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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1997.
Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _____________ to _____________.
COMMISSION FILE NUMBER: 0-9474
POTOMAC ENERGY CORPORATION
(FORMERLY MIDWESTERN RESOURCES, INC.)
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
OKLAHOMA 73-1088064
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 FOUNDERS TOWER
5900 MOSTELLER DRIVE
OKLAHOMA CITY, OKLAHOMA 73112-4605
(Address of principal executive offices) (Zip Code)
Issuer's telephone number:(405) 840-1427
Securities to be registered under
Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
NONE NONE
Securities to be registered under
Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days. Yes No X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year was $1,443.
The aggregate market value of the voting stock held by non-affiliates based upon
the price at which the common equity was sold ($.25 per share) as of June 29,
1998, was $1,257,065.
The number of outstanding of Common Stock as of June 29, 1998, was 7,628,261.
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
Yes No X
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TABLE OF CONTENTS
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Part I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 8
Part II
Item 5. Market for Common Equity and Related Stockholders Matters . . . . . . . . . . . . . . . . . . . . 8
Item 6. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . . 9
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . 12
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 11. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . 15
Item 12. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(b) Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
Certain statements under the captions "Item 1. Description of Business,"
"Item 2. Description of Property," and "Item 6. Management's Discussion and
Analysis or Plan of Operation," and elsewhere in this Report and the documents
referenced herein constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but
not necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategies that involve risks and
uncertainties. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, levels of
activity, performance or achievements of Potomac Energy Corporation, or industry
results, to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. As a result of the foregoing and other factors, no assurance can be
given as to future results, levels of activity and achievements and neither
Potomac Energy Corporation nor any other person assumes responsibility for the
accuracy and completeness of these statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Potomac Energy Corporation ("PEC" or the "Company") (formerly Midwestern
Resources, Inc.) was formed in 1980 under the laws of the State of Oklahoma and
became inactive and its corporate charter was suspended in 1983. In March 1998,
the Company was reincorporated under the name "Midwestern-Oklahoma Energy
Resources Corporation." Effective June 17, 1998, Potomac Energy (Bermuda) Ltd.,
a Bermuda corporation ("Potomac (Bermuda)"), merged with and into Potomac
Exploration Acquisition Corporation, a wholly-owned subsidiary of the Company
("Potomac Acquisition"), pursuant to a Plan of Reorganization and Agreement of
Merger dated June 12, 1998 (the "Merger"). As a condition of the Merger, on
June 17, 1998, the outstanding Common Stock of the Company was reverse split on
the basis of one share for each 41.40846 outstanding shares, which resulted in
578,261 shares of Common Stock being outstanding immediately prior to the Merger
(the "Reverse Stock Split"). In consummation of the Merger, the Company issued
7,050,000 shares of its Common Stock to the former shareholders of Potomac
(Bermuda) and the Company's name was changed to "Potomac Energy Corporation."
The Merger was accounted for as a reverse acquisition of the Company by Potomac
(Bermuda). Potomac (Bermuda) was formed on April 7, 1997. Immediately prior to
the Merger, the Company did not have any assets or liabilities.
The Company is a development stage company engaged in the exploration and
development of oil and gas properties outside of North America. The Company,
through its subsidiaries, owns interests in a prospective area located in
Colombia, South America, which is in the initial stages of exploration and
development. Prior to the Merger, Potomac (Bermuda) had not conducted any
operations other the acquisition of the interests in the Rosablanca Association
Contract and the Montecristo Association Contract for exploration and
development of the Rosablanca and Montecristo Blocks within the Middle Magdalena
Valley Basin, Colombia, South America. The Rosablanca and Montecristo Blocks
are in the initial stages of exploration. See "Item 2. Description of
Property--Middle Magdalena Valley Basin." The Company also may seek to acquire
additional oil and gas exploration opportunities in Colombia which management
believes may have large reserve potential; however, there is no assurance that
additional interests will be acquired or if acquired will be capable of
commercial development and production. All references to the "Company" includes
Potomac Energy Corporation and its subsidiaries, unless the context indicates
otherwise.
EXPLORATION STRATEGY
The Company's oil and gas exploration and development operations are
currently focused entirely on its activities in Colombia, South America. Such
operations are conducted through the Columbian branch of Potomac Energy (BVI)
Ltd., a wholly-owned British Virgin Islands subsidiary corporation ("Potomac
(BVI)"). The dependence on the activities in Columbia is likely to be reflected
in both the short-term performance and the Company's long-term financial
results. The Company may serve as operator with respect to those properties
acquired pursuant to association contracts in which the Company obtains a
controlling interest or holds the largest ownership interest; however, it is
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anticipated that the Company will also participate in the development of
properties operated by third parties and in some cases may delegate operations
to a third party. The Company's business strategy includes:
- Establishing production, cash flow and reserve value by developing proved
undeveloped reserves;
- Building the Company's base of operations by initially concentrating its
development activities in Colombia;
- Acquiring additional properties with potential for development drilling to
establish and maintain a significant inventory of undeveloped prospects and
to establish and enhance the Company's foundation for future growth;
- Serving as operator of its wells to ensure technical performance and reduce
costs;
- Establish relationships with other oil and gas exploration companies to
access their undeveloped properties, geological data and financial
resources;
- Managing financial risk and mitigating technical risk by drilling in known
productive trends with multi-geologic potential, diversifying investment
over a number of wells in the Company's primary operating areas, developing
properties that provide a balance between short and long reserve lives, and
establishing and maintaining a balanced reserve profile between oil and
gas; and
- Maintaining low general and administrative expenses.
Oil and gas exploration and development is a speculative business and
involves a high degree of risk. The Company is subject to all the risks normally
incident to drilling for and producing oil and gas, including hazards such as
high-pressured formations, blowouts, cratering, fires, spills, or other hazards
or conditions, any of which could result in damage to or loss of life or
property. In accordance with industry practice, the Company is not fully
insured against these risks nor are all such risks insurable. Payment of such
potential liabilities would reduce the funds available for exploration, drilling
and production and could have a material adverse effect on the Company.
The Company has expended, and plans to continue to expend, significant
amounts of capital on the acquisition and exploration of its oil and gas
interests. Even if the results of such activities are favorable, subsequent
drilling at significant costs must be conducted on a property to determine if
commercial development of the property is feasible. Oil and gas drilling may
involve unprofitable efforts, not only from dry holes but from wells that are
productive but do not produce sufficient net revenues to return a profit after
drilling, operating and other costs. It is difficult to project the costs of
implementing an exploratory drilling program due to the inherent uncertainties
of drilling in unknown formations, the costs associated with encountering
various drilling conditions, such as high-pressured zones and tools lost in the
hole, and changes in drilling plans and locations as a result of prior
exploratory wells or additional seismic data and interpretations thereof. The
marketability of oil and gas which may be acquired or discovered by the Company
will be affected by the quality and viscosity of the production and by numerous
factors beyond its control, including market fluctuations, the proximity and
capacity of oil and gas pipelines and processing equipment, government
regulations, including regulations relating to prices, taxes, royalties, land
tenure, importing and exporting of oil and gas and environmental protection.
There can be no assurance the Company will be able to discover, develop and
produce sufficient reserves in Colombia or elsewhere to recover the costs and
expenses incurred in connection with the acquisition, exploration and
development thereof and achieve profitability.
COLOMBIA--OVERVIEW
The Company's success currently depends entirely on its drilling and
exploration activities in Colombia. This dependence is likely to be reflected
in both the short-term performance and the Company's long-term financial
results.
