below:
"Affiliate" means:
i. in the case of Buyers:
<PAGE>
(a) N.V. Koninklijke Nederlandsche Petroleum Maatschappij (a
Netherlands Company);
(b) The "Shell" Transport and Trading Company, p.l.c. (an English
Company); and
(c) any company (other than Sellers) which is for the time being
directly or indirectly affiliated with N.V. Koninklijke
Nederlandsche Petroleum Maatschappij and The "Shell" Transport
and Trading Company, p.l.c. or with either of them.
For the purpose of this definition, a company is directly affiliated
with another company or companies if it holds shares carrying fifty
per cent (50%) or more of the votes at a general meeting (or
equivalent) or fifty per cent (50%) or more of the issued capital of
the first-mentioned company and a particular company is indirectly
affiliated with a company or companies (hereinafter in this paragraph
called the "parent company or companies") if a series of companies can
be specified, beginning with the parent company or companies and
ending with the particular company, so related that each company of
the series, except the parent company or companies, is directly
affiliated with one or more of the companies earlier in the series;
and
ii. in the case of Sellers:
any company or entity which (i) controls either directly or indirectly
Sellers, (ii) is directly or indirectly controlled by Sellers, or
(iii) is directly or indirectly controlled by a company or entity
which directly or indirectly controls Sellers, for which purpose
"control" means the right to exercise 50% or more of the voting shares
of Sellers or other company or entity in relation to the appointment
of the directors of such company or entity.
"Agreement" means this agreement and all the attachments hereto.
"Barrel" means 42 U.S. standard gallons of 231 cubic inches at 60(0)
Fahrenheit.
"BS&W" means sediment and water.
"Control" means the power to direct the management or policies of an
entity, directly or indirectly, through the ownership of voting capital
(provided that the direct or indirect ownership of 50% or more of the share
capital or similar right of ownership in an entity shall be deemed to
constitute control of that entity), and a "Change of Control" when applied
to Sellers means Central Asian Petroleum (Guernsey) Limited ceasing to own,
legally and beneficially in aggregate fifty (50) per cent of the shares in
Sellers, except with the prior written approval of Buyers.
"CPC Blend" means the blend of crude oil generally available at the CPC
Terminal that complies with a minimum specification to be agreed between
Sellers and Buyers.
"CPC Pipeline" means the pipeline which is being built by the CPC
consortium, which will run from the Tengiz field to Novorossiisk.
"CPC Pipeline Operational Date" means the last day of the month in which:
i. the completed CPC Pipeline is commissioned;
ii. the Field is so connected with the CPC Pipeline (via pipeline,
rail link or otherwise) that Karakuduk Export Crude Oil can and
will be evacuated from the Field to the CPC Terminal via the CPC
Pipeline; and
iii. CPC Pipeline starts pumping commercial quantities of crude oil
all as determined by Sellers and Buyers; and
iv. if the CPC Pipeline transports crude oil such that only CPC Blend
will be available for lifting at the CPC Terminal, Sellers and
Buyers have agreed a minimum specification for the CPC Blend.
<PAGE>
"CPC Terminal" means the single buoy mooring terminal which is being built
by the CPC consortium near Novorossiisk.
"Delivery Acceptance Act" or "DAA" means in respect of delivery of REBCO
DAF Budkovce, DAF Fenyeshlitke or DAF Adamovo, a set of four original
documents in one of the formats set out in Attachment 5 (or any other
format agreed by the Parties) which record the quantity and details of a
delivery of crude oil at that Delivery Point.
"Delivery Month" or "Month M" means a Month during the term of this
Agreement from the First Delivery Month to the Last Delivery Month
(inclusive).
"Delivery Point" shall have the meaning ascribed to it in Article 6.1.
"Dollars" or the symbol "$" means the lawful currency of the United States
of America.
"Effective Date" shall have the meaning ascribed to it in Article 2.1.
"Field" means the Karakuduk oil field in the Mangistau Oblast of the
Republic of Kazakhstan as more particularly described in the Agreement for
Exploration, Development and Production of Oil in Karakuduk Oil Field in
Mangistau Oblast of the Republic of Kazakhstan between the Ministry of Oil
and Gas Industries of the Republic of Kazakhstan for and on behalf of the
Government of the Republic of Kazakhstan and Joint Stock Company of Closed
Type Karakudukmunay Joint Venture dated August 30, 1995 (the "Contract")
and the Petroleum Licence.
"First Delivery Month" means the month following the month in which the
Effective Date falls.
"Initial Term" means a period commencing on the date hereof and concluding
on the last day of the month in which the fifth anniversary of the
Effective Date falls.
"Karakuduk Crude Oil" means crude oil produced from the Field.
"Karakuduk Export Crude Oil" means the quantity of Karakuduk Crude Oil,
expressed in tonnes, as is produced and available for export at the
Delivery Points during the term of this Agreement less that quantity of
such crude oil that Sellers are obliged to deliver to the Government of the
Republic of Kazakhstan in respect of royalty in kind due under the terms of
the Contract.
"Last Delivery Month" means the Delivery Month in which this Agreement
terminates howsoever arising.
"Lenders" has the meaning assigned to it in the Loan Agreement.
"Loan Agreement" has the meaning assigned to it in the recitals hereto.
"LTBP" means the London Tanker Brokers Panel.
"Monthly Karakuduk Crude Oil Production" means in respect of any month the
quantity of Karakuduk Crude Oil expressed in tonnes produced in that month.
"Monthly Karakuduk Crude Oil Export Quantity" means in respect of any month
the quantity of the Karakuduk Export Crude Oil produced in that month.
"Nomination" means in respect of any Delivery Month, Sellers' nomination
made pursuant to Article 7.3.
"Nomination Confirmation" shall have the meaning ascribed to it in Article
7.3.
"Principal Period" means the period from the Effective Date to the CPC
Pipeline Operational Date or the date of termination of this Agreement,
whichever occurs first.
<PAGE>
"Petroleum Licence" has the meaning assigned to it in the recitals hereto.
"REBCO" means Russian export blend crude oil.
"Scheduling Month" or "Month M-1" means in respect of any Delivery Month
the month immediately before that Delivery Month.
"Secondary Period" means the period from the CPC Pipeline Operational Date
to the date of termination of this Agreement (inclusive).
Service Agreement" means the service agreement between the Parties in the
form set out in Attachment 4.
1.2 In this Agreement, unless the context otherwise requires:
i. headings are for convenience only and do not affect the interpretation
of this Agreement;
ii. an expression importing a natural person includes any company,
partnership, trust, joint venture, association, corporation or other
body corporate and vice versa;
iii. references to Articles, Parts and Attachments are, unless the context
otherwise requires, references to articles or parts of and attachments
to this Agreement;
iv. except as otherwise provided, a reference to a document includes an
amendment or supplement to, or replacement or novation of, that
document, but disregarding any amendment, supplement, replacement or
novation made in breach of this Agreement;
v. a reference to a Party to this Agreement and to any other document
includes that Party's successors and permitted assigns;
vi. words importing the singular include the plural and vice versa;
vii. the word "including" means "including without limitation";
viii.a "business day" means a day (other than Saturday or Sunday) on which
banks are open for ordinary banking business in London;
ix. "tonne" is a metric ton; and
x. a "year" means a calendar year, a "quarter" means a calendar quarter
and a "month" means a calendar month.
ARTICLE 2: CONDITIONS PRECEDENT
2.1 The provisions of this Agreement other than this Article 2.1 shall only
come into effect on the date (the "Effective Date") when:
i. disbursement of the first advance under the Loan Agreement shall have
occurred;
ii. the Service Agreement shall have been executed and delivered by the
Parties; and
iii. the payment of the "First Annual Fee" as required by Article 5.1 of
the Service Agreement shall have been made by Sellers to STASCO in
accordance with Article 6.1 of the Service Agreement;
whereupon this Agreement shall have full force and effect. In the event
that the Effective Date does not occur prior to 31st January 2000, this
Agreement may be terminated forthwith by Buyers with immediate effect.
ARTICLE 3: TERM OF AGREEMENT
3.1 Subject to Articles 2.1 and 10, this Agreement shall be effective for the
Initial Term and thereafter will be extended, or further extended,
automatically for a period of 12 months, each such extension commencing at
the end of the last day of the Initial Term or the relevant anniversary
thereof, unless either Party serves written notice of termination on the
other party at least 60 days prior to the end of the Initial Term, or any
<PAGE>
subsequent extension, such notice to expire and be effective on the last
day of the Initial Term, or any subsequent extension, (as the case may be)
provided always that Sellers may not serve a notice to terminate this
Agreement pursuant to this Article 3.1 if sums remain outstanding to the
Lenders under the Loan Agreement (whether or not then due and payable).
3.2 Any notice served by the Parties that does not provide the period of notice
required by Article 3.1 or is served by Sellers in breach of Article 3.1
shall be invalid and of no effect whatsoever.
3.3 Termination of this Agreement pursuant to Article 3.1 shall not create any
obligation on either Party to pay any compensation in respect of such
termination.
ARTICLE 4: SALE AND PURCHASE OF CRUDE OIL
4.1 Subject to the terms and conditions set out herein, during the term of this
Agreement, Sellers agree to sell and deliver to Buyers, and Buyers agree to
purchase and take delivery of from Sellers:
i. in the Principal Period, the quantity of REBCO in tonnes determined in
accordance with Article 7 being equal to that quantity of Karakuduk
Export Crude Oil expressed in tonnes produced from the Field during
the Principal Period; and
ii. in the Secondary Period:
aa. if Buyers determine that the CPC Pipeline shall transport
Karakuduk Export Crude Oil in segregated parcels so that
Karakuduk Crude Oil can be lifted at the CPC Terminal, that
quantity of Karakuduk Export Crude Oil expressed in tonnes
determined in accordance with Article 7 produced from the Field
during the Secondary Period; or
bb. if Buyers determine that the CPC Pipeline shall transport
Karakuduk Export Crude Oil in unsegregated parcels so that CPC
Blend (rather than Karakuduk Crude Oil) can be lifted at the CPC
Terminal, that quantity of CPC Blend in tonnes determined in
accordance with Article 7 being equal to that quantity of
Karakuduk Export Crude Oil expressed in tonnes produced from the
Field during the Secondary Period.
4.2 During the term of this Agreement:
i. save in respect of those quantities of Karakuduk Crude Oil that
Sellers are obliged to deliver to the Government of the Republic of
Kazakhstan in respect of royalty in kind due under the terms of the
Petroleum Licence, Sellers shall not enter into any agreement or
understanding with any third party to sell, swap, barter or otherwise
supply Karakuduk Crude Oil or enter into any other agreement or
understanding for the sale or supply of any other grade or type of
crude oil based on or connected with the production of Karakuduk Crude
Oil; and
ii. Sellers shall make and maintain all necessary arrangements for the
Karakuduk Export Crude Oil to be exported from the Republic of
Kazakhstan and transported to the Delivery Points such that REBCO,
Karakuduk Crude Oil or CPC Blend is available at the Delivery Points
for delivery to Buyers as contemplated by this Agreement.
ARTICLE 5: - QUALITY
5.1 The Crude Oil to be supplied hereunder:
i. in the Principal Period shall be REBCO of normal export quality
generally being supplied at the time of delivery at the Delivery Point
for that crude oil (as determined in accordance with Article 7)
provided always that all REBCO supplied hereunder shall comply the
specification set out in Attachment 1A; and
<PAGE>
ii. in the Secondary Period shall be either Karakuduk Crude Oil complying
with the specification set out in Attachment 1B or CPC Blend complying
with the minimum specification to be agreed between Sellers and
Buyers.
ARTICLE 6: - DELIVERY
6.1 Unless otherwise agreed (in which case delivery and price shall be as
agreed) between the Parties in the Principal Period, REBCO may be supplied:
i. FOB Novorossiisk;
ii. FOB Odessa;
iii. FOB Ventspils;
iv. DAF Budkovce;
v. DAF Fenyeshlitke; or
vi. DAF Adamovo
and during the Secondary Period, Karakuduk Crude Oil or CPC Blend (as
the case may be) shall be supplied FOB CPC Terminal (each being a
"Delivery Point").
6.2 The basis of supply for each parcel of REBCO, Karakuduk Crude Oil or CPC
Blend (as the case may be) shall be determined in accordance with Article
7.
6.3 Sellers acknowledge that during the Principal Period, Buyers' preference is
to take delivery of REBCO either FOB Novorossiisk; FOB Odessa or FOB
Ventspils and, unless otherwise advised by Buyers, Sellers shall use their
best efforts to arrange supplies on these terms and Sellers may only
propose the supply of REBCO on a DAF Budkovce; DAF Fenyeshlitke or DAF
Adamovo basis pursuant to Article 7.2 if Sellers can demonstrate to Buyers'
reasonable satisfaction that they are unable to arrange the delivery of
such REBCO on a FOB Novorossiisk; FOB Odessa or FOB Ventspils basis.