The Company's principal asset is a 25 percent interest in the Association
Contracts that relate to Rosablanca and Montecristo Blocks located in the Middle
Magdalena Valley Basin in and around Bogota, Colombia, South America (the
"Rosablanca and Montecristo Association Contracts"). As of the date of this
Report, a well has not been drilled on either of the Rosablanca and Montecristo
Blocks. The Rosablanca and Montecristo Association Contracts were issued by
Empresa Colombiana de Petroleos ("Ecopetrol"), the state-owned Colombian oil
company, in November 1997, and provide generally for a six-year exploration
phase followed by a 22-year production period, with partial relinquishments of
acreage, excluding commercial fields, required commencing at the end of the
sixth year
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of the Rosablanca and Montecristo Association Contracts. The Company currently
intends to participate in the drilling of the initial well on the Magdalena
Valley Basin before the end of 1998. See "Item 2. Description of
Property--Middle Magdalena Valley Basin--Rosablanca and Montecristo Association
Contracts."
The Rosablanca and Montecristo Association Contracts entitle the Company to
engage in exploration, development and production activities on approximately
695,000 acres (173,750 net acres) located in the Middle Magdalena Valley Basin,
before any relinquishment to Ecopetrol.
Colombia is the fourth largest country in South America, with a total land
area of more than 1,038,700 square kilometers, with a population of 35.9 million
people (1993 census). The official language is Spanish and the official
currency is the Colombian peso. Colombia has a democratic form of government.
While Colombia experiences insurgency and national political protests, the
Colombian economy has been among the best performers in Latin America during the
past 20 years. According to publicly available information, Colombia's Gross
Domestic Product ("GDP") has grown by an average of four percent annually in the
last 10 years, approximately twice the average for Latin America. Colombia is
the only country in South America that did not have a single year of negative
GDP or declining per capita income growth in the 1980s and the 1990s. Colombia
recently introduced legislation to attract foreign investment in energy
projects. The measures include the exemption of new oil operations from the $1
per barrel tax which was levied in 1992 to finance protection of oil operations.
According to publicly available information, the United States is
Colombia's largest trading partner, accounting for more than 43 percent of that
country's total imports and 38 percent of its total exports. The United States
is also the top provider of eight of Colombia's 15 largest imports. United
State oil companies now account for 11 of the 18 largest foreign oil concerns
operating in Colombia. Colombia is Latin America's third leading crude exporter
to the United States, after Venezuela and Mexico.
Colombia is the only country in South America that has seaports on both the
Pacific and Atlantic Oceans, which provide access to major oil markets. The
country has three main crude oil export pipelines leading to the port of Covenas
in Colombia. The pipeline from Cano Limon has a maximum capacity of 200,000
barrels of oil per day ("BOPD"), and two pipelines from Vasconia with 300,000
and 500,000 BOPD capacities.
The geology of Colombia has been studied since the mid-1800s and has
continued to the present, amassing some detail of the tectonic framework and
related stratigraphy. During the evolution of the geological knowledge of
Colombia, oil and natural gas exploration has been pursued in the Llanos,
Putumayo and Magdalena basins. Exploration in the Magdalena Valley Basin began
in 1918 with the drilling of the Guataqui wells in the Girardot subbasin,
followed in 1951 by the Ortega discovery. Since the mid-1980's the oil industry
has been the single largest component of economic growth, with total Colombian
oil reserves currently estimated to be approximately 3.7 billion barrels of
recoverable oil. As of December 1993, 210 exploratory wells had been drilled,
resulting in the discovery of 30 fields.
Two major physiographic features dominate the geography of Colombia. To
the west lie the Andes mountains, which, north of the Ecuador border, bifurcate
into three ranges, the Western, Central and Eastern Cordillera, extending toward
the Caribbean coast. These ranges are separated by the Cauca and Magdalena
valleys, respectively. To the east lies the Llanos, a savanna within the bounds
of the Orinoco Basin, which extends over the remainder of the country.
Association contracts acquired from Empresa Colombiana de Petroleos, the
Colombian national oil company ("Ecopetrol"), after being approved by all proper
Colombian governmental authorities as well as the board of Ecopetrol, are
mutually executed by the parties and subsequently recorded as a public deed in
Colombia. Therefore, ownership of an association contract is of public record
and protected by Colombian law.
RISKS INHERENT IN FOREIGN OPERATIONS
There are risks inherent in the fact that the Company has acquired and
intends to continue to acquire interests in oil and gas properties located
outside of North America in some cases in countries which may be considered
politically and economically unstable.
Foreign properties, operations or investments may be adversely affected by
local political and economic developments, exchange controls, currency
fluctuations, royalty and tax increases, retroactive tax claims, renegotiation
of contracts with governmental entities, expropriation, import and export
regulations and other foreign laws or policies
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governing operations of foreign-based companies, as well as by laws and policies
of the United States affecting foreign trade, taxation and investment. In
addition, as the Company's operations are governed by foreign laws, in the event
of a dispute, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the United States. The Company may also be hindered
or prevented from enforcing its rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity.
The Company's business is subject to political risks inherent in all
foreign operations. While Colombia has no history of nationalizing its business
nor expropriation of foreign assets, the Company's oil and gas operations are
subject to certain risks, including: (i) loss of revenue, property, and
equipment as a result of unforeseen events such as expropriation,
nationalization, war and insurrection, (ii) risks of increases in taxes and
governmental royalties, (iii) renegotiation of contracts with governmental
entities, and (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects in certain areas in Colombia but
has not affected the Company's interest in the Rosablanca and Montecristo
Association Contracts. The Colombian government continues its efforts through
negotiation and legislation to reduce the problems and effects of insurgent
groups, including regulations containing sanctions such as impairment or loss of
contract rights on companies and contractors if found to be giving aid to such
groups. The associate parties will continue to cooperate with the government,
and do not expect that future guerrilla activity will have a material impact on
the exploration and development of the Rosablanca and Montecristo Association
Contracts. However, there can be no assurance that such activity will not occur
or have such an impact and no opinion can be given on what steps the government
may take in response to any such activity. Colombia is among several nations
whose progress in stemming the production and transit of illegal drugs is
subject to annual certification by the President of the United States. As of
the date of this Report, Colombia has received such certification. The
consequences of the failure to receive certification generally include the
following: all bilateral aid, except anti-narcotics and humanitarian aid, has
been or will be suspended; the Export-Import Bank of the United States and the
Overseas Private Investment Corporation will not approve financing for new
projects in Colombia; United States representatives at multilateral lending
institutions will be required to vote against all loan requests from Colombia,
although such votes will not constitute vetoes; and the President of the United
States and Congress retain the right to apply future trade sanctions. Each of
these consequences of the failure to receive such certification could result in
adverse economic consequences in Colombia and could further heighten the
political and economic risks associated with the Company's operations in
Colombia.
JOINT VENTURE ARRANGEMENTS
As a means of diversifying exploration risks, the Company has and expects
to continue to enter into joint venture arrangements for the exploration and
development of properties acquired under association contracts initially
obtained by the Company or acquire only partial interests in oil and gas
properties through joint venture agreements with other oil and gas corporations
that may, by the terms of such joint venture agreements, be the operators of
such properties and joint ventures. Although the Company can take certain steps
to determine if the risk of the exploration activities to be conducted by the
designated operator of such joint ventures is appropriately spread over a number
of prospects within a contract area of an association contract, there can be no
assurance that the risk will be so allocated, that the exploration activities
will be carried out by the operator in a manner deemed appropriate by the
Company or that the activities will be successful. In addition, the Company's
ability to continue its exploration and development activities may be dependent
upon the decision of its joint venture partner or partners to continue
exploration and development activities and to finance their respective portions
of the costs and expenses of the joint venture exploration activities. If the
Company's joint venture partners do not elect to continue and to finance their
obligations to the joint venture, the Company may be required to accept an
assignment of the partners' interests therein and assume their financing
obligations of further development or relinquish the Company's interest in the
joint venture or the association contract.
MARKETS
In the event the Company's exploration and development drilling activities
result in the discover and production of oil and gas and upon Ecopetrol's
declaration of the commerciality of the Company's discovery, oil produced from
the Rosablanca and Montecristo Blocks may be sold to Ecopetrol or to third
parties provided that 75 percent of the purchase price is paid in United States
currency and the remainder in Colombian pesos. In the event the
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production is required to satisfy internal demand for oil in Colombia, the
Company may be required to sell some or all of its production to Ecopetrol at
prevailing market prices. It is anticipated that any oil and gas production of
the Company from its Colombian operations will be sold to Ecopetrol under
contracts that provide for cancellation by either party with notice. In the
event of cancellation by Ecopetrol, the Company would be required to arrange for
the export and sale of its production.
Since the early 1970's the market price for crude oil has been
significantly affected by policies adopted by the member nations of the
Organization of Petroleum Exporting Countries ("OPEC"). Members of OPEC
establish prices and production quotas among themselves for petroleum products
from time to time with the intent of controlling the current global supply and
consequently price levels. The Company is unable to predict the effect, if any,
which OPEC policy or price changes would have on any decision of Ecopetrol to
continue or cancel production purchase contracts with the Company or the effect
such policies and price changes might have on the ability of the Company to
otherwise profitable export and market the Company's production from Colombia in
the event Ecopetrol should elect to cancel productions purchase contracts with
may be entered into for the purchase of the Company's production.
Changes in natural gas and crude oil prices significantly affect the
revenues and cash flows of the Company attributable to oil and gas production
and the value of its oil and gas properties. Declines in the prices of crude
oil and natural gas could have a material adverse effect on the business and
financial condition of the Company. The Company is unable to predict whether
the prices of crude oil and natural gas will rise, stabilize or decline in the
future.
REGULATION
The Company's operations are subject to regulations imposed by the local
regulatory authorities including, without limitation, currency regulation,
import and export regulation, taxation and environmental controls. The
regulations also generally specify, among other things, the extent to which
properties may be acquired or relinquished, permits necessary for drilling of
wells, spacing of wells, measures required for preventing waste of oil and gas
resources and, in some cases, rates of production and sales prices to be charged
to purchasers. Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,
and the Ministry of the Environment. It is possible that the administration and
enforcement of current environmental laws and regulations or the passage of new
environmental laws or regulations in Colombia could result in substantial costs
and liabilities in the future or in delays in obtaining the necessary permits to
conduct and expand the Company's operations in such country. The Company has
experienced and may continue to experience delays in obtaining the necessary
environmental permits to expand its operations in Colombia.
EMPLOYEES
As of June 19, 1998, the Company The Company's operations are managed from
its offices in Oklahoma City, with a staff of five employees as of June 19,
1998, and use professional consulting services as needed. The Company's
employees are not represented by a labor organization. The Company and its
subsidiaries consider the relations with their employees and consultants to be
good.dd
ITEM 2. DESCRIPTION OF PROPERTY.
MIDDLE MAGDALENA VALLEY BASIN
The Company has identified and completed the preliminary investigation of
oil and gas reserves existing in the Middle Magdalena Valley Basin in and around
Bogota, Colombia. The Company has acquired a 25 percent interest in the
Rosablanca and Montecristo Association Contracts on a joint-venture basis
granting rights to develop oil and gas in certain specified properties known as
the Rosablanca and the Montecristo Blocks (sometimes referred to as the
Rosablanca II Block) located in the Middle Magdalena Valley Basin. The
Rosablanca Block covers approximately 326,000 acres and the Montecristo Block
covers approximately 375,000 acres.
Oil and gas reserves have been investigated and explored in the Magdalena
Valley Basin since as early as 1940. The first commercial field was established
by Trocco Oil in 1951 with proven recoverable reserves in excess of 800 million
barrels. Through the use of advanced technologies and exploration techniques
such as seismic, gravimetric and magneto metric surveys, combined with now
historically proven data and exploratory drilling, additional potentially large
reserves have been identified and recovered throughout the Middle Magdalena
Valley Basis. Several independent
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oil companies such as Trident Energy, Harken Oil and Gas, and Seven Seas along
with major oil and gas producers such as Exxon, Inc., and Texaco, Inc., have
made important recent discoveries that have drawn international attention to all
of Central and South America.
To date, approximately 1,300 kilometers of 2-D seismic data has been
acquired on the Rosablanca Block and the Montecristo Block. Based on analysis
and processing of such data, it is estimated that combined anticipated
recoverable oil reserves from the Rosablanca and Montecristo Blocks exceed one
billion barrels.
Pursuant to agreement dated February 27, 1997 (the "GHK Agreement"),
Omnipresent Exploration and Production Corporation (formerly Potomac Energy
Corporation and predecessor in interest of Potomac (Bermuda)) and GHK Company,
L.L.C., an Oklahoma limited liability company ("GHK"), agreed to jointly acquire
and develop any association contracts related to the Rosablanca Block and the
Montecristo Block acquired by Potomac (Bermuda) or GHK. Under the GHK
Agreement, the applications to acquire the association contract was assign to
GHK for the purpose of allowing the association contracts on the specified
blocks to be acquired by GHK. With respect to any association contract
obtained, GHK agreed to assign a 25 percent interest in such association
contract to Potomac Energy (BVI) Ltd., a British Virgin Islands wholly-owned
subsidiary corporation of the Company ("Potomac (BVI)). GHK is proposed to be
designated as operator under the association contracts obtained. The GHK
Agreement further provides that (i) upon issuance of the association contracts,
GHK will to pay Potomac (Bermuda) US$150,000, (ii) GHK will provide any initial
guarantee for the performance of exploratory activity under the association
contracts as required by Ecopetrol, (iii) following issuance of each such
association contract, Potomac (Bermuda) will have three months to (A) qualify
Potomac (BVI) to do business in Colombia, (B) reimburse GHK 25 percent of any
initial guarantees required by Ecopetrol, and (C) demonstrate financial
capability to pay 25 percent of the costs to perform the first year obligations
of the association contract, and (iv) cause Potomac (BVI) to enter into an
International Operating Agreement with accounting procedure for each contract
area naming GHK's branch company as operator. In the event the Company is
unable, within the three-month period, to pay its 25 percent share of the
guarantee or demonstrate financial ability to pay 25 percent of the costs to
perform the first year obligations of the association contract, the Company will
forfeit all rights to its interest in the association contract. Pursuant to the
Merger, Potomac Acquisition acquired and assumed all obligations of Potomac
(Bermuda) under the agreement with GHK. Following execution of the GHK
Agreement, it was assigned and transferred to Seven Seas Petroleum, Inc. ("Seven
Seas") and to Potomac (BVI). As of the date of this Report, Potomac (BVI) is
qualified to do business in Colombia.
ROSABLANCA AND MONTECRISTO ASSOCIATION CONTRACTS. On November 19, 1997,
the Association Contracts related to the Rosablanca Block and Montecristo Block
(the " Rosablanca and Montecristo Association Contracts") were awarded to the
Colombian branch of Seven Seas and the Company became entitled to receive a 25
percent interest in the Association Contracts, subject to the GHK Agreement. In
connection with obtaining the Rosablanca and Montecristo Association Contracts,
Seven Seas was not required to provide any form of financial guarantee of
performance of the other Rosablanca and Montecristo Association Contracts.