6.4 Unless otherwise agreed between the Parties, in respect of:
i. any supply of REBCO on a FOB Novorossiisk basis or of Karakuduk Crude
Oil or CPC Blend on a FOB CPC Terminal basis, the quantity to be
supplied in any one parcel shall be in the range 63,000 - 140,000
tonnes with a plus or minus 5% tolerance at Buyers' option
ii. any supply of REBCO on a FOB Odessa basis, , the quantity to be
supplied in any one parcel shall be in the range 63,000 - 85,000
tonnes with a plus or minus 5% tolerance at Buyers' option
iii. any supply of REBCO on a FOB Ventspils basis, the quantity to be
supplied in any one parcel shall be in the range 63,000 - 100,000
tonnes with a plus or minus 5% tolerance at Buyers' option; and
iv. any supply of REBCO on a DAF Budkovce; DAF Fenyeshlitke or DAF Adamovo
basis, the quantity to be supplied in any one parcel shall not be less
than 3,000 tonnes with a plus or minus 5% tolerance at Sellers' option
and in the event that pursuant to Article 7 Sellers propose to supply
REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be) in a quantity
that does not comply with the requirements of this Article 6.4, then,
subject to the provisions of Article 8.2, Buyers may agree to the proposed
supply or to buy and take any such quantities of REBCO, Karakuduk Crude Oil
or CPC Blend (as the case may be) but shall be under no obligation to so
agree or buy and take.
ARTICLE 7: - NOMINATIONS
7.1 On or before the Effective Date in respect of the period from the Effective
Date to 31 December 2000 and then by no later than the first working day of
the month proceeding a quarter, Sellers shall provide to Buyers a forecast
of the Monthly Karakuduk Crude Oil Production and Monthly Karakuduk Crude
Oil Export Quantity by month for that quarter and the next three quarters.
In the event that it could be reasonably anticipated by Sellers at any time
<PAGE>
that the forecasts for any month should be revised by more than 10%,
Sellers shall promptly so notify Buyers and shall provide Buyers with a
full and detailed explanation for the forecast revision.
7.2 On or before the Effective Date in respect of the First Delivery Month and
then in respect of any subsequent Month M by no later that the first
working day of Month M-1 for that Delivery Month, Sellers shall notify to
Buyers the Monthly Karakuduk Crude Oil Production and Monthly Karakuduk
Crude Oil Export Quantity for that Delivery Month (which shall be
consistent with the last forecast for that month provided by Sellers
pursuant to Article 7.1) and, subject to Article 6.4, depending on whether
the month is in the Principal Period or the Secondary Period, Sellers shall
propose to Buyers the quantity in tonnes of REBCO, Karakuduk Crude Oil or
CPC Blend as the case may be, (which unless otherwise agreed by the
Parties, shall be equal to the Monthly Karakuduk Crude Oil Export Quantity
for that month), to be delivered to Buyers in that month, together with
proposed parcel sizes, Delivery Points (in respect of REBCO) and, in
respect of deliveries on a FOB Novorossiisk, FOB Odessa, FOB Ventspils or
FOB CPC Terminal basis, indicative loading date ranges of 3 consecutive
days.
As soon as reasonably practical Buyers shall advise Sellers whether
Sellers' proposal is acceptable and if not what changes are required by
Buyers. Sellers and Buyers shall agree a mutually acceptable schedule but
if Sellers and Buyers cannot so agree by no later than the twenty third day
of Month M-1, the proposed schedule (complying with the requirements of
Article 7.4) shall be determined by Sellers, but as far as reasonably
practical Sellers shall propose a schedule as close as possible to the
requirements of Buyers.
7.3 Subject to Article 7.4, on or before the Effective Date in respect of the
First Delivery Month and then in respect of any subsequent Month M by no
later that the twenty-fifth day of Month M-1 for that Delivery Month,
Sellers shall notify to Buyers in the form set out in Attachment 2 (a
"Nomination Confirmation") :
i. the total quantity of REBCO, Karakuduk Crude Oil or CPC Blend (as the
case may be) in tonnes to be delivered to Buyers in that month;
ii. the size of each parcel of REBCO, Karakuduk Crude Oil or CPC Blend (as
the case may be) and the Delivery Point for each parcel;
iii. in respect of deliveries, DAF Budkovce; DAF Fenyeshlitke or DAF
Adamovo basis the month of delivery for each parcel and
iv. in respect of deliveries on a FOB Novorossiisk, FOB Odessa, FOB
Ventspils or FOB CPC Terminal basis the 3 consecutive day loading
range for each parcel
(each such parcel of REBCO, Karakuduk Crude Oil or CPC Blend (as the case
may be) shall be a "Nomination".)
In respect of any Delivery Month, the terms of a Nomination Confirmation
shall not deviate from the schedule established pursuant to Article 7.2
without the written agreement of the Parties. The terms set out in any
Nomination may be amended with the mutual consent of the Parties.
7.4 Unless otherwise agreed by Buyers, schedules made pursuant to Article 7.2
and Nominations shall not provide for:
i. a loading range at any of the Delivery Points within the first 10 days
of any Delivery Month; and
ii. delivery of REBCO on a DAF Budkovce; DAF Fenyeshlitke or DAF Adamovo
basis unless by no later than the twenty third day of the relevant
Month M-1, Buyers can advise Sellers of the sales chain from Buyers to
the final receiver of that proposed parcel of oil and are able to
procure from the final receiver of that parcel of oil a written
confirmation stating that it will take that oil into its facilities
<PAGE>
and that it has contractual arrangements to transport that oil from
the proposed Delivery Point to such facilities.
7.5 In respect of any Delivery Month, Buyer may but shall not be obliged to:
i. agree to any schedule pursuant to Article 7.2 that does not comply
with the requirements of Article 7.4;
ii. buy and take REBCO , Karakuduk Crude Oil or CPC Blend (as the case may
be) under any Nomination if:
aa. the Nomination Confirmation is not notified to Buyers by the
twenty-fifth day of Month M-1;
bb. the Nomination Confirmation deviates from the schedule made for
that Delivery Month pursuant to Article 7.2;
cc. the Nomination Confirmation does not comply with the requirements
of Article 7.4.
7.6 In respect of any Delivery Month, for Nominations to be delivered on a DAF
Budkovce; DAF Fenyeshlitke or DAF Adamovo basis, by not later than the
first day of that Delivery Month, Sellers shall provide a copy of the
Routing Cable (Marshrutnoe Poruchenie) from AK Transneft authorising the
pumping of quantities of REBCO for the account of or in the ownership of
Sellers from Samara, Russia to each such Delivery Point equal to the
quantities stated in the Nominations to be delivered at each such Delivery
Point in that month.
ARTICLE 8 - PRICE AND PAYMENT
8.1 For the period from the Effective Date to 31 December 2000:
i. the price ("P") expressed in Dollars per Barrel net of BS&W payable by
Buyers to Sellers for REBCO delivered in that period pursuant to a
Nomination, shall be calculated as follows:
P = R - D
Where:
D is the applicable discount calculated by Buyers pursuant to
Article 8.1 ii;
and
for REBCO delivered under a Nomination on a FOB Novorossiisk
basis:
i. in a parcel size of 63,000 - 85,000 tonnes:
R = Urals (Med) - [((80Med_Med + C) x
A_N-Wsflat)/7.3] x [80,000/A]
ii. in a parcel size of 85,001 - 140,000 tonnes:
R = Urals (Med) - [((130Med_Med + C) x
A_N-Wsflat)/7.3] x [130,000/A]
bb. for REBCO delivered under a Nomination on a FOB Odessa basis in a
parcel size of 63,000 - 85,000 tonnes:
R = Urals (Med) - [((80Med_Med + C) x A_N-Wsflat
t)/7.3] x [80,000/A]
cc. for REBCO delivered under a Nomination on a FOB Ventspils basis:
i. in a parcel size of 63,000 - 85,000 tonnes:
R = Urals (Rdam) - [((80UKC_UKC+C) x
V_R-WSflat)/7.3] x [80,000/A]
ii. in a parcel size of 85,001 - 100,000 tonnes:
R = Urals (Rdam) - [((130UKC_UKC+C) x
V_R-WSflat)/7.3] x [130,000/A]
<PAGE>
and
"Urals (Med)" is the average of the mean (high/low) of the
Platt's Crude Oil Marketwire quotes for "Urals (Med)"
expressed in Dollars per Barrel for five consecutive
quotations immediately after the Bill of Lading date (B/L=0)
"80Med_Med" is the average of the "Platt's Dirty Tanker
Wire" quotes (expressed as a percentage) for a voyage from a
Mediterranean loadport to a Mediterranean discharge port as
published under the heading West of Suez for 80kt tankers
for 5 consecutive quotations starting 15 days before the
middle day of the 3 day delivery range for that Nomination
"130Med_Med" is the average of the "Platt's Dirty Tanker
Wire" quotes (expressed as a percentage) for a voyage from a
Mediterranean loadport to a Mediterranean discharge port as
published under the heading West of Suez for 130kt tankers
for 5 consecutive quotations starting 15 days before the
middle day of the 3 day delivery range for that Nomination
"C" is 5 percentage points
"A_N-WSflat" is the flat voyage charter freight rate between
Augusta and Novorossiisk or Odessa (as the case may be) as
shown in Worldscale Tanker Nominal Freight Scale
"A" is the quantity of REBCO net of BS&W expressed in tonnes
delivered pursuant to that Nomination
"Urals (Rdam)" is the average of the mean (high/low) of the
Platt's Crude Oil Marketwire quotes for "Urals (Rdam)"
expressed in Dollars per Barrel for five consecutive
quotations immediately after the Bill of Lading date (B/L=0)
"80UKC_UKC" is the average of the "Platt's Dirty Tanker
Wire" quotes (expressed as a percentage) for a voyage from a
UK/Continent load port to a UK/Continent discharge port as
published under the heading West of Suez for 80kt tankers
for 5 day consecutive quotations starting 15 days before the
middle day of the 3 day delivery range for that Nomination
"130UKC_UKC" is the average of the "Platt's Dirty Tanker
Wire" quotes (expressed as a percentage) for a voyage from a
UK/Continent load port to a UK/Continent discharge port as
published under the heading West of Suez for 130kt tankers
for 5 day consecutive quotations starting 15 days before the
middle day of the 3 day delivery range for that Nomination
"V_R-WSflat" is the flat rate between Ventspils and
Rotterdam (including provision for harbour dues) as it is
shown in Worldscale Tanker Nominal Freight Scale
"A" is the quantity of REBCO net of BS&W expressed in tonnes
delivered pursuant to that Nomination
dd. for REBCO delivered on a DAF Budkovce; DAF Fenyeshlitke or
DAF Adamovo basis:
R is the price in Dollars per Barrel net of BS&W (or its
equivalent at the Delivery Point) at which Buyers sell such
REBCO to their buyers.
ii. the discount ("D") expressed in Dollars per Barrel net of BS&W to be
applied to REBCO delivered in that period pursuant to a Nomination,
shall be calculated as follows;
<PAGE>
Discount D to be applied
per Barrel of REBCO
net of BS&W in Dollars:
A On any Barrels being part of the first 5,000,000
Barrels of REBCO net of BS&W delivered to Buyers
at any of the Delivery Points in that period in
respect of Karakuduk Export Crude Oil produced in
that period: 0.15
On any Barrels being part of the 5,000,001st to
10,000,000th Barrels of REBCO net of BS&W
delivered to Buyers at any of the Delivery Points
in that period in respect of Karakuduk Export
Crude Oil produced in that period: 0.10
On any Barrels being part of the 10,000,001st or
more Barrels of REBCO net of BS&W delivered to
Buyers at any of the Delivery Points in that
period in respect of Karakuduk Export Crude Oil
produced in that period: 0.05
iii. in respect of any Nomination for the delivery of REBCO on a FOB
Novorossiisk, FOB Odessa or FOB Ventspils basis, the price of REBCO
determined pursuant to Article 8.1 i shall be increased by $0.003 per
Barrel net of BS&W for each full 0.10 API degree above 32.00 degree
and decreased by $0.003 per Barrel net of BS&W for each full 0.10 API
degree below 32.09 degree API that the REBCO achieves when analysed
upon delivery; provided that no price adjustment shall occur if the
API for that REBCO is within the range 32.00-32.09 degrees API;
iv. in respect of any Nomination for the delivery of REBCO on a DAF
Budkovce; DAF Fenyeshlitke or DAF Adamovo basis, Buyers shall:
aa. calculate the total net quantity of REBCO already supplied to
Buyers pursuant to this Agreement in that period at the Delivery
Points and the discount calculated pursuant to Article 8.1 ii to
be applied to the Barrels to be delivered under that Nomination;
bb. confirm the price per Barrel in Dollars (or its equivalent at the
Delivery Point) at which Buyers have sold the REBCO specified in
that Nomination to their buyers; and
cc. advise the date on which Buyers' buyers will make payment in
respect of such supply
within 3 working days of making arrangements to sell such parcel
of crude oil.