The Rosablanca and Montecristo Association Contracts provide generally for
a three-to-six year exploration phase followed by a 22-year production period,
with partial relinquishments of acreage, excluding commercial fields, required
commencing at the end of the sixth year of each contract. Under the terms of
each contract, Seven Seas and the Company are required over a three-to-six-year
period to undertake and complete certain work commitments involving exploration
and development of the Rosablanca Block and the Montecristo Block. Seven Seas
and the Company are required during the first two years of the contracts to
reprocess existing seismic date (300 kilometers on the Rosablanca Block and 500
kilometers on the Montecristo Block), acquire and interpret landstat images and
perform surface geological and geochemical work, and shoot and evaluate 100
kilometers of new two dimensional seismic and, at the election of the Company
and Seven Sears, during the third year to drill one exploratory well. In the
event after the first two years, the Company and Seven Seas elect to drill an
exploratory well, they will be required to relinquish and reduce their interest
in the block to not more than 247,100 acres (100,000 hectares). The contract
will terminate at the end of the third year, unless an extension is granted by
Ecopetrol pursuant to application or a commercial field has been discovered.
The exploration period may be further extended beyond the third year upon annual
application to and approval by Ecopetrol for up to three years. During each
year of this extension, Seven Seas and the Company will be required to drill one
additional exploratory well that penetrates an hydrocarbon producing formation.
In the event such work commitments are not completed as required, the contract
rights will be forfeited. Furthermore, if a
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<PAGE>
commercial field is discovered during the initial three-year period of the
contract or any extension thereof, the block or contract area will be reduced 50
percent, two years thereafter will be reduced 50 percent of the remaining block
or contract area and two years thereafter will be further reduced to the
commercial fields that are producing or under development plus a reserve belt
2.5 kilometers wide surrounding each Commercial Field within the block or
contract area. Upon application to and approval by Ecopetrol, the period for
retention of the block or contract area may be extended for up to four years.
Under the terms of the contracts, Ecopetrol will receive a royalty equal to
20 percent of production (after pipeline tariffs are deducted) on behalf of the
Colombian government and, in the event a commercially feasible discovery is
made, Ecopetrol will acquire a 50 percent interest in the remaining production,
bear 50 percent of the development costs, and reimburse Seven Seas, the Company
and other joint venture partners, from Ecopetrol's share of future production,
for 50 percent of the costs of certain exploration activities. Upon acceptance
of a field as commercial, Ecopetrol will acquire a 50 percent interest therein
and the interests of the other parties to the contract, including the Company,
will be reduced by 50 percent; all decisions regarding the development of a
commercial field will be made by an Executive Committee consisting of
representatives of the parties to the contract who will vote in proportion to
their respective interests in such contract. Decisions of the Executive
Committee will be made by the affirmative vote of the holders of over 50 percent
of the interests in the contract.
If any commercial field in the respective contract areas produces in excess
of 60 million barrels, Ecopetrol's interest in production and costs for such
contract area increases from 50 percent to 75 percent as the ratio of the
accumulated income attributable to Seven Seas, the Company or any other joint
venture partner other than Ecopetrol to the accumulated development, exploration
and operating costs of such parties (less any expenses reimbursed by Ecopetrol)
increases from one to one to two to one.
Under the terms of the association contracts, in the event a discovery is
made and is not deemed to be commercially feasible by Ecopetrol, Seven Seas and
the Company may expend up to $2 million over a one-year period to further
develop the field, 50 percent of which will be reimbursed if Ecopetrol
subsequently accepts the commercial feasibility thereof. If Ecopetrol does not
declare the field commercial, the joint venture may continue to develop the
field at its own expense. In such event, Ecopetrol will have the right to
acquire a 50 percent interest therein upon payment of 200 percent of the amounts
expended by the joint venture, which payment may be made out of Ecopetrol's
share of future production.
The Company's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian corporate income tax at a rate of 35 percent.
An additional remittance tax is imposed upon remittance of profits abroad at a
rate of five percent.
PLAN OF DEVELOPMENT
Seven Seas and the Company have established a 24-month plan of development
of the Rosablanca and Montecristo Blocks. Under this plan, in addition to the
minimum work commitments under the Rosablanca and Montecristo Association
Contracts (the cost of which is estimated to be approximately $750,000),Seven
Seas and the Company propose to (i) the obtain and process new two-dimensional
seismic (75 kilometers on the Montecristo Blaock and 50 kilometers on the
Rosablanca Block) at an estimated cost of $550,000, (ii) identify and drill one
exploratory well on the Rosablanca Block at an estimated cost of $500,000, (iii)
drill one horizontal well on the Rosablanca Block at an estimated cost of
$1,750,000, (iv) drill three additional horizontal wells on the Rosablanca Block
at an estimated cost of $3,750,000, and (v) reenter and deepen an existing well
on the Montecristo Block at an estimated cost of $500,000. In addition, the
Company plans on participating, on a joint-venture basis, in the reworking of
existing wells with a major oil company on blocks outside the Rosablanca and
Montecristo Blocks at an estimated cost of $4,000,000. The timing and
undertakings under the development plan will depend upon a number of factors,
most of which will not be within the control of the Company, including
availability of capital resources of the Company and its joint venture partners,
the results of geological and geophysical surveys and analysis, the expected or
actual results of each development undertaking or operation which in large part
may be affected by the anticipated or current cost of such operations and the
prices of crude oil and natural gas, general domestic and international economic
conditions within and without the oil and gas industry, and Columbian legal and
regulatory compliance. Therefore, this can be no assurance that such plan of
development will be successful or will be completed as anticipated as of the
date of this Report.
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<PAGE>
UNCERTAINTY OF FUTURE ESTIMATES OF OIL AND NATURAL GAS RESERVES
As of the date of this Report, the Company does not have any proved oil and
gas reserves. However, it is anticipated that through development of the
Company's interest in the Middle Magdalena Valley Basin and other properties
acquired and developed, the Company will obtain and provide to the shareholders
of the Company, through annual reports or other means, estimates of the
Company's oil and gas reserves. Estimates of the Company's proved oil and gas
reserves and projected future net revenues will be based on reserve reports
prepared by independent petroleum engineers. The estimation of reserves
requires substantial judgment on the part of the petroleum engineers, resulting
in imprecise determinations, particularly with respect to new discoveries.
Different reserve engineers may make different estimates of reserve quantities
and revenues attributable thereto based on the same data. Estimates of proved
undeveloped reserves, which in the future may comprise a substantial portion of
the Company's reserves, are by their nature less certain. The accuracy of any
reserve estimate depends on the quality of the available data as well as
engineering and geological interpretation and judgment. Results of drilling,
testing and production and changes in the assumptions regarding decline and
production rates, crude oil prices, revenues, taxes, capital expenditures,
operating expenses, geologic success and quantities of recoverable crude oil may
vary substantially from those assumed in the estimates, may result in revisions
to such estimates and could materially affect the estimated quantities and
related value of reserves set forth herein. The estimates of future net
revenues will reflect oil and gas prices as of the date of estimation, without
escalation. There can be no assurance, however, that such prices will be
realized or that the estimated production volumes will be produced during the
periods indicated. Future performance that deviates significantly from the
reserve reports could have a material adverse effect on the Company.
OFFICE PROPERTIES
The Company maintains its executive office in approximately 2000 square
feet at 1400 Founders Tower, 5900 Mosteller Drive, Oklahoma City, Oklahoma
73112-4605. The office premises are occupied under a lease which expires June
30, 1998, and the monthly rental payment is $3,100. The Company has entered
into a three year lease covering approximately 3,400 square feet, requiring
monthly rental payments of $4,000, at Suite 1100W, The Oil Center, 2601
Northwest Expressway, Oklahoma City, Oklahoma 73112-7293, to which the Company
will relocate its executive offices on July 1, 1998. The Company considers such
space to be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company does not have any pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1997, the
Company did not submit any matters to a vote of its shareholders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
The Company's Common Stock has not been traded since 1983 and as of the
date of this Report a market does not exist for the Common Stock. On March 26,
1998, there were approximately 1,625 holders of the Company's Common Stock.
The Company's dividend policy is to retain its earnings, if any, to support
the expansion of its operations. The Board of Directors of the Company does not
intend to pay cash dividends on the Common Stock in the foreseeable future. Any
future cash dividends will depend on future earnings, capital requirements,
financial condition and other factors deemed relevant by the Board of Directors.
The Company's future earnings and cash flow are dependent principally upon the
operating results of the exploration and production activities of Potomac (BVI)
in Colombia, South America, and it is anticipated that such dependency will
continue indefinitely in the future.
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<PAGE>
PENNY STOCK TRADING RULES
As of the date of this Report, a market for the Common Stock does not
exist. However, it is anticipated, although there can be no assurance, that the
Common Stock will be included and quoted on the Electronic Bulletin Board System
operated by the National Association of Securities Dealers, Inc. in the near
term. In such event, the Common Stock will be subject to the "penny stock"
trading rules. The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers recommending the purchase of a penny stock
(by a purchaser that is not an accredited investor as defined by Rule 501(a)
promulgated by the Commission under the 1933 Act) or the sale of a penny stock.
Among such duties and responsibilities, with respect to a purchaser who has not
previously had an established account with the broker-dealer, the broker-dealer
is required to (i) obtain information concerning the purchaser's financial
situation, investment experience, and investment objectives and (ii) make a
reasonable determination that transactions in the penny stock are suitable for
the purchaser and the purchaser (or his independent adviser in such
transactions) has sufficient knowledge and experience in financial matters and
may be reasonably capable of evaluating the risks of such transactions, followed
by receipt of a manually signed written statement which sets forth the basis for
such determination and which informs the purchaser that it is unlawful to
effectuate a transaction in the penny stock without first obtaining a written
agreement to the transaction. Furthermore, until the purchaser becomes an
established customer (I.E., having had an account with the dealer for at least
one year or, the dealer had effected three sales or more of penny stocks on
three or more different days involving three or more different issuers), the
broker-dealer must obtain from the purchaser a written agreement to purchase the
penny stock which sets forth the identity and number of shares or units of the
security to be purchased prior to confirmation of the purchase. A dealer is
obligated to provide certain information disclosures to the purchaser of a penny
stock, including (i) a generic risk disclosure document which is required to be
delivered to the purchaser before the initial transaction in a penny stock, (ii)
a transaction-related disclosure prior to effecting a transaction in the penny
stock (I.E., confirmation of the transaction) containing bid and asked
information related to the penny stock and the dealer's and salesperson's
compensation (I.E., commissions, commission equivalents, markups and markdowns)
in connection with the transaction, and (iii) the purchaser-customer must be
furnished account statements, generally on a monthly basis, which include
prescribed information relating to market and price information concerning the
penny stocks held in the customer's account. The penny stock trading rules do
not apply to those transactions in which a broker-dealer or salesperson does not
make any purchase or sale recommendation to the purchaser or seller of the penny
stock.
Required compliance with the penny stock trading rules affect or will
affect the ability to resell the Common Stock by a holder principally because of
the additional duties and responsibilities imposed upon the broker-dealers and
salespersons recommending and effecting sale and purchase transactions in such
securities. In addition, many broker-dealers will not effect transactions in
penny stocks, except on an unsolicited basis, in order to avoid compliance with
the penny stock trading rules. The penny stock trading rules consequently may
materially limit or restrict the liquidity typically associated with other
publicly traded equity securities. In this connection, the holder of Common
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control the market in such securities and may set prices
that are not based on competitive forces. Furthermore, at times there may be a
lack of bid quotes which may mean that the market among dealers is not active,
in which case a holder of Common Stock may be unable to sell such securities.
Because market quotations in the over-the-counter market are often subject to
negotiation among dealers and often differ from the price at which transactions
in securities are effected, the bid and asked quotations of the Common Stock may
not be reliable.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
REPORT.
PLAN OF OPERATION
The Company's plan of operation for the next 12 months is focused on the
exploration, development and production operations to be conducted in Colombia,
South America. See "Item 2. Description of Property--Middle Magdalena Valley
Basin--Plan of Development."
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<PAGE>
RESULTS OF OPERATIONS
Potomac (Bermuda) was formed on April 7, 1997. Prior to the Merger, PEC
was inactive and did not have any assets or liabilities. Effective June 17,
1998, Potomac (Bermuda) merged with and into Potomac Acquisition and became a
wholly-owned subsidiary of PEC. The Merger was accounted for as a reverse
acquisition of PEC by Potomac (Bermuda) under the purchase method of accounting.
Therefore, the following discussion and analysis of results of operations
discussed below are only those of to Potomac (Bermuda) prior to the Merger. See
"Item 1. Description of Business--Background" and "Item 12. Certain
Relationships and Related Transactions."
Potomac (Bermuda) is a development stage company that during the period
April 7, 1997 (Inception) through December 31, 1997, did not have any revenue
from oil and gas sales and incurred a net loss of $695,799. There is no
assurance that the Company will have revenues from oil and gas sales in the
future. The only revenues received by Potomac (Bermuda) during 1997 was derived
from interest income of $1,443 earned or accrued on cash and cash and marketable
securities. During 1997, Potomac (Bermuda) obtained interests in the Rosablanca
and Montecristo Association Contracts and in connection therewith incurred
$692,557 in professional fees and consulting expenses and incurred miscellaneous
expenses of $4,685. Other than the activities associated with obtaining the
Rosablanca and Montecristo Association Contracts, Potomac (Bermuda) did not
conduct any operating activities during 1997.
During the three months ended March 31, 1998, Potomac (Bermuda) did not
have any revenue from oil and gas sales and incurred a net loss of $247,685.
The only revenues received by Potomac (Bermuda) during the three months ended
March 31, 1998 was derived from interest income of $1,007 earned or accrued on
cash and cash and marketable securities. In connection with the Rosablanca and
Montecristo Association Contracts Potomac (Bermuda) incurred professional fees
and consulting expenses of $247,888 and miscellaneous expenses of $804.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
The Company's computer systems are year 2000 compliant. The Company's
computer systems which employed two digit year date format rather than four
digit date format have been programed to comply with year 2000 requirements on a
system-by-system basis.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 1997, The Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which requires the reporting of all
items of income that are recognized under accounting standards as components of
comprehensive income, consisting of both net income and those items that bypass
the income statement and are reported in the balance within a separate component
of stockholders' equity, be reported in a financial statement and displayed with
the same prominence as other financial statements. This statement is effective
for financial statements of the Company for the year ending December 31, 1998.
Management of the Company believes that adoption of SFAS No. 130 will not have a
material effect on the Company's financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which modifies segment reporting
requirements and establishes certain criteria for reporting disclosures
concerning a company's products and services, geographic areas and major
customers in annual and interim financial statements. This statement is
effective for financial statements of the Company for the year ending December
31, 1998. Management of the Company believes that adoption of SFAS No. 131 will
not have a material effect on the Company's financial statements, other than
possibly the disclosure related to the Company's services, geographic service
area and major customers.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits," which requires disclosures related
to employer's obligations related to pension and other retirement benefits.