8.2 For the period from the Effective Date to 31 December 2000, in the event
that Sellers wish to deliver and sell to Buyers REBCO in a parcel size
smaller than 63,000 tonnes, Buyers shall be obliged to purchase and take
delivery of such a parcel and the price formula applicable to that
undersized parcel shall be as set out in Article 8.1.i However, if Sellers
are able to identify other tonnes of REBCO which are available for
purchase, Sellers may introduce Buyers to the third party seller of those
<PAGE>
additional tonnes, with a view to Buyers seeking to agree terms with the
said third party seller to purchase some or all of the said additional
tonnes. The Sellers acknowledge that the decision whether or not to make
such a purchase shall be entirely in the discretion of Buyers, and Sellers
shall have no recourse to Buyers in the event that Buyers decline to
purchase the additional tonnes. In the event that Buyers do agree to
purchase the additional tonnes, the parcel size shall be calculated by
adding the quantity of the Sellers' REBCO to the quantity of the additional
tonnes, and the price for such parcel shall be calculated on the sum
thereof.
8.3 In the event that any index referred to in this Agreement ceases to be
published or if the publisher changes quotation criteria, the Parties
shall, upon notice from either Party, meet to discuss an alternative index
which most closely replaces the index as it is published on the date this
Agreement is executed. If the Parties fail to agree within 30 working days
after either Party notifies the other Party, the issue shall be submitted
to an expert. To assist the expert in such determination, each Party shall
submit one, and only one, proposed replacement index and the expert shall
determine which of the two proposed indexes most closely approximates the
index which is changed or no longer published. Pending resolution by the
expert, the prices calculated pursuant to Article 8.1 shall be determined
using the indices proffered by Buyers and any payments based on such
indices shall be adjusted (if necessary) to take account of the
determination by the expert and following the determination by the expert
the price thenceforth shall adjusted to take account of the determination
by the expert.
8.4 During the term of this Agreement, by no later than 1 October 2000, and
thereafter by the same date in each subsequent year, the Parties shall
convene a meeting to discuss the price of, and the appropriate API
adjustment for the REBCO, Karakuduk Crude Oil or CPC Blend (as the case may
be) to be supplied under this Agreement in the year 2001, or the next year,
(as the case may be). The Parties shall negotiate mutually acceptable terms
for the price and API adjustment for the REBCO, Karakuduk Crude Oil or CPC
Blend (as the case may be) taking account the pricing and API adjustment
agreed for the then current year and the changes in the market. If by 30
November 2000, or thereafter by the same date in each subsequent year, the
parties are unable to agree the price or API adjustment per Barrel for the
REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be) for the next
year, then:
i. the price expressed in Dollars per Barrel net of BS&W payable by
Buyers to Sellers for REBCO, Karakuduk Crude Oil or CPC Blend (as the
case may be) delivered to Buyers at any Delivery Point in that next
year pursuant to a Nomination shall be the price per Barrel net of
BS&W (or its equivalent at the Delivery Point ) in Dollars at which
Buyers sell the REBCO, Karakuduk Crude Oil or CPC Blend (as the case
may be) to their buyers (provided always that Buyers shall endeavour
to obtain the best price available in the market at that time) less a
discount which shall be calculated as follows:
Discount to be applied
per Barrel net of BS&W in Dollars:
* On any Barrels being part of the first
5,000,000 Barrels of REBCO, Karakuduk Crude
Oil and/or CPC Blend net of BS&W delivered to
Buyers at any of the Delivery Points in the
year in respect of Karakuduk Export Crude Oil
produced in that year: 0.15
<PAGE>
* On any Barrels being part of the 5,000,001st
to 10,000,000th Barrels of REBCO, Karakuduk
Crude Oil and /or CPC Blend net of BS&W
delivered to Buyers at any of the Delivery
Points in the year in respect of Karakuduk
Export Crude Oil produced in that year: 0.10
* On any Barrels being part of the 10,000,001st
or more Barrels of REBCO, Karakuduk Crude Oil
and /or CPC Blend net of BS&W delivered to
Buyers at any of the Delivery Points in the
year in respect of Karakuduk Export Crude Oil
produced in that year: 0.05
For each Nomination in that next year, Buyers shall:
aa. calculate the total net quantity of REBCO, Karakuduk Crude Oil
and/or CPC Blend already supplied to Buyers in that year at the
Delivery Points and the discount calculated pursuant to Article
8.3 i to be applied to the Barrels to be delivered under that
Nomination;
bb. confirm the price per Barrel in Dollars (or its equivalent at the
Delivery Point) at which Buyers have sold the REBCO, Karakuduk
Crude Oil or CPC Blend specified in that Nomination to their
buyers; and
cc. advise the date on which Buyers' buyers will make payment in
respect of such supply
within 3 working days of making arrangements to sell such parcel of
crude oil;
ii. the API adjustment in respect of deliveries on a FOB Novorossiisk, FOB
Odessa, FOB Ventspils basis or FOB CPC Terminal basis, shall be as set
out in Article 8.1 iii mutatis mutandis and for the avoidance of doubt
there shall be no API adjustment for deliveries on a DAF Budkovce, DAF
Fenyeshlitke or DAF Adamovo basis.
8.5 Whenever pursuant to this Agreement it is necessary for the purpose of
calculating a price or a payment due, to convert a given quantity of REBCO,
Karakuduk Crude Oil or CPC Blend at a particular Delivery Point from tonnes
into Barrels (or vice versa), the conversion tables set out in Attachment 6
shall be used by Buyers to make that conversion and such conversion shall
be conclusive, final and binding on the Parties. In the event that the said
conversion tables are updated, amended or re-issued Buyers may use such
updated, amended or re-issued conversion tables instead of the tables set
out in Attachment 6.
8.6 All prices of REBCO, Karakuduk Crude Oil and CPC Blend supplied hereunder
shall be calculated to three (3) decimal places and the following
arithmetic rules shall be applied to do this:
i. if the fourth decimal place is five (5) or greater than five (5) then
the third decimal place shall be rounded up to the next digit.
ii. if the fourth decimal place is four (4) or less than four (4) then the
third decimal place will be unchanged.
<PAGE>
8.7 Subject to Article 17.6, Article F.12 of Part 2 and Article D.2 of Part 3,
all payments to be made by Buyers to Sellers under this Agreement shall be
made free of charges and without asserting at the time of payment any
set-off, counterclaim or right to withhold whatsoever, in Dollars in London
to such bank account as may be advised by Sellers to Buyers quoting
Sellers' invoice number and Buyers' name.
8.8 Unless otherwise agreed in writing any amount due from Buyers which is not
paid within the agreed credit period shall bear simple interest commencing
on the day immediately after the date on which it became due up to and
including the date of payment at the rate calculated as an annual rate (360
day year basis) of one (1) per cent plus the one (1) month London Interbank
Offered Rate as quoted by the National Westminster Bank PLC at the 11.00
a.m. fixing on the first London banking day for each month in which the
overdue exists.
The foregoing shall not be construed as an indication of any willingness on
the part of Sellers to provide extended credit as a matter of course and
shall be without prejudice to any rights and remedies which Sellers may
have under the agreement or otherwise.
8.9 Where the last day for payment falls on a Saturday or on any day which is
not a banking day in London then any such payment shall be made on the next
following London banking day in the same calendar month (if there is one)
or the nearest preceding London banking day if otherwise.
ARTICLE 9: - TERMS OF SUPPLY
9.1 REBCO supplied pursuant to any Nomination shall be supplied under the terms
set out in this Part 1 together with:
i. if the Nomination requires delivery on a FOB Novorossiisk; FOB Odessa
or FOB Ventspils basis, the terms set out in Part 2; and
ii. if the Nomination requires delivery on a DAF Budkovce; DAF
Fenyeshlitke or DAF Adamovo basis, the terms set out in Part 3.
9.2 Karakuduk Crude Oil or CPC Blend supplied pursuant to any Nomination shall
be supplied under the terms set out in this Part 1 together with the terms
set out in Part 2
9.3 In the event of there being any inconsistency or conflict between Part 1
and Part 2 or Part 3, the terms set out in this Part 1 shall prevail.
ARTICLE 10: TERMINATION EVENTS
10.1 If Sellers:
i. do not provide the forecasts required pursuant to Article 7.1 for a
period of 6 consecutive months;
ii. do not make Nomination Confirmations in respect of 6 consecutive
months;
iii. make Nomination Confirmations that do not comply with the requirements
of Article 7.4. in respect of 3 consecutive months;
iv. during the term of this Agreement without the written agreement of
Buyers, except in respect of those quantities of Karakuduk Crude Oil
that Sellers are obliged to deliver to the Government of the Republic
of Kazakhstan in respect of royalty in kind due under the terms of the
Petroleum Licence, enter into any agreement or understanding with any
third party to sell, swap, barter or otherwise supply Karakuduk Crude
Oil or enter into any other agreement or understanding for the sale or
supply of any other grade or type of crude oil based on or connected
with the production of Karakuduk Crude Oil;
v. fails to pay on written demand by Buyers any amounts that are then due
to Buyers pursuant to this Agreement;
vi. purport to sell, transfer or assign their rights or duties under this
Agreement in breach of Article 13.3; or
<PAGE>
vii. undergo a Change of Control,
then Buyers may forthwith terminate this Agreement by serving written
notice of termination on Sellers.
10.2 If either Party should go into liquidation (other than voluntary
liquidation for the purpose of corporate reconstruction), or if a
receiver, administrator or sequestration of the undertaking and assets
(or any part thereof) of either Party should be appointed, or if either
Party should become bankrupt or insolvent, should enter into a deed of
arrangement or a composition for the benefit of their creditors, or
should do or suffer any equivalent act or thing under any applicable law,
the other Party may terminate the Agreement forthwith by notice to the
other Party.
10.3 Buyers may terminate this Agreement forthwith by written notice to Sellers
if:
(a) the Loan Agreement shall terminate, other than upon payment of all
sums payable thereunder having been duly paid, or Shell Capital
Services Limited, whether through assignment, transfer or otherwise,
has no remaining interest in, or is no longer a party to, the Loan
Agreement; or
(b) the Service Agreement shall terminate.
10.4 In the event that all sums payable under the Loan Agreement have been duly
paid, either Party may terminate this Agreement forthwith by serving
written notice on the other Party.
10.5 If Buyers fail to pay on written demand by Sellers any amounts that are
then due to Sellers pursuant to this Agreement, and fail to remedy such
default within thirty days of notice thereof from Sellers, then Sellers may
forthwith terminate the Agreement by serving written notice of termination
on Buyers.
10.6 This Article 10 is not intended to be an exhaustive list of circumstances
in which either Party shall be entitled to terminate this Agreement and is
without prejudice to either Party's other rights of termination under this
Agreement or at law.
10.7 Save as expressly set out herein, the breach by a Party of its obligations
in respect of any Nomination shall not entitle that party to repudiate or
otherwise terminate this Agreement.
10.8 No termination of this Agreement shall prejudice any rights or remedies
under this Agreement relating to any period prior to such termination or
accrued before, at, or in consequence of the termination, or any
proceedings (including arbitration) for determination or enforcement of any
rights or remedies.
ARTICLE 11: FORCE MAJEURE
11.1 Subject to Article 11.3 and except in respect of the obligation to make any
payment as required by this Agreement (which shall not be subject to relief
under this Article 11.1), a Party shall not be in breach of this Agreement
and liable to the other Party for any failure to fulfil any obligation
under Agreement to the extent any fulfilment has been interfered with,
hindered, delayed or prevented by any circumstance whatsoever which is not
reasonably within the control of and is unforeseeable by such Party and if
such Party exercised due diligence, including, acts of God, fire, flood,
freezing, landslides, lightning, earthquakes, fire, storm, floods, washouts
and other natural disasters, war (declared or undeclared), insurrections,
riots, civil disturbances, epidemics, quarantine restrictions, breakdown of
any of Buyers' nominated vessel, blockade, embargo, strike, lockouts,
labour disputes or restrictions imposed by any Government.
11.2 The Party affected shall be excused from the performance or punctual
performance, as the case may be, of such obligation for so long as such
circumstance continues to exist. The Party affected shall promptly and at
<PAGE>
any rate, within twenty-four (24) hours of the occurrence of the event
notify the other Party of the occurrence of the circumstance and of the
obligation affected.
11.3 In respect of any Month, Sellers shall not be entitled to relief under
Articles 11.1 and 11.2 in respect of any failure to deliver REBCO,
Karakuduk Crude Oil or CPC Blend (as the case may be) under a Nomination if
the Field has produced Karakuduk Crude Oil in that month and crude oil is
being loaded on to vessels or pumped (as the case may be) during the
loading range or that month (as the case maybe) at the Delivery Point for
that Nomination save where Sellers can produce evidence, to the reasonable
satisfaction of Buyers, that such failure to deliver has been caused by
force majeure having been declared by Kazakh Oil, Transneft or Kaztransoil
11.4 If the performance of the obligations of a Party under this Agreement has
been delayed for a period of 3 months, the other Party shall be entitled to
terminate this Agreement thereafter by giving notice to that effect to the
Party claiming relief under this Article 11.
11.5 No circumstance described in Article 11.1 shall operate to extend the term
of this Agreement.
ARTICLE 12: EXCLUSION OF LIABILITIES
12.1 Neither Party shall be liable to the other for any indirect, special or
consequential losses or damages whatsoever and howsoever arising,
including, any loss of production from the Field or damage to or shut down
of the Field.
ARTICLE 13: - ASSIGNMENT
13.1 Subject to Article 13.2, Sellers may not sell, transfer or assign their
rights or duties under this Agreement or their interest in this Agreement
to any other person except with the prior written approval of Buyers and
any such purported sale, transfer or assignment without the approval of
Buyers shall be invalid and not binding on Buyers.
13.2 Notwithstanding Article 13.1, Sellers may transfer or assign their rights
under or interest in this Agreement to the Lenders by way of a security
interest in this Agreement for the benefit of the Lenders.
13.3 Subject to Article 13.4, Buyers may not sell, transfer or assign their
rights or duties under this Agreement or their interest in this Agreement
to any other person except with the prior written approval of Sellers and
any such purported sale, transfer or assignment without the approval of
Sellers shall be invalid and not binding on Sellers.
13.4 Notwithstanding Article 13.3, Buyers may delegate any or all of their
duties or obligations under this Agreement to any of their Affiliates but
they shall retain responsibility to Sellers for the proper performance of
such duties and obligations so delegated.
ARTICLE 14: NOTICES.
14.1 All notices or other communications shall be given in writing or by telex
or facsimile. Any such notice shall be deemed to be given as follows:
(a) if in writing, when delivered;
(b) if by telex, when despatched, but only if, at the time of
transmission, the correct answerback appears at the start and end of
the sender's copy of the notice; and
(c) if by facsimile, when the answerback is received.
However, a notice given in accordance with the above but received on a
non-working day or after business hours in the place of receipt shall only
be deemed to be given on the next working day in that place.
<PAGE>
If such notice is to Sellers, to:
Shell International Trading and Shipping Company Limited
Shell Mex House
Strand
London. WC2R 0ZA
Telephone : 44 171 546 5000
Facsimile : 44 171 546 4448
Telex : SHELL LONDON 919651
Attention : General Manager, Government Accounts
If such notice is to Buyers, to:
Closed Type JSC Karakudukmunay Inc.
Microregion 3
Building 82, Aktau
466200 Kazakhstan
Telephone: 7 3292 514814
Facsimile: 7 3292 518336
Telex: To be advised
Attention: Nikolai Klinchev, Director General
With a copy to:
Chaparral Resources, Inc.
16945 Northcase Drive
Suite 1440
Houston, Texas 77060
USA
Telephone: 1 281 877 7100
Facsimile: 1 281 877 0985
Telex: To be advised
Attention: Mike Young, KKM Notices
ARTICLE 15: REPRESENTATIONS
15.1 Each Party represents to the other Party that:
i. it is duly organised and validly existing under the laws of the
jurisdiction of its organisation or incorporation and, if relevant
under such laws, in good standing;
ii. it has the power to execute and deliver this Agreement and has taken
all necessary action to authorise such execution, delivery and
performance;
iii. such execution and delivery do not violate or conflict with any law
applicable to it, any provision of its constitutional documents, any
order or judgement of any court or other agency of government
applicable to it or any of its assets or any contractual restriction
binding on or affecting it or any of its assets;
iv. all governmental and other consents which are required to have been
obtained by it with respect to this Agreement, have been obtained and
are in full force and effect and all conditions of any such consents
have been complied with; and
v. its obligations under this Agreement constitute its legal, valid and
binding obligations, enforceable in accordance with its respective
terms (subject to applicable bankruptcy, re-organisation, insolvency,
moratorium or similar laws affecting creditors' rights generally and
subject, as to the enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a
proceeding in equity or at law))
<PAGE>
ARTICLE 16: APPOINTMENT OF EXPERTS
16.1 Where pursuant to any provisions in the agreement a matter is required to
be determined by an expert, the expert shall be a person fitted by the
possession of expert knowledge for the determination of the particular
matter in question. The expert shall be appointed by agreement between
Sellers and Buyers, or, in default of such agreement, by the President for
the time being of the Institute of Petroleum in London.
16.2 Sellers and Buyers shall furnish the expert with all written or oral
information which he may reasonably require for his determination.
16.3 The cost of the services of the expert, if appointed, shall be shared
equally between Sellers and Buyers.
ARTICLE 17: MISCELLANEOUS
17.1 This Agreement constitutes the entire agreement of the Parties with respect
to the subject matter of this Agreement and the Parties acknowledge that
they do not enter into this Agreement relying on any of the previous
communications between the Parties or their Affiliates.
17.2 No variation of or amendment to any of the terms of this Agreement shall be
effective unless it is in writing and signed by or on behalf of each of the
Parties and no waiver of any provision hereof shall be effective unless it
is in writing and signed by the Party against whom such waiver is sought to
be enforced.
17.3 Except as expressly provided herein, the rights, powers and remedies
provided in this Agreement are cumulative and not exclusive of any rights,
powers and remedies provided by law.
17.4 Except as expressly provided herein no delay or omission on the part of
either Party in exercising any right, power or remedy provided by law or
under this Agreement, nor any indulgence granted by any Party to any other
Party, shall impair such right, power or remedy, or be construed as a
waiver thereof, nor shall the single or partial exercise of any right,
power or remedy provided by law or under this Agreement preclude any other
or further exercise thereof or the exercise of any other right, power or
remedy.
17.5 Nothing in this Agreement shall constitute or be deemed to constitute a
partnership, trust or agency. The Parties shall not, and shall procure that
their directors, officers and employees, in that capacity, shall not,
represent themselves or otherwise hold themselves out as an agent or other
representative of the other Party or otherwise hold themselves out as
having any authority to bind the other unless such person is validly
authorised in writing to do so.
17.6 Buyers shall have the right to deduct from any monies due or which may
become due to Sellers any monies or sums due and payable to Buyers or
Buyers' Affiliates (including under the Service Agreement but excluding
sums due and payable to any Buyers' Affiliates in their capacity as Lenders
under the Loan Agreement) from Sellers or Sellers' Affiliates, provided
always that Buyers shall only be permitted to exercise such right to deduct
to the extent that the Sellers shall still receive, after Buyers'
deduction, such monies as it requires to deliver to the Government of the
Republic of Kazakhstan in respect of royalty due under the terms of the
Contract.
17.7 In the event that any provision of this Agreement is declared to be
illegal, invalid or otherwise unenforceable, this Agreement shall terminate
forthwith without obligation on either Party to pay any compensation in
respect of such termination.
17.8 Each Party acknowledges and agrees to the tape or electronic recording of
conversations between them pursuant to this Agreement, whether by one or
other or both of them, and that any such recordings may be submitted in
evidence in any proceedings relating to the agreement. Each Party further
agrees to deliver up a copy or transcript of any such recording retained by
it upon the written request of the other Party.
<PAGE>
17.9 All exchange of correspondence between the Parties shall be in English.
17.10This Contract shall be signed in three originals in the Russian language
and three originals in the English language, the English language version
shall be the authoritative text.
17.11This Agreement does not confer rights or remedies upon any person other
than Sellers and Buyers.
ARTICLE 18: GOVERNING LAW AND ARBITRATION
18.1 The proper law of this agreement is English Law and English Law shall be
used for interpreting the agreement and for resolving all claims or
disputes arising out of or in connection with the agreement (whether based
in contract in tort or on any other legal doctrine). Any such claim or
dispute not settled by negotiation shall be settled by arbitration in
London before a single arbitrator agreed upon by both parties or if not so
agreed appointed in accordance with the Arbitration Act 1996 as amended
from time to time. The arbitration shall be conducted in English, in
accordance with the provisions of the Arbitration Act 1996 as amended from
time to time, the seat of the arbitration shall be England and the
arbitration award shall be final and binding without appeal to the Courts.
18.2 Sellers hereby appoint Law Debenture Corporation PLC of Princes House,
Gresham Street, London EC2 as their agents in London for the service of
process to accept service of process on their behalf in connection with
proceedings in the English Courts. Sellers may only dismiss their process
agents or change the process agent with the prior consent of Buyers (which
shall not be unreasonably withheld or delayed).
18.3 The UN Convention on Contracts for the International Sale of Goods (1980)
shall not apply.
PART 2
TERMS FOR NOMINATIONS REQUIRING DELIVERY ON
A FOB NOVOROSSIISK; FOB ODESSA, FOB VENTSPILS OR FOB CPC TERMINAL BASIS
ARTICLE A: MEASUREMENT, SAMPLING AND TESTING
A.1 The quantity and quality of each delivery of REBCO, Karakuduk Crude Oil or
CPC Blend (as the case may be) shall be determined by measurement, sampling
and testing in the manner customary at the loading port and shall include
testing that enables a quantity net of BS&W to be calculated. Sellers shall
prepare and sign certificates as to the quantity and quality of the oil
loaded upon completion of loading of the cargo. Sellers shall advise Buyers
by telex, cable or facsimile of the quantity and quality recorded on such
certificates as soon as possible after completion of loading of the cargo.
A.2 The results of measurement, sampling and testing shall, for the purposes of
the agreement, be treated as conclusive as to the quantity and quality
loaded, however, the conclusiveness of the results so far as they relate to
the quantity and quality loaded may be displaced to the extent that it can
be shown that the results are incorrect.
A.3 Buyers may appoint a representative acceptable to Sellers to assist in the
supervision of and to inspect the loading of each cargo. If such
representative is appointed the quantity and quality of the REBCO,
Karakuduk Crude Oil or CPC Blend (as the case may be) as jointly
ascertained by Buyers' representative and Sellers' representative shall be
the quantity and quality for the purpose of the certificate(s). If any
difference arises between Buyers' representative and Sellers with regard to
the loaded quantity and quality, it shall be settled by an expert appointed
under Article 16 of Part 1. The decision of such expert shall
<PAGE>
be final and binding upon both Buyers and Sellers; but pending such
decision, the quantity and quality as ascertained by Sellers'
representative shall be used for the purpose of the telex, cable or
facsimile referred to in Article A.1 of this Part 2.
Unless otherwise specifically agreed, all costs incurred by Buyers in
respect of their representative shall be borne by Buyers and any delays
occasioned by such inspection resulting in demurrage at the loading port
shall be for the sole account of Buyers.
A.4 A sufficient quantity of the relevant representative samples shall be
correctly taken at each loading port and kept in accordance with
internationally recognised methodology and practice.
ARTICLE B: RISK AND PROPERTY
B.1 The risk and property in the REBCO, Karakuduk Crude Oil or CPC Blend (as
the case may be) supplied pursuant to this Part 2 of the Agreement shall
pass to Buyers at the loading port as the REBCO, Karakuduk Crude Oil or CPC
Blend (as the case may be) passes the loading vessel's permanent hose
connection.
B.2 Any loss of or damage to the REBCO, Karakuduk Crude Oil or CPC Blend (as
the case may be) during loading, if caused by the vessel or her officers or
crew, shall be for the account of Buyers.
ARTICLE C: PAYMENT
C.1 Payment in respect of each Nomination shall be made by Buyers to Sellers
against presentation of the following documents:
i. full set of clean original Bills of Lading; and
ii. invoice complying with the requirements of this Article C,
within thirty (30) days after Bill of Lading date (Bill of Lading date
equals day zero) provided however that if any or all of the required
documents are not available at the time payment is due hereunder Buyers
shall pay against Sellers' Letter of Indemnity (in the form set out in
Attachment 3) for the missing documents.