This statement is effective for financial statements of the Company for the year
beginning after December 15, 1997. Management of the Company believes that
adoption of SFAS No. 132 will not have a material effect on the Company's
financial statements.
Furthermore, in June 1998, FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires disclosures
related to trading and holding of derivative instruments and the
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<PAGE>
conduct of hedging activities. This statement is effective for financial
statements of the Company for the year beginning after June 15, 1999.
Management of the Company believes that adoption of SFAS No. 133 will not have a
material effect on the Company's financial statements.
EFFECTS OF OIL AND GAS PRICE FLUCTUATIONS
In the event the Company's exploration activities result in significant
production of crude oil or natural gas, the Company's operations and the value
of its oil and gas assets, including producing and non-producing assets, will be
subject to the effects of fluctuations in crude oil and natural gas prices. As
a result of the instability and volatility of prices and the surplus of crude
oil and natural gas, and current market conditions within the oil and gas
industry, financial institutions have become more selective in the energy
lending area and have reduced the percentage of existing reserves that may
qualify for the borrowing base to support energy loans.
In the future, the Company anticipates that its principal source of cash
flows, if any, will be from the production and sale of crude oil and natural
gas reserves which are depleting assets. Cash flows from oil and gas production
sales depends upon the quantity of production and the price obtained for such
production. Generally, an increase in prices allows a company to finance its
operations to a greater extent with internally generated funds, may allow a
company to obtain equity financing more easily or on better terms and lessens
the difficulty of attracting financing alternatives available to a company from
industry partners and non-industry investors. However, price increases heighten
the competition for oil and gas association contracts, leases and other
contractual arrangement, increase the costs of exploration and development
activities, and because of potential price declines, increase the risks
associated with the purchase of producing properties while prices are at higher
levels.
A decline in oil and gas prices (i) reduces internally generated cash flows
which in turn reduces the funds available for exploration for and replacement of
oil and gas reserves, (ii) increases the difficulty of obtaining equity
financing and worsens the terms on which such financing may be obtained, (iii)
reduces the number of available oil and gas properties on reasonable economic
terms, (iv) may result in the expiration of oil and gas contractual interests
based upon the potential oil and gas reserves in relation to exploration and
development costs, (v) results in marginally productive oil and gas wells being
abandoned as non-commercial wells, and (vi) increases the difficulty of
attracting financing alternatives available from industry partners and
non-industry investors. However, price declines reduce the competition for oil
and gas interests and, correspondingly, reduce the prices paid for such
interests or result in obtaining such interests on more favorable terms.
Furthermore, exploration and production costs generally decline, although the
decline may not be at the same rate of decline of oil and gas prices.
SEASONALITY
It is anticipated that the results of operations of the Company will be
somewhat seasonal due to seasonal fluctuations in the price for crude oil and
natural gas. Historically, crude oil prices have been generally higher in the
third and fourth quarters and natural gas prices have been generally higher in
the fourth quarter. Due to these seasonal price fluctuations, it is anticipated
that results of operations for individual quarterly periods may not be
indicative of results which may be realized on an annual basis.
INFLATION AND CHANGES IN PRICES
Inflation principally affects the costs required to drill, complete and
operate oil and gas wells. In recent years inflation has had a minimal effect
on such costs. However, increases and decreases in drilling activities, which
generally a linked to crude oil and natural gas price increases and decreases,
have resulted in the increase and decrease of drilling and exploration costs on
an industry-wide basis.
LIQUIDITY AND CAPITAL RESOURCES
Potomac (Bermuda) has financed its development state activities through the
sale of equity securities and does not have any borrowing facilities or
arrangements in place to fund its capital commitments. During 1997, net cash
used by operating activities totaled $249,098, net cash used by investing
activities totaled $60,120 and net cash provided by financing activities totaled
$412,000. During the three months ended March 31, 1998, net cash used by
operating activities totaled $77,685 and net cash provided by financing
activities totaled $75,000. As of March 31,
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<PAGE>
1998, Potomac (Bermuda) had working capital of $121,173, compared to working
capital of $168,858 at December 31, 1997.
Under the terms of the Rosablanca and Montecristo Association Contracts,
the Company has certain minimum work commitments on a joint venture basis with
Seven Seas, the Company's share of such costs is estimated to be approximately
$750,000. In addition to the minimum work commitments, the Company has
established a 24-month plan of development of the Rosablanca and Montecristo
Blocks at an estimated cost of $6,950,000. See "Item 2. Description of
Property--Middle Magdalena Valley Basin--Plan of Development." The Company
anticipates that the costs of development of the Rosablanca and Montecristo
Blocks will be funded with proceeds from the sale of equity and debt securities
and, although unlikely, borrowings. There is no assurance that such funding
will be available or on terms acceptable to the Company, in which event the
Company may forfeit its interests in the Rosablanca and Montecristo Blocks.
ITEM 7. FINANCIAL STATEMENTS
The response to this Item is set forth herein in a separate section of this
report, appearing on page F-2 through F-10.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements of the type required to be reported under
this Item between management of the Company and its independent accountants
during 1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Set forth below is certain information with respect to each executive
officer and Director of the Company. Directors are generally elected at the
annual shareholders' meeting and hold office until the next annual shareholders'
meeting and until their successors are elected and qualify. Executive officers
are elected by the Board of Directors and serve at its discretion. The Bylaws
of the Company provide that the Board of Directors shall consist of not less
than two and such number as the Board of Directors may from time to time
determine by resolution or election. The Company's Board of Directors currently
consists of six members.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Carl W. Swan . . . . . . . . . . 72 Chief Executive Officer
and Vice Chairman of the Board of
Directors
Gene Callaway. . . . . . . . . . 49 President and Director
James E. Frazier . . . . . . . . 34 Vice President, Chief Financial
Officer, Secretary
and Director
Frank H. Mahan . . . . . . . . . 56 Executive Vice President
and Director
Paul D. Meadows. . . . . . . . . 71 Chairman of the Board of Directors
Joseph Edward Michaud. . . . . . 66 Director
</TABLE>
The executive officers of the Company devote such time to the business and
affairs of the Company as may be required, but not less than 50 percent of their
time.
BACKGROUND OF COMPANY EXECUTIVE OFFICERS AND DIRECTORS
The following is a brief description of the business background of the
executive officers and Directors of the Company:
CARL W. SWAN is Chief Executive Officer and Vice Chairman of the Board of
Directors of the Company. Mr. Swan has been actively involved in all facets of
the oil and gas industry since 1951. He co-founded and served as President and
Chief Executive Officer and a Director of Basin Petroleum Corporation, which was
a publicly held company that merged into Reserve Oil and Gas Corporation in
1976. Since 1976, Mr. Swan has operated Swan
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<PAGE>
Petroleum Corporation, a privately held oil and gas exploration company involved
in oil and gas drilling, exploration and refining. Mr. Swan has extensive oil
and gas drilling and production experience in several foreign countries. Mr.
Swan has conducted oil and gas operations with Frank Mahan through affiliated
entities since 1989. Mr. Swan is a graduate of the University of New Mexico.
GENE CALLAWAY is President and a Director of the Company and a practicing
attorney, specializing in the oil and gas area. Mr. Callaway was employed by
Shell Oil Company in several capacities including director of the Western U.S.