C.2 Sellers' invoice shall be based on quantities determined in accordance with
Article A of this Part 2. Where the pricing terms for the oil to be
supplied hereunder do not allow a final invoice to be despatched in time
for payment to be made by the due date, Sellers may invoice Buyers on a
provisional basis. A final invoice will be despatched to Buyers by Sellers
as soon as is practical thereafter. Any resultant additional payment will
be due immediately by Buyers to Sellers. Any resultant overpayment will be
immediately refunded by Sellers to Buyers.
C.3 Unless otherwise agreed the payment of any other costs, expenses or charges
which arise under the terms of the agreement shall be made against
presentation of Sellers' invoice and shall be for immediate settlement by
Buyers on or by the date advised thereon.
ARTICLE D: TAXES, DUTIES AND IMPOSTS
D.1 All taxes, duties, levies or other imposts (other than those levied on the
vessel) charged in respect of any REBCO, Karakuduk Crude Oil or CPC Blend
(as the case may be) supplied pursuant to this Part 2 of this Agreement in
respect of the period prior to title to it passing to Buyers whether in its
country of origin or in any country through which it is transported or is
loaded onto Buyers' vessel shall be for the account of Sellers and all
taxes, duties, levies or other imposts charged in respect of any REBCO,
Karakuduk Crude Oil or CPC Blend (as the case may be) supplied pursuant to
this Part 2 of this Agreement in respect of the period after title passes
to Buyers shall be for the account of Buyers.
<PAGE>
ARTICLE E: VESSEL NOMINATION
E.1 Unless otherwise agreed, in respect of any Nomination, Buyers shall at
least five (5) days before the first day of the agreed loading date range
notify Sellers by telex of the name and summer deadweight tonnage of the
vessel to be used and the expected date of that vessel's arrival at the
loading port, and shall provide Sellers with any other vessel details
necessary for the purpose of implementing the agreement. Sellers shall give
notice accepting or rejecting any vessel nomination within one (1) London
working day after receipt of such nomination, but shall not reject any such
nomination unreasonably. In case of rejection, Buyers shall, as soon as
possible, nominate to Sellers an alternative vessel for Sellers' prompt
acceptance or rejection, and, in the case of the latter, the parties shall
negotiate a mutually acceptable nomination.
Buyers' nomination shall be consistent with the loading port authority
requirements and shall include, but shall not be limited to, the vessel's
name, flag, crew nationality, capacity, length, beam, summer deadweight and
draught together with the quantity of REBCO, Karakuduk Crude Oil or CPC
Blend (as the case may be) to be loaded. If any of this detail is unknown
at the time of nomination then such missing detail should be advised no
later than seven days prior to the first day of the agreed loading range.
E.2 Buyers may, or if necessary to perform their obligations hereunder must,
with Sellers' prior agreement, substitute any vessel by another vessel
which is similar in all material respects to the vessel so replaced. Buyers
may also, with Sellers' prior agreement and by giving Sellers reasonable
notice, amend in other respects any vessel nomination or series of vessel
nominations. If such amendment is rejected by Sellers, the parties shall
negotiate a mutually acceptable alternative vessel nomination. Buyers shall
not, unless otherwise agreed, be relieved of its responsibility to perform
the agreed loading.
E.3 Buyers hereby warrant and undertake that:-
i. they are familiar with the latest vessel size restrictions,
including but not limited to, deadweight, draught, beam and
overall length limitations of the loading port and will not
nominate a vessel exceeding such limitations;
ii. they are familiar with, and shall instruct the vessel to comply
with, all applicable regulations in force at the loading port,
including, but without limitation, those relating to fires on
board vessels; and
iii. they shall instruct each vessel nominated hereunder, at the time
of loading:
(a) to comply with all applicable rules, regulations and
directions of governmental, local and port authorities (and
of the loading terminal) and shall conform in all respects
to all relevant international regulations and agreements;
(b) to have hull, machinery, boilers, tanks, equipment and
facilities which are in good order and condition, in every
way fit for the service required and fit to load and carry
the cargo specified; and
(c) have a full and efficient complement of master, officers and
crew.
E.4 Buyers warrant and undertake that (for each vessel nominated to carry a
cargo) the vessel is owned or demise chartered by a member of the
International Tanker Owners Pollution Federation Ltd (ITOPF).
Buyers shall exercise reasonable efforts to ensure that:
i. the vessel carries on board a valid certificate of insurance as
described in the 1969 Civil Liability Convention for Oil Pollution
Damage and the International Convention on Civil Liability for Oil
Pollution Damage 1992;
<PAGE>
ii. the vessel has in place insurance cover for oil pollution no less in
scope and amounts than the highest available under the Rules of P&I
Clubs entered into the International Group of P&I Clubs.
E.5 Buyers shall exercise reasonable efforts to ensure that any vessel
nominated to Sellers has on board a valid safety management certificate for
the vessel issued pursuant to the International Safety Management (ISM)
code and a certified copy of the vessel's manager's document of compliance
issued pursuant to the SOLAS convention 1974 as amended.
ARTICLE F: LOADING CONDITIONS
F.1 Buyers shall give Sellers as far in advance as Sellers require full
instructions consistent with the loading port regulations regarding the
loading of each vessel and the making up and destination of documentation
covering the cargo(s). Sellers shall use reasonable endeavours to arrange
for such instructions to be carried out but they shall not be obliged to
arrange for an instruction to be carried out which is inconsistent with any
provision, express or implied, in the agreement.
F.2 Buyers shall arrange for each vessel nominated by Buyers to cable or telex
to the agent of Sellers and to the agent of the ship owner at the port of
loading the vessel's expected time of arrival at the port of loading at
least 96 hours prior to that time specifying deadweight, flag, and draught
of the tanker, volume of clean and dirty ballast on board. Buyers shall
instruct the vessel shall also give to Sellers notice of its estimated time
of arrival at the port of loading 48, 24 and 12 hours prior to arrival.
F.3 Sellers shall provide or shall cause to be provided, free of charge, a
berth or berths which the vessel can safely reach and leave and at which
she can lie and load always safely afloat. All port costs, including the
expense, if any, of shifting berth at the loading port (unless such shift
is for Sellers' purposes), shall be for Buyers' account.
F.4 Sellers shall at all material times and at no expense to Buyers provide and
maintain or cause to be provided and maintained in good working order all
necessary flexible hoses, connections, pipelines, tankage facilities and
other accommodation for such loading of the vessel.
F.5 The time allowed for loading each cargo under the agreement shall be thirty
six (36) running hours (weather permitting and Sundays and holidays
included) and shall begin to run at each loading port either:-
i. at the expiry of six (6) hours after notice of readiness to load has
been received by Sellers, or by any other party nominated by Sellers,
from the Master or his representative (which notice of readiness may
be tendered only after the vessel has arrived within the customary
anchorage or waiting place of the port or, if the vessel moves
directly to the berth, when the vessel is securely moored to the
loading berth); or
ii. if the vessel moves directly to the berth, when the vessel is securely
moored at the loading berth,
whichever occurs first, except that:-
(a) if the vessel arrives before the first day of the agreed loading
date range nominated and accepted in accordance with the
provisions of Article 7 of Part 1, laytime shall not commence
until 06.00 hours on the first day of the agreed loading date
range or the time loading commences whichever is the earlier; or
(b) if the vessel arrives after the last day of the agreed loading
date range nominated and accepted in accordance with the
provisions of Article 7 of Part 1, laytime shall commence at the
time loading commences.
F.6 Laytime shall cease on disconnection of cargo hoses on completion of
loading.
F.7 Time shall not count against laytime, or, if the vessel is on demurrage,
for demurrage when spent or lost:-
<PAGE>
i. on an inward passage moving from her waiting place to the loading
place nominated by Sellers; or
ii. whilst the vessel is handling or preparing to handle ballast or
bunkers, unless this is carried out concurrent with loading or other
normal cargo operations such that no loss of time is involved, or is
carried out to comply with shore restrictions; or
iii. by any delay due to fault, failure or inefficiency of the vessel; or
iv. awaiting tide, tug boats, pilot, daylight, immigration/customs or
pratique, unless any or all of these delays are occasioned by shifting
berth for Sellers' account as defined in Article F.3 of this Part 2;
or
v. as a result of strike, lockout, stoppage or restraint of labour.
F.8 If the laytime allowance as provided under Article F.5 of this Part 2 is
exceeded Sellers shall, except as hereinafter provided in this Clause, pay
to Buyers demurrage for all such excess time at the full rate specified in
Article F.9 of this Part 2. If however all or part of such demurrage is
incurred due to fire or explosion or by breakdown of machinery or equipment
at the port of loading in or about the loading terminal or berth (not being
first caused by the negligence or the wilful act or omission of Sellers or
the terminal operator, their servants or agents), or arises or results from
act of God, act of war, riot, civil commotion, or arrest or restraint of
princes, rulers or peoples, the rate of demurrage shall be reduced to one
half for the period of such demurrage or part thereof.
F.9 If in respect of any Nomination, the laytime allowance at the port of
loading is exceeded and demurrage incurred, Sellers shall pay demurrage to
Buyers at the demurrage rate established by reference to the LTBP award for
the particular voyage in question.
F.10 If the nominated vessel is loaded by Sellers and other suppliers at the
same port, demurrage will be divided in proportion to quantity of goods
covered by the bill of lading of each supplier provided that if any
demurrage is caused by only one of the suppliers demurrage will be totally
for that party's account.
F.11 Any claim for demurrage must be sent by Buyers to Sellers with full
supporting documentation within 60 days after the date of the bill of
lading (or if all documents are not available to Buyers, Buyers may submit
the claim with an estimate of amount), otherwise claims will be deemed to
have been waived.
F.12 Buyers may deduct and set-off the amount of any demurrage agreed with
Sellers or other agreed costs and expenses due to Buyers from any amount
due to Sellers from Buyers provided that if no such deduction and set-off
is made, such demurrage shall be immediately due and payable and shall be
paid forthwith by Sellers to Buyers in Dollars free of charges and without
asserting at the time for payment any set-off, counterclaim or right to
withhold whatsoever in New York to Buyers' account number 9492604708 with
Chase Manhattan Bank, New York . For Further Credit to STASCO USD Receipt
Account. SWIFT address CHASUS33 or CHIPS Participant Number 0002 or Fed
Wire Routing Number 021000021 (or to such other bank account as may be
advised by Buyers to Sellers from time to time ) quoting Buyer's invoice
number and Sellers' name.
F.13 Sellers agree to reimburse Buyers for the cost of any time lost and for any
bunkers used on behalf of Buyers to raise the temperature above or reduce
the temperature below the temperature at which cargo was loaded in order to
meet the temperature range agreed separately between Sellers and Buyers
provided that:
i. the vessel loading such cargo arrives at the loading port ready to
load during the agreed loading date range and failure to meet
requirements of the temperature range is not due to fault or failure
of the vessel or to suspension of loading for vessel's purposes; or
<PAGE>
ii the vessel loading such cargo arrives at the loading port ready to
load during the agreed loading date range, and Sellers elect to load
the vessel with oil at a temperature not within the specified or
agreed temperature range.
In respect of each claim, Buyers shall furnish Sellers with reasonable
evidence of the costs which have been incurred.
ARTICLE G: CLAIMS
G.1 Any claim in respect of a shortage in quantity or defect in the quality of
oil will only be considered by Sellers if notice in writing of such claim
is received by Sellers within one hundred and twenty (120) days after the
date of the Bill of Lading (Bill of Lading date equals day zero) for the
Nomination and such notice is followed by a fully documented claim to be
received by Sellers within one hundred and eighty (180) days after the date
of the Bill of Lading (Bill of Lading date equals day zero). If Buyers fail
to give notice of or to submit any such claim within the time limits,
Buyers' claim is deemed to be waived and any liability on the part of
Sellers extinguished.
ARTICLE H. TERMS AND CONDITIONS
H.1. Incoterms 1990 are incorporated into and form part of this Part 2. In the
event of any conflict or inconsistency between the terms set out in this
Agreement and the Incoterms 1990, the terms set out in this Agreement shall
prevail.
PART 3
TERMS FOR NOMINATIONS REQUIRING DELIVERY ON
A DAF BUDKOVCE; DAF FENYESHLITKE OR DAF ADAMOVO BASIS
ARTICLE A: DELIVERY
A.1 Delivery of REBCO made in respect of any Nomination shall be made in pipe
at the Delivery Point specified in the Nomination upon the duly completed
DAA for that REBCO (being all or part of the quantity in the Nomination)
being delivered by the Delivering Party to the Receiving Party.
ARTICLE B: MEASUREMENT, SAMPLING AND TESTING
B.1 In respect of each Nomination the quantity and quality of the REBCO
delivered shall be determined by measurement, sampling and testing in the
manner customary at the Delivery Point which shall include testing that
enables a quantity net of BS&W to be calculated. The quantity and quality
so determined shall be stated on the DAA for that REBCO and the results of
measurement, sampling and testing obtained at the Delivery Point in
accordance with this Clause shall be treated, in the absence of fraud or
manifest error, as conclusive and binding as to the quantity and quality of
the oil delivered.
ARTICLE C: RISK AND PROPERTY
C.1 Risk and property in REBCO delivered in respect of any Nomination shall
pass from Sellers to Buyers at the Delivery Point stated in that Nomination
at [24:00 hours local time] on the date stated upon the duly completed DAA
for that REBCO
C.2 Sellers hereby warrant to Buyers that at the time property in the REBCO
delivered under the Agreement passes to Buyers, Sellers have the right to
sell that crude oil to Buyers and Sellers have unencumbered title to that
crude oil. Without prejudice to any other remedy available to Buyers,
Sellers hereby irrevocably and unconditionally undertake to indemnify
Buyers and hold Buyers harmless against any and all claims made against
Buyers by anyone and all loss, costs (including but not limited to legal
costs), damages, and expenses which Buyers may suffer, incur or be put to
as a result of a breach of the warranty set out in this Article C.2.
<PAGE>
ARTICLE D: PAYMENT
D.1 In respect of each Nomination:
i. Sellers' invoice shall be for the quantity of REBCO net of BS&W as
stated on the DAA(s) for that Nomination and the total amount payable
shall be stated in Dollars and calculated on the basis of the price
per Barrel and applicable discount advised by Buyers pursuant to
Article 8.1 of Part 1;
ii. payment for REBCO delivered shall be made by Buyers to Sellers on the
day that Buyers have agreed with their buyers of the REBCO delivered
under that Nomination, or the day that falls 45 days after the date of
the original DAA for that Nomination (whichever is the earlier) as
being the payment date against presentation by Sellers of Sellers'
commercial invoice (telex invoice acceptable) complying with the
requirements of Article D.1i of this Part 3 and the original DAA(s)
for that Nomination complying with the requirements set out below
together with the delivery of any other delivery documents as
stipulated in the instructions issued by the Buyers prior to delivery.
In respect of each original DAA presented by Sellers, in order for
Buyers to be obliged to make payment against such document, the DAA
must:
i. be in one of the formats set out in Attachment 5;
ii. have a serial number;
iii. state the date of pumping;
iv. state the number of Routing Cable (Marshrutnoe Poruchenie);
v. state the number of the Customs Declaration for the oil;
vi. state the number of the Measuring Station;
vii. state the name of the Delivering Party Representative;
viii. state the name of the Receiving Party Representative;
ix. state the owner of REBCO as being Sellers;
x. state the exporter of the REBCO as being [either] Sellers [or Kazakh
Oil];
xi. state the chain of buyers starting with Buyers and listing every buyer
in the chain and finishing with the final receiver as advised by
Buyers pursuant to Article 7.4.ii.(a) of Part 1;
xii. states the quality as being REBCO conforming with the specification
set out in Attachment 1A;
xiii. states the gross and net quantity of REBCO in tonnes;
xiv. bear the signatures and legible impressions of the stamps of
Delivering Party's Representative and Receiving Party's
Representative.
D.2 Buyers may deduct and set-off the amount of any and all costs and expenses
incurred by Buyers and agreed with Sellers in connection with the delivery
of a Nomination due to the Sellers' performance, non-performance or
mis-performance under this Agreement from any amount due to Sellers
provided that if no such deduction and set-off is made, all such costs and
expenses claimed by Buyers shall be immediately due and payable and shall
be paid forthwith by Sellers to Buyers in Dollars free of charges and
without asserting at the time for payment any set-off, counterclaim or
right to withhold whatsoever in New York to Buyers' account number
9492604708 with Chase Manhattan Bank, New York . For Further Credit to
STASCO USD Receipt Account. SWIFT address CHASUS33 or CHIPS Participant
Number 0002 or Fed Wire Routing Number 021000021 (or to such other bank
account as may be advised by Buyers to Sellers from time to time ) quoting
Buyers' invoice number and Sellers' name.
<PAGE>
ARTICLE E: TAXES AND DUTIES
E.1 All taxes, duties, levies or other imposts charged in respect of any REBCO
supplied pursuant to this Part 3 of this Agreement prior to title to it
passing to Buyers whether in its country of origin or in any country
through which it is transported or is delivered to Buyers shall be for the
account of Sellers and all taxes, duties, levies or other imposts charged
in respect of any REBCO supplied pursuant to this Part 3 of this Agreement
in respect of the period after title to it passes to Buyers shall be for
the account of Buyers.
ARTICLE F: CLAIMS
F.1 Any claim in respect of a shortage in quantity or defect in the quality of
oil will only be considered by Sellers if notice in writing of such claim
is received by Sellers within one hundred and twenty (120) days after the
date of the DAA or last DAA for the particular Nomination and such notice
is followed by a fully documented claim to be received by Sellers within
one hundred and eighty (180) days after the date of the DAA or last DAA for
the particular Nomination. If Buyers fail to give notice of or to submit
any such claim within the time limits, Buyers' claim is deemed to be waived
and any liability on the part of Sellers extinguished.
ARTICLE G: TERMS AND CONDITIONS
G.1 Incoterms 1990 are incorporated into and form part of this Part 3. In the
event of any conflict or inconsistency between the terms set out in this
Agreement and the Incoterms 1990, the terms set out in this Agreement shall
prevail.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed
by their duly authorised representatives on the dates shown below.
SIGNED
for and on behalf of
SHELL INTERNATIONAL TRADING AND SHIPPING COMPANY LIMITED
as agents for
SHELL TRADING INTERNATIONAL LIMITED
By :
-------------------------------------------
Name :
-------------------------------------------
Title :
-------------------------------------------
Date :
-------------------------------------------
SIGNED
for and on behalf of
CLOSED TYPE JSC KARAKUDUKMUNAY
By :
------------------------------------------
Name :
------------------------------------------
Title :
------------------------------------------
Date :
------------------------------------------
<PAGE>
By :
------------------------------------------
Name :
------------------------------------------
Title :
------------------------------------------
<PAGE>
ATTACHMENT 1A
Specification for Russian Export Blend Crude Oil
Density at 20 degr. C, g/cm cub., mx 0.8700
Sulphur Content, pct, weight max. 1.8
Paraffin content, pct, weight max. 6.0
Water and Sediments content, pct, max. (vol) 1.2
Distillation, pct, volume:
up to 200 degree C . 21
up to 300 degree C . 41
up to 350 degree C 50
Salts content, mg/l, . 100
ATTACHMENT 1B
Specification of Karakuduk Crude Oil
Density at 15 degr. C, KG/L 0.816
API gravity 60 degr. F 41.9
KIN.VISC. at 40 degr. C MM2/S 6.61
KIN.VISC. at 60 degr. C MM2/S 3.55
Sulphur content % M/M 0.04
Reid vapour pressure PSI/KPA 4.3/30
Pour point ASTM(MIN/MAX) degr. C 15/27
Exist H2S content MG/KG less 1
Potent H2S content MG/KG less1
Potent HCL content MG/KG 9
Calc gross cal value KJ/KG 46040
<PAGE>
ATTACHMENT 2
Nomination Confirmation
"Nomination Confirmation
To: STASCO
London
Attention: [ ]
We are please to make the following Nomination Confirmation pursuant to Article
7.3 of the Crude Oil Sale and Purchase Agreement dated [ ] for the month of [ ]:
1. Total Quantities to be supplied:
A REBCO: [ ] tonnes
A Karakuduk Crude Oil: [ ] tonnes
A CPC Blend: [ ] tonnes
1. Nominations:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Nomination Grade of crude oil to be Delivery Point Quantity Delivery Period
Ref. delivered
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Regards,
[ ]"
</TABLE>
<PAGE>
ATTACHMENT 3
Letter of Indemnity
"LETTER OF INDEMNITY
FROM: [ ]
TO: SHELL INTERNATIONAL TRADING AND SHIPPING COMPANY LIMITED
(For and on behalf of Shell Trading International Limited)
IN CONSIDERATION of your paying for the cargo of..............U.S. Barrels /
Metric Tons of (type of crude oil and/or product).............which sailed from
(Port) ............on (vessel and date) loaded with such cargo when the
(document) ................for such cargo has not been delivered to you at the
time payment is due under our contract dated................. we hereby warrant
to you that at the time property passed as specified under the terms of the
above contract we had the right to sell the said cargo to you and we had
unencumbered title to the said cargo.
We hereby irrevocably and unconditionally undertake to indemnify you and hold
you harmless against any claim made against you by anyone as a result of breach
by us of any of our warranties as set out above, and all losses, costs
(including, but not limited to costs as between attorney or solicitor and own
client), damages, and expenses which you may suffer, incur or be put to which
are not too remote as a result of our failure to deliver the above document(s)
in accordance with the contract.
This indemnity shall terminate on delivery by us of the aforesaid document(s)
and their acceptance by you.
This indemnity shall be governed by and construed in accordance with English law
and all disputes, controversies or claims arising out of or in relation to this
indemnity or the breach, termination or validity hereof shall be decided by the
English courts.
SIGNED for
[ ]
By : ...................................
Name : ...................................
Title : ...................................
Date : ...................................
<PAGE>
ATTACHMENT 4
Service Agreement.
Dated: 1St November,1999
Commercial Services Agreement
Shell Trading International Limited
and
Closed Type JSC Karakudukmunay
<PAGE>
THIS COMMERCIAL SERVICES AGREEMENT is made the 1st day of November, 1999
BETWEEN:
(1) SHELL TRADING INTERNATIONAL LIMITED, a company incorporated under the laws
of England and having its principal office at Shell Centre London SE1 7NA
("STIL"), acting through its agent SHELL INTERNATIONAL TRADING AND SHIPPING
COMPANY LIMITED, a company incorporated under the laws of England, and
having its principal office at Shell-Mex House, Strand, London WC2R OZA
(hereinafter referred to as "STASCO"). and
(2) CLOSED TYPE JSC KARAKUDUKMUNAY a company incorporated under the laws of the
Republic of Kazakhstan,and having its principal office at Microregion 3,
Building 82, Aktau 466200 Kazakhstan (hereinafter referred to as "KKM").
(STASCO and KKM may be referred to herein individually as a "Party" and
collectively as the "Parties".)
WHEREAS:
A. KKM is the lawful holder of the Petroleum Licence No. MG #249(Oil) dated 25
June 1995 (as subsequently amended) granted to KKM by the Government of the
Republic of Kazakhstan.
B. STASCO provides to its Affiliates certain services relating to the sale and
marketing of crude oils and KKM wishes to receive similar services more
particularly described herein in relation to its business activities
undertaken pursuant to the Petroleum Licence.
C. KKM and STIL, acting through its agent, STASCO, are parties to a crude oil
sale and purchase agreement even dated herewith regarding the sale and
purchase of crude oil being, or being equivalent to, the total quantity of
exportable Karakuduk Crude Oil (the "Crude Oil Sale and Purchase
Agreement") and the Crude Oil Sale and Purchase Agreement shall only become
effective, inter alia, upon the execution and delivery of this agreement.
THEREFORE IT IS AGREED AS FOLLOWS:-
ARTICLE 1 - DEFINITIONS
1.1 In this Agreement and the recitals hereto, save as set out in Article 1.2
below, or unless the context otherwise requires, any term which is defined
in the Crude Oil Sale and Purchase Agreement shall have the same meaning
when used herein as is ascribed to it in the Crude Oil Sale and Purchase
Agreement.
1.2 The following terms shall have the meaning set out below, unless the
context otherwise requires:
"Agreement" means this agreement.
"Confidential Information" means any knowledge, data and information at any
time disclosed to one Party ('the receiving Party') by or on behalf of the
other Party ('the disclosing Party') in writing, in drawings, in computer
programs, or in any other way, or acquired directly or indirectly by the
receiving Party from the disclosing Party.
"Crude Oil Sale and Purchase Agreement" shall have the meaning ascribed to
it in Recital C hereto.
"Effective Date" shall have the meaning ascribed to it in Article 2.1.
"Fee" shall have the meaning ascribed to it in Article 5.1.
"First Annual Fee" shall have the meaning ascribed to it in Article 5.1.
"Gross Negligence or Wilful Misconduct" means any act or omission done or
omitted to be done intentionally or with deliberate or reckless disregard
for the reasonably foreseeable consequences of such act or omission, but
does not include any good faith error of judgement or mistake.
"Services" shall have the meaning set out in Article 4.1.