Exploration and Production Legal Department, the largest division of Shell Oil,
director of the Natural Gas Department, for four years was on assignment
providing legal support for all international operations including Africa, Asia,
South and Central America and the Western Pacific area. Mr. Callaway is a
graduate of Louisiana State University and a member of the Texas and Louisiana
Bar Associations.
JAMES E. FRAZIER is Vice President, Chief Financial Officer, Secretary and
a Director of the Company. Mr. Frazier is President and Chief Executive Officer
of JCZ Leasing, Inc., which provides financial services to more than 235
commercial equipment dealers in Oklahoma and throughout the Southwestern United
States, and a director of Heritage Financial Services, Inc., a private
investment services company. Mr. Frazier served as Vice President of Chase
Manhattan Bank, N.A. and managed operations within the Global Securities and
Institutional Trust Divisions as well as the Private Banking and Credit Services
Divisions. Mr. Frazier is a graduate of Fordham University with a degree in
economics.
FRANK H. MAHAN is an Executive Vice President and Director of the Company.
Mr. Mahan has 25 years experience in the oil and gas industry. He has attended
a number of management and supervisory courses involving the oil and gas
industry. He attended Oklahoma State University from 1960 until 1965, majoring
in business management and has been involved in the management of several
companies engaged in oil and gas drilling, exploration and production and has
been an independent producer since 1979. Mr. Mahan has conducted oil and gas
operations with Carl W. Swan through affiliated entities since 1989.
PAUL D. MEADOWS is Chairman of the Board of Directors of the Company, a
private investor in and consultant with respect to oil and gas investments and
Chairman and, as trustee of a family trust, a 50 percent shareholder of Vega
Energy Company, an independent oil and gas company. Mr. Meadows was a founder
and served as a director of Ensource, Inc., a New York Stock Exchange
exploration and production company, until its merger with UMC Petroleum
Corporation in 1989 and thereafter, until September 1995, served on its
technical advisory committee. Mr. Meadows holds a Bachelor of Science Degree in
Petroleum Engineering and an Honorary Doctor of Science Degree from the New
Mexico Institute of Mining and Technology.
JOSEPH EDWARD MICHAUD is a Director of the Company and an independent
analyst of oil and gas properties and an investor in exploratory and development
prospects. Mr. Michaud has in excess of 40 years experience in the oil and gas
business, including extensive training as a petroleum engineer while employed by
James A. Lewis Engineering, a leading consulting firm in reservoir analysis and
property appraisals in the United States and Canada..
ITEM 10. EXECUTIVE COMPENSATION
The Company was inactive during 1997, 1996 and 1995 and no executive
officer compensation was paid or accrued during such years. The following table
sets forth certain information with respect to the total cash compensation, paid
or accrued, of the Chief Executive Officer of Potomac (Bermuda) during 1997.
Such compensation was paid by BV Operating, Inc., an affiliate of Potomac
(Bermuda). With respect to each of their executive officers, Potomac (Bermuda)
and its affiliates did not pay or accrue total compensation in excess of
$100,000 during 1997. Furthermore, Potomac (Bermuda) was formed in 1997;
therefore, during 1996 and 1995, no compensation was paid to or accrued for the
executive officers of Potomac (Bermuda) and its affiliates.
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<PAGE>
OFFICER COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- --------------------------- ---- -------- ------- --------------
<S> <C> <C> <C> <C>
Carl W. Swan . . . . . . . . . . . . . . . . . 1997 . . . . $48,000 $1,000 $7,800
Chief Executive Officer of Potomac (Bermuda)
</TABLE>
- ------------------------
(1) Dollar value of base salary (both cash and non-cash) earned during the
year.
(2) Dollar value of bonus (both cash and non-cash) earned during the year.
(3) The amounts reflected are for an automobile and telephone expense
reimbursements, health insurance premiums paid by the Company.
During 1997, Potomac (Bermuda) and the Company did not grant any stock
options to their executive officers and directors. However, on April 1, 1998,
Potomac (Bermuda) granted each of Carl W. Swan and Frank H. Mahan stock options
exercisable on or before December 31, 2003, for the purchase of 100,000 shares
of common stock of Potomac (Bermuda) for $1.00 per share, and issued to Gene
Callaway and James E. Frazier 400,000 and 100,000 shares of common stock,
respectively, for services rendered. In connection with the Merger, all
outstanding stock options of Potomac (Bermuda) were assumed by the Company and
became exercisable for the purchase of shares of Common Stock of the Company for
$1.00 per share.
COMPENSATION OF DIRECTORS
The directors of the Company that are employees are not currently
compensated for attending meetings of directors and committees of the Board of
Directors, but are reimbursed out-of-pocket expenses. The compensation of
non-employee directors has not been determined by the Board of Directors, but
non-employee directors are reimbursed out-of-pocket expenses incurred in
attending meetings of directors and committees on which they serve. During
1997, the Board of Directors of PEC held no meetings; therefore, the members of
the Board of Directors of PEC did not receive any compensation nor was any
compensation accrued during 1997.
LACK OF EMPLOYMENT ARRANGEMENTS AND LOSS OF KEY EMPLOYEES
The Company does not have any written employment agreements or arrangements
with its officers and employees. Accordingly, each officer and employee of the
Company may be terminated as determined in the sole discretion of the Company.
The Company has a limited operating history and the success of the Company
depends to a large degree upon the efforts of its executive officers, the loss
of whose services could have a material adverse effect on the Company. The
Company does not maintain key man insurance covering the loss of life or
disability of its executive officers.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation Act, the
Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of PEC for a breach of their
fiduciary duty as directors. These provisions do not eliminate the liability of
a director for (i) a breach of the director's duty of loyalty to PEC or its
shareholders, (ii) acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) liability
arising under Section 1053 of the Oklahoma General Corporation Act (relating to
the declaration of dividends and purchase or redemption of shares in violation
of the Oklahoma General Corporation Act), or (iv) any transaction from which the
director derived an improper personal benefit. In addition, these provisions do
not eliminate liability of a director for violations of federal securities laws,
nor do they limit the rights of PEC or its shareholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other forms of
non-monetary relief. Such remedies may not be effective in all cases.
The Certificate and Bylaws of PEC provide that PEC shall indemnify all
directors and officers of PEC to the full extent permitted by the Oklahoma
General Corporation Act. Under such provisions, any director or officer, who in
his capacity as such, is made or threatened to be made, a party to any suit or
proceeding, may be indemnified if the Board of Directors determines such
director or officer acted in good faith and in a manner he reasonably
-14-
<PAGE>
believed to be in or not opposed to the best interest of PEC. The Certificate
and Bylaws of PEC and the Oklahoma General Corporation Act further provide that
such indemnification is not exclusive of any other rights to which such
individuals may be entitled under the Certificate, the Bylaws, an agreement,
vote of shareholders or disinterested directors or otherwise. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors and officers of PEC pursuant to the foregoing provisions, or
otherwise, PEC has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table presents certain information as to the beneficial
ownership of the Common Stock of the Company as of June 29, 1998, and the
beneficial ownership of the Common Stock of (i) each person that beneficially
more than five percent thereof, (ii) each executive officer and director of the
Company, and (iii) all executive officers and directors as a group. All persons
listed have sole voting and investment power with respect to their shares, and
there is no family relationship between the executive officers and directors.