1.3 In this Agreement, unless the context otherwise requires:
(a) headings are for convenience only and do not affect the interpretation
of this Agreement;
(b) an expression importing a natural person includes any company,
partnership, trust, joint venture, association, corporation or other
body corporate and vice versa;
<PAGE>
(c) references to Articles, unless the context otherwise requires, are
references to articles of this Agreement;
(d) except as otherwise provided, a reference to a document includes an
amendment or supplement to, or replacement or novation of, that
document, but disregarding any amendment, supplement, replacement or
novation made in breach of this Agreement;
(e) a reference to a Party to this Agreement and to any other document
includes that Party's successors and permitted assigns;
(f) words importing the singular include the plural and vice versa;
(g) the word "including" means "including without limitation";
(h) a "business day" means a day (other than Saturday or Sunday) on which
banks are open for ordinary banking business in London;
(i) a "year" means a calendar year, a "quarter" means a calendar quarter
and a "month" means a calendar month.
ARTICLE 2: - CONDITIONS PRECEDENT
2.1 The provisions of this Agreement other than this Article 2.1, Article 5.1
and Article 6.1 shall only come into effect on the date (the "Effective
Date") when:
(a) disbursement of the first advance under the Loan Agreement shall have
occurred;
(b) the Crude Oil Sale and Purchase Agreement shall have been executed and
delivered by the parties thereto; and
(c) the payment required by Article 5.1 shall have been made by KKM to
STASCO in accordance with Article 6.1
whereupon this Agreement shall have full force and effect. In the event
that the Effective Date does not occur prior to 31st January 2000, this
Agreement may be terminated forthwith by Buyers with immediate effect.
ARTICLE 3: - TERM OF AGREEMENT
3.1 Subject to Articles 2.1 and 10, this Agreement shall be effective for the
duration of the Crude Oil Sale and Purchase Agreement and subject to
earlier termination pursuant to Articles 2.1 and 10 shall only terminate
upon the termination of the said Crude Oil Sale and Purchase Agreement.
3.2 Termination of this Agreement pursuant to Article 3.1 shall not create any
obligation on either Party to pay any compensation in respect of such
termination.
ARTICLE 4: - SERVICES
4.1 Subject to Article 4.4, STASCO shall provide the services set out in
Article 4.2 (the "Services") to KKM.
4.2 The Services shall comprise:
(a) The provision of information regarding international crude oil markets
to assist KKM gain a better understanding of international crude oil
markets and how REBCO, Karakuduk Crude Oil or CPC Blend (as the case
may be) is placed against the competitors. This information may either
be of a general nature or specific to a particular area or market
environment.
(b) The preparation and delivery of presentations (not exceeding two per
year) at the request of KKM on international crude oil markets to the
government departments, the national oil company and other official
entities in the Republic of Kazakhstan.
(c) The provision (to the extent STASCO is free to disclose the same) of
information pertaining to meetings and contacts with members of the
oil industry around OPEC meetings.
(d) If requested by KKM, the provision of advice to KKM on ways and means
to upgrade crude oil deliverability (cargo size, timing) by KKM of
crude oil to be supplied under the Crude Oil Sale and Purchase
Agreement.
(e) If requested by KKM, the provision of assistance to obtain access to
public country data (including competitor information, if available)
and crude evaluation of the different crudes produced in the Republic
of Kazakhstan.
<PAGE>
(f) If requested by KKM, the review of crudes oil grades that compete with
REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be) and their
pricing range vis-a-vis REBCO, Karakuduk Crude Oil or CPC Blend (as
the case may be).
(g) If requested, the provision of information to independent market
assessors (e.g. Platts, Argus) regarding the true and fair value of
REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be).
(h) The provision of the services of a "non-dedicated" account manager to
assist with the marketing and sale of Karakuduk Crude Oil to such
extent as STASCO considers to be appropriate and reasonable which
shall include not more than two visits per year to KKM in the Republic
of Kazakhstan by the STASCO account manager (the total aggregate
duration of which shall not exceed six working days), save in the
first year of this Agreement in which no more than five visits shall
be made to KKM in the Republic of Kazakhstan by the STASCO account
manager.
(i) The provision (to the extent STASCO is free to disclose the same) of
information pertaining to meetings and contacts made at international
oil industry meetings (e.g. IP, API, APEC) in so far as it relates to
the marketing of REBCO, Karakuduk Crude Oil or CPC Blend (as the case
may be).
4.3 The Services may be varied by the mutual agreement of the parties.
4.4 STASCO shall use its reasonable endeavours to fulfil its obligations and
discharge its responsibilities hereunder with all due care and in
accordance with good commercial practice but always subject to the
provisions of Article 9.
ARTICLE 5: - REMUNERATION AND EXPENSES
5.1 In consideration of the provision of the Services, KKM shall pay an annual
fee (the "Fee") to STASCO of $100,000 in respect of the period from the
date hereof until 31st December 2000 (the "First Annual Fee") and
thereafter $50,000 in respect of each year (or part thereof) during the
term of this Agreement.
5.2 Save as set out in Article 5.1, all costs and expenses incurred in relation
to the provision of the Services shall be solely for the account of STASCO.
ARTICLE 6: - TERMS OF PAYMENT
6.1 KKM shall pay the First Annual Fee upon the execution of this Agreement and
the Fee in respect of each year after the year 2000, shall be paid by 31
December each year for the following year.
6.2 STASCO shall invoice KKM for the First Annual Fee and the Fee for each year
including and after the year 2000 and any value added tax payable thereon
and KKM shall pay each invoice free of charges and without asserting at the
time for payment, any set-off, counterclaim or right to withhold
whatsoever, in Dollars in New York to STASCO's account number 9492604708
with Chase Manhattan Bank, New York . For Further Credit to STASCO USD
Receipt Account. SWIFT address CHASUS33 or CHIPS Participant Number 0002 or
Fed Wire Routing Number 021000021 (or to such other bank account as may be
advised by STASCO to KKM from time to time) quoting STASCO's invoice number
and KKM's name.
6.3 All payment under this Agreement will be made without any deduction or
withholding for or on account of any tax, levies or impost whatsoever
unless such deduction or withholding is required by any applicable law in
which case KKM shall pay in addition to the payment to which STASCO are
otherwise entitled under this Agreement such additional amount as is
necessary to ensure that the net amount actually received by STASCO will
equal the full amount that STASCO would have received had no such deduction
or withholding been required.
6.4 Unless otherwise agreed in writing any amount due from KKM under this
Agreement which is not paid by the due date shall bear simple interest
accruing on a daily basis commencing on the day immediately after the date
on which it became due up to and including the date of payment at the rate
calculated for each Month on the basis of an annual rate (360 day year
basis) of three percent plus the one Month London Interbank Offered Rate as
<PAGE>
quoted by the National Westminster Bank PLC at the 11.00 a.m. fixing on the
first London banking day for each Month in which the amount due from KKM
remains unpaid. The foregoing shall not be construed as an indication of
any willingness on the part of STASCO to provide extended credit as a
matter of course and shall be without prejudice to any rights and remedies
which STASCO may have under this agreement or otherwise.
6.5 Where the due day for payment falls on a Saturday or on a weekday other
than Monday which is not a banking day in New York or at such other place
as may be designated by STASCO for payment, then any such payment shall be
made on the nearest preceding banking day. Where the last day for payment
falls on a Sunday or a Monday which is not a banking day in New York or at
such other place so designated, then any such payment shall be made on the
next following banking day.
ARTICLE 7: - RELATIONSHIP BETWEEN THE PARTIES
7.1 In performing its obligations under this Agreement STASCO is an independent
contractor to KKM. STASCO shall make it clear in all dealings that it is
not an agent of KKM and unless expressly authorised in writing by KKM,
STASCO shall have no authority whatsoever to make any legally binding
commitment on behalf of KKM.
7.2 Nothing herein shall be construed as creating a partnership or trust or an
agency between KKM and STASCO.
7.4 Nothing in this Agreement shall prevent STASCO from providing services of a
similar nature as the Services to any other party whether or not an
Affiliate of STASCO.
ARTICLE 8: - EXCLUSIVITY AND CONFLICT OF INTERESTS
8.1 During the term of this Agreement, KKM shall not procure services of a
similar or comparable nature to the Services from any of STASCO's major oil
company competitors in the business of international trading of crude oil
and petroleum products.
8.2 Title and access to, copyright and all intellectual property rights to
(including the right to patent any new invention), the right to possession
of and the free right of use of all things created under or arising out of
the Services shall be retained or shall vest immediately in (as the case
may be) STASCO.
ARTICLE 9: - LIABILITY AND INDEMNITY
9.1 Except as provided in Article 9.5, neither STASCO, nor any of its
Affiliates, nor any person appointed by or acting on behalf of STASCO,
shall have any liability to KKM whatsoever (whether or not arising from the
negligence of STASCO, any of its Affiliates or any person appointed by or
acting on behalf of STASCO) for any loss, liability, damages, costs or
expenses whatsoever suffered or incurred by KKM arising out of or connected
with the performance, non-performance or mis-performance of STASCO's
obligations and duties hereunder except in respect of any loss, liability,
damages, costs or expenses suffered or incurred by KKM as a direct result
of STASCO's Gross Negligence or Wilful Misconduct.
9.2 In no case whatsoever shall STASCO be responsible for any indirect, special
or consequential losses or damages, including in respect of loss of
production, loss of profit, business interruption, field shut in or damage
to the Field.
9.3 KKM shall indemnify and hold STASCO, any of its Affiliates, their
respective directors, officers and employees and any person appointed by
or acting on behalf of STASCO harmless against all actions, proceedings,
claims, demands, losses, fines, damages, settlements, expenses and
liabilities whatsoever (including those arising out of or connected with
the negligence of STASCO, any of its Affiliates, their respective
directors, officers and employees and any person appointed by or acting
on behalf of STASCO) suffered or incurred by STASCO, any of their
Affiliates, their respective directors, officers and employees and any
<PAGE>
person appointed by or acting on behalf of STASCO arising out of or
connected with the performance, non-performance or mis-performance of
STASCO's obligations and duties hereunder except (i) in respect of any
such actions, proceeding, claims, demands, losses, fines, damages,
settlements, expenses and liabilities that directly result from STASCO's
Gross Negligence or Wilful Misconduct; and (ii) as provided in Article
9.5.
9.4 For the purpose of obtaining the benefit of this Article 9, STASCO
contracts as agents of or trustees for any of its Affiliates, their
respective directors, officers and employees and any person appointed by or
acting on behalf of STASCO.
9.5 STASCO represents, warrants and covenants that it has all necessary right,
title and authority to provide the Services to KKM, and to deliver to KKM
any information, data and analyses provided or to be provided as a part of
the Services. STASCO shall indemnify and hold harmless KKM, any of its
Affiliates, their respective directors, officers and employees and any
person appointed by or acting on behalf of KKM against any liability
arising out of or connected with any breach of the representation, warranty
and covenant set out in the first sentence of this Article 9.5
ARTICLE 10: - EARLY TERMINATION
10.1 If KKM:
(a) during the term of this Agreement without the written agreement of
STASCO enters into any agreement or understanding with any third party
for the procurement of services of a similar or comparable nature to
the Services from any of STASCO's major oil company competitors in the
business of international trading of crude oil and petroleum products;
(b) fails to pay on written demand by STASCO any amounts that are then due
to STASCO pursuant to this Agreement;
(c) purports to sell, transfer or assign its rights or duties under this
Agreement in breach of Article 13; or
(d) undergoes a Change of Control STASCO may forthwith terminate this
Agreement by serving written notice of termination on KKM.
10.2 If either Party should go into liquidation (other than voluntary
liquidation for the purpose of corporate reconstruction), or if a receiver,
administrator or sequestration of the undertaking and assets (or any part
thereof) of either Party should be appointed, or if either Party should
become bankrupt or insolvent, should enter into a deed of arrangement or a
composition for the benefit of their creditors, or should do or suffer any
equivalent act or thing under any applicable law, the other Party may
terminate the Agreement forthwith by notice to the other Party.
10.3 STASCO may terminate this Agreement forthwith by written notice to KKM if:
(a) the Loan Agreement shall terminate, other than upon payment of all
sums payable thereunder having been duly paid, or Shell Capital
Services Limited through assignment, transfer or otherwise has no
remaining interest in, or is no longer a party to, the Loan Agreement;
or
(b) the Crude Oil Sale and Purchase Agreement shall terminate.
10.4 In the event that all sums payable under the Loan Agreement have been duly
paid, either Party may terminate this Agreement forthwith by serving
written notice on the other Party.
10.5 This Article 10 is not intended to be an exhaustive list of circumstances
in which either Party shall be entitled to terminate this Agreement and is
without prejudice to either Party's other rights of termination under this
Agreement or at law.
10.6 No termination of this Agreement shall prejudice any rights or remedies
under this Agreement relating to any period prior to such termination or
accrued before, at, or in consequence of the termination, or any
proceedings (including arbitration) for determination or enforcement of any
rights or remedies.
<PAGE>
ARTICLE 11: CONFIDENTIALITY
11.1 Subject to the further provisions of this Article 11, each Party shall use
its best efforts to maintain in confidence any Confidential Information
supplied to it pursuant to the terms hereof.
11.2 Notwithstanding Article 11.1, the receiving Party may disclose Confidential
Information if and to the extent:
(a) required by law;
(b) required by any securities exchange or regulatory or governmental body
to which such Party is subject or submits, wherever situated, whether
or not such requirement for information has the force of law;
(c) disclosed to the legal advisers or auditors of such Party provided
that such Party procures that such persons protect such Confidential
Information on the same terms as, and agrees to be bound as if it were
a Party to, this Article 11 or are otherwise bound to maintain the
confidentiality of the Confidential Information by applicable
standards of professional responsibility;
(d) the Confidential Information is already in the public domain through
no fault of such Party;
(e) the disclosing Party has given prior written approval to the
disclosure;
(f) it is disclosed to any Affiliate of the receiving Party provided that
such Party procures that the Affiliate protects such Confidential
Information on the same terms as, and agrees to be bound as if it were
a Party to, this Article 11;
(g) the information was lawfully, validly and properly received by the
receiving Party, whether through any licence or permission granted by
the disclosing Party, or otherwise and disclosure of such information
is permitted pursuant to such licence or permission.
11.3 The receiving Party shall:
(a) procure that Confidential Information is not disclosed to any of its
employees, officers or agents by any persons other than personnel
employed by it or acting on its behalf who are required to have access
to such information in order to enable this Agreement to be carried
into effect;
(b) be liable for and shall indemnify the disclosing Party against any
losses or damages suffered by the disclosing Party arising from any of
the receiving Party's employees, officers and agents to whom such
Confidential Information is or has been disclosed disclosing or using
any such Confidential Information contrary to the requirements of this
Article; and
(c) not at any time make or assist any other person whatsoever to make any
unauthorised disclosure or use of any such Confidential Information
and will procure and ensure that every person who, as its employee,
officer or agent or otherwise, through or from it, acquires or
receives any Confidential Information at any time, shall not make or
assist any other person whomsoever to make any unauthorised disclosure
or use of that information.
11.4 The receiving Party may not use Confidential Information for any purpose
other than in direct connection with the performance of its obligations and
exercise of its rights hereunder or under the Crude Oil Sale and Purchase
Agreement.
11.5 The direct or indirect disclosure by STASCO of any Confidential Information
or other information shall not be construed as granting to KKM any rights
therein or any licence under any patents or industrial property right or
any application for a patent or industrial property right which STASCO or
its Affiliates may now or hereinafter own in any country or under which
STASCO or its Affiliates may hereinafter hold licensing rights.
11.6 The Confidential Information shall remain the property of the disclosing
Party and that party may demand the return thereof at any time upon giving
written notice to the receiving Party. Within 30 days of receipt of such
notice, the receiving Party shall return all of the original Confidential
Information and shall destroy all copies and reproductions (both written
and electronic) in its possession.
<PAGE>
ARTICLE 12: - FORCE MAJEURE
12.1 Except in respect of the obligation to make any payment as required by
this Agreement (which shall not be subject to relief under this Article
12.1), a Party shall not be in breach of this Agreement or liable to the
other Party for any failure to fulfil any obligation under this Agreement
to the extent any fulfilment has been interfered with, hindered, delayed
or prevented by any circumstance whatsoever which is not reasonably
within the control of and is unforeseeable by such Party and if such
Party exercised due diligence.
12.2 The Party affected shall be excused from the performance or punctual
performance, as the case may be, of such obligation for so long as such
circumstance continues to exist. The Party affected shall promptly and at
any rate, within twenty-four (24) hours of the occurrence of the event
notify the other Party of the occurrence of the circumstance and of the
obligation affected.
12.3 No circumstance described in Article 12.1 shall operate to extend the term
of this Agreement.
ARTICLE 13: - ASSIGNMENT
13.1 Subject to Article 13.2, KKM may not sell, transfer or assign its rights or
duties under this Agreement or its interest in this Agreement to any other
person except with the prior written approval of STASCO and any such
purported sale, transfer or assignment without the approval of STASCO shall
be invalid and not binding on STASCO.
13.2 Notwithstanding Article 13.1, KKM may transfer or assign its rights under
or interest in this Agreement to the Lenders by way of a security interest
in this Agreement for the benefit of the Lenders.
13.3 Subject to Article 13.4, STASCO may not sell, transfer or assign its rights
or duties under this Agreement or its interest in this Agreement to any
other person except with the prior written approval of KKM and any such
purported sale, transfer or assignment without the approval of KKM shall be
invalid and not binding on KKM.
13.4 Notwithstanding Article 13.3, STASCO may delegate any or all of its duties
or obligations under this Agreement to any of its Affiliates but it shall
retain responsibility to KKM for the proper performance of such duties and
obligations so delegated.
ARTICLE 14: NOTICES.
14.1 All notices or other communications shall be given in writing or by telex
or facsimile. Any such notice shall be deemed to be given as follows:
(a) if in writing, when delivered;
(b) if by telex, when despatched, but only if, at the time of
transmission, the correct answerback appears at the start and end of
the sender's copy of the notice; and
(c) if by facsimile, when the answerback is received. However, a notice
given in accordance with the above but received on a non-working day
or after business hours in the place of receipt shall only be deemed
to be given on the next working day in that place.
If such notice is to Sellers, to:
Shell International Trading and Shipping Company Limited
Shell Mex House
Strand
London. WC2R 0ZA
Telephone : 44 171 546 5000
Facsimile : 44 171 546 4448
Telex : SHELL LONDON 919651
Attention : General Manager, Government Accounts
If such notice is to Buyers, to:
Closed Type JSC Karakudukmunay Inc.
Microregion 3
Building 82, Aktau
466200 Kazakhstan
Telephone: 7 3292 514814
Facsimile: 7 3292 518336
Telex: To be advised
Attention: Nikolai Klinchev, Director General
<PAGE>
With a copy to:
Chaparral Resources, Inc.
16945 Northcase Drive
Suite 1440
Houston, Texas 77060
USA
Telephone: 1 281 877 7100
Facsimile: 1 281 877 0985
Telex: To be advised
Attention: Mike Young, KKM Notices
ARTICLE 15: REPRESENTATIONS
15.1 Each Party represents to the other Party that:
(a) it is duly organised and validly existing under the laws of the
jurisdiction of its organisation or incorporation and, if relevant
under such laws, in good standing;
(b) it has the power to execute and deliver this Agreement and has taken
all necessary action to authorise such execution, delivery and
performance;
(c) such execution and delivery do not violate or conflict with any law
applicable to it, any provision of its constitutional documents, any
order or judgement of any court or other agency of government
applicable to it or any of its assets or any contractual restriction
binding on or affecting it or any of its assets;
(d) all governmental and other consents which are required to have been
obtained by it with respect to this Agreement, have been obtained and
are in full force and effect and all conditions of any such consents
have been complied with; and
(e) its obligations under this Agreement constitute its legal, valid and
binding obligations, enforceable in accordance with its respective
terms (subject to applicable bankruptcy, re-organisation, insolvency,
moratorium or similar laws affecting creditors' rights generally and
subject, as to the enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a
proceeding in equity or at law)).
ARTICLE 16: MISCELLANEOUS
16.1 This Agreement constitutes the entire agreement of the Parties with respect
to the subject matter of this Agreement and the Parties acknowledge that
they do not enter into this Agreement relying on any of the previous
communications between the Parties or their Affiliates.
16.2 No variation of or amendment to any of the terms of this Agreement shall be
effective unless it is in writing and signed by or on behalf of each of the
Parties and no waiver of any provision hereof shall be effective unless it
is in writing and signed by the Party against whom such waiver is sought to
be enforced.
16.3 Except as expressly provided herein, the rights, powers and remedies
provided in this Agreement are cumulative and not exclusive of any rights,
powers and remedies provided by law.
16.4 No delay or omission on the part of either Party in exercising any right,
power or remedy provided by law or under this Agreement, nor any indulgence
granted by any Party to any other Party, shall impair such right, power or
remedy, or be construed as a waiver thereof, nor shall the single or
partial exercise of any right, power or remedy provided by law or under
this Agreement preclude any other or further exercise thereof or the
exercise of any other right, power or remedy.
<PAGE>
16.5 Nothing in this Agreement shall constitute or be deemed to constitute a
partnership, trust or agency. The Parties shall not, and shall procure that
their directors, officers and employees, in that capacity, shall not,
represent themselves or otherwise hold themselves out as an agent or other
representative of the other Party or otherwise hold themselves out as
having any authority to bind the other unless such person is validly
authorised in writing to do so.
16.6 In the event that any provision of this Agreement is declared to be
illegal, invalid or otherwise unenforceable, this Agreement shall terminate
forthwith without obligation on either Party to pay any compensation in
respect of such termination; except that KKM shall be entitled to a
pro-rata (based on actual days remaining in the relevant year) refund of
Fees for the year of termination.
16.7 Each Party acknowledges and agrees to the tape or electronic recording of
conversations between them pursuant to this Agreement, whether by one or
other or both of them, and that any such recordings may be submitted in
evidence in any proceedings relating to the agreement.
16.8 All exchange of correspondence between the Parties shall be in English.
16.9 This Contract shall be signed in three originals in the Russian language
and three originals in the English language, the English language version
shall be the authoritative text.
16.10This Agreement does not confer rights or remedies upon any person other
than KKM and STASCO.
ARTICLE 17: GOVERNING LAW AND ARBITRATION
17.1 The proper law of this agreement is English Law and English Law shall be
used for interpreting the agreement and for resolving all claims or
disputes arising out of or in connection with the agreement (whether based
in contract in tort or on any other legal doctrine). Any such claim or
dispute not settled by negotiation shall be settled by arbitration in
London before a single arbitrator agreed upon by both parties or if not so
agreed appointed in accordance with the Arbitration Act 1996 as amended
from time to time. The arbitration shall be conducted in English, in
accordance with the provisions of the Arbitration Act 1996 as amended from
time to time, the seat of the arbitration shall be England and the
arbitration award shall be final and binding without appeal to the Courts.
17.2 KKM hereby appoint Law Debenture Corporation PLC of Princes House, Gresham
Street, London, EC2 as its agents in London for the service of process to
accept service of process on its behalf in connection with proceedings in
the English Courts. KKM may only dismiss its process agents or change the
process agent with the prior consent of STASCO (which shall not be
unreasonably withheld or delayed).
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed
by their duly authorised representatives on the dates shown below.
SIGNED by
for and on behalf of
SHELL INTERNATIONAL TRADING AND SHIPPING COMPANY LIMITED
as agents for SHELL TRADING INTERNATIONAL LIMITED
By : ...................................
Name : ...................................
Title : ...................................
Date : ...................................
SIGNED by
for and on behalf of
CLOSED TYPE JSC KARAKUDUKMUNAY
By : ...................................
Name : ...................................
Title : ...................................
Date : ...................................
By : ...................................
Name : ...................................
Title : ...................................
Date : ...................................
<PAGE>
ATTACHMENT 5
Acceptable formats for Delivery Acceptance Acts.
<PAGE>
ATTACHMENT 6
Conversion Tables
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 21,000 121,000
<SECURITIES> 0 0
<RECEIVABLES> 30,000 445,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 764,000 1,398,000
<PP&E> 36,287,000 32,354,000
<DEPRECIATION> 33,000 17,000
<TOTAL-ASSETS> 38,078,000 34,324,000
<CURRENT-LIABILITIES> 7,468,000 1,685,000
<BONDS> 0 0
5,113,000 4,850,000
0 0
<COMMON> 0 0
<OTHER-SE> 25,287,000 27,579,000
<TOTAL-LIABILITY-AND-EQUITY> 38,078,000 34,324,000
<SALES> 0 0
<TOTAL-REVENUES> 1,308,000 805,000
<CGS> 0 0
<TOTAL-COSTS> 1,652,000 2,213,000
<OTHER-EXPENSES> 1,536,000 1,223,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 309,000 189,000
<INCOME-PRETAX> (2,189,000) (2,820,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,189,000) (2,820,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,189,000) (2,189,000)
<EPS-BASIC> (2.51) (3.58)
<EPS-DILUTED> (2,51) (3.58)
</TABLE>