For purposes of the following table, the number of shares and percent of
ownership of outstanding Common Stock that the named person and beneficially
owns includes shares of Common Stock that such person has the right to acquire
within 60 days of the foregoing date upon exercise of outstanding stock options,
but such shares are not included for the purposes of computing the number of
shares beneficially owned and percent of outstanding Common Stock of any other
named person.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED SHARES
- ------------------------------------ ------------ -------------
<S> <C> <C>
Carl W. Swan(1)(2) . . . . . . . . . . . . . . . . 1,100,000 14.6%
Frank H. Mahan(1)(2) . . . . . . . . . . . . . . . 1,100,000 14.6%
Auburn Trust(3). . . . . . . . . . . . . . . . . . 1,000,000 12.6%
Karl Rollke(4) . . . . . . . . . . . . . . . . . . 950,000 12.8%
Value Invest, Ltd.(5). . . . . . . . . . . . . . . 800,000 10.8%
Marlene S. Schiff(2)(6). . . . . . . . . . . . . . 500,000 6.6%
Lawrence Ronald Crow(3). . . . . . . . . . . . . . 500,000 6.6%
Lamar Lee Lindenmuth(3). . . . . . . . . . . . . . 500,000 6.6%
Peter R. Garland(7). . . . . . . . . . . . . . . . 400,000 5.4%
Gene Callaway(1) . . . . . . . . . . . . . . . . . 400,000 5.4%
James E. Frazier(1). . . . . . . . . . . . . . . . 200,000 2.7%
Paul D. Meadows(8) . . . . . . . . . . . . . . . . 200,000 2.6%
Joseph Edward Michaud(9) . . . . . . . . . . . . . 200,000 2.6%
Executive Officers and
Directors as a Group (six persons)(10) . . . . . 3,200,000 39.9%
</TABLE>
- ------------------------
(1) The named person's address is 1400 Founders Tower, 5900 Mosteller Drive,
Oklahoma City, OK 73112-4605.
(2) The number of beneficially owned shares of percentage of outstanding shares
includes stock options exercisable for the purchase of 100,000 shares of
Common Stock.
(3) The address of Auburn Trust is 440 Benmar, Suite 3020, Houston, Texas
77069. The beneficiaries of Auburn Trust are Lawrence Ronald Crow and
Lamar Lee Lindenmuth, each a 50 percent beneficiary.
(4) Mr. Rollke's address is 1888 Albeni Street, Apartment 1201, Vancouver,
B.C., Canada V6 1B3.
(5) The address of Value Invest, Ltd. is Letzibraben 89, 8040 Zurich,
Switzerland.
(6) Ms. Schiff's address is 950 Fifth Avenue, New York, New York 10021.
(7) Mr. Garland's address is 6610 Campden Drive, Spring, Texas 77379.
-15-
<PAGE>
(8) Mr. Meadows' address is Suite 202, 7860 East Berry Place, Englewood,
Colorado 80111. The number of beneficially owned shares of percentage of
outstanding shares includes stock options exercisable for the purchase of
200,000 shares of Common Stock.
(9) Mr. Michaud's address is 5964 East Princeton Circle, Englewood, Colorado
80111. The number of beneficially owned shares of percentage of
outstanding shares includes stock options exercisable for the purchase of
200,000 shares of Common Stock.
(10) The number of beneficially owned shares of percentage of outstanding shares
includes stock options exercisable for the purchase of 600,000 shares of
Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a description of transactions entered into between PEC
or Potomac (Bermuda) and certain of its officers, directors and shareholders
during the last two years. Certain of these transactions will continue in
effect and may result in conflicts of interest between PEC and such
individuals. Although these persons have fiduciary duties to PEC and its
shareholders, there can be no assurance that conflicts of interest will always
be resolved in favor of PEC.
In connection with the reincorporation of PEC on March 10, 1998, Michael E.
Dunn, the former President and Director of the Company, was issued 300,696
shares of Common Stock, after giving effect to the reverse stock split, for
services rendered.
In connection with the organization and formation of Potomac (Bermuda), (i)
each of Carl W. Swan and Frank H. Mahan contributed all of his rights under the
applications with Ecopetrol related to the Rosablanca and Montecristo Blocks to
Potomac (Bermuda) and in exchange therefor was issued 1,000,000 shares of common
stock of Potomac (Bermuda) and (ii) James E. Frazier was issued 100,000 shares
of common stock of Potomac (Bermuda) for services rendered. The value of the
applications with Ecopetrol related to the Rosablanca and Montecristo Blocks was
estimated to be not less than $20,000 which was substantially less than the
direct costs that Messrs. Swan and Mahan in making such applications.
On April 1, 1998, Potomac (Bermuda) (i) granted each of Messrs. Swan and
Mahan stock options exercisable on or before December 31, 2003 for the purchase
of 100,000 shares of common stock of Potomac (Bermuda) for $1.00 per share, (ii)
issued to Gene Callaway and James E. Frazier 400,000 and 100,000 shares of
common stock, respectively, for services rendered, and (iii) granted Mr. Dunn
stock options exercisable on before December 31, 2003, to purchase 50,000 shares
of common stock for legal services rendered and to be rendered for $.50 per
share. On February 9, 1997, Potomac (Bermuda) granted Marlene S. Schiff stock
options exercisable for the purchase of 100,000 shares of Common Stock on or
before April 30, 1999, for $1.00 per share. In addition, on May 8, 1998,
Potomac (Bermuda) granted to each of Paul D. Meadows and Joseph Edward Michaud
stock options exercisable on or before December 31, 2003 for the purchase of
200,000 shares of common stock of Potomac (Bermuda) for $1.00 per share. In
connection with the Merger, all outstanding stock options of Potomac (Bermuda)
were assumed by the Company and became exercisable for the purchase of shares of
Common Stock of the Company for $1.00 per share.
Commencing in May 1997, Potomac (Bermuda) made certain monthly payments to
BV Operating, Inc., an Oklahoma corporation owned equally by Messrs. Swan and
Mahan, for reimbursement of general overhead, employee salaries (including the
compensation of the executive officers of Potomac (Bermuda)), travel and other
expenses incurred in connection with services performed on behalf of Potomac
(Bermuda) principally related to the application for and obtaining of the
Rosablanca and Montecristo Association Contracts. Potomac (Bermuda) reimbursed
BV Operating, Inc. $132,130 and $100,500 during 1997 and the three months ended
March 31, 1998, respectively. The reimbursement arrangement with BV Operating,
Inc. was terminated on June 30, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
3.1 The Registrant's Certificate of Incorporation.
3.2 The Registrant's Bylaws.
-16-
<PAGE>
4.1 Form of Certificate of Common Stock of the Registrant.
4.2 Plan of Reorganization and Agreement of Merger among
Registrant, Potomac Exploration Acquisition Corporation and
Potomac Energy (Bermuda) Ltd., dated June 12, 1998.
10.1 Association Contract between Empresa Colombiana De Petroleos
and Seven Seas Petroleum Colombia, the Rosablanca sector,
dated November 19, 1997.
10.2 Association Contract between Empresa Colombiana De Petroleos
and Seven Seas Petroleum Colombia, the Montecristo sector,
dated November 19, 1997.
10.3 Letter of Intent between Potomac Energy Corporation and The
GHK Company L.L.C., dated February 27, 1997.
21.1 Subsidiaries of Registrant.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
During the last quarter of 1997, the Company did not file any reports on
Form 8-K.
-17-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC ENERGY CORPORATION
(Formerly Midwestern Resources, Inc.)
(Registrant)
By: /S/CARL W. SWAN
------------------------------------------
Carl W. Swan, Chief Executive Officer
Date: June ___, 1998
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Name Title Date
---- ----- ----
Chief Executive Officer, Secretary
and Vice Chairman of the Board
/S/CARL W. SWAN Directors June ___, 1998
- -------------------------
Carl W. Swan
/S/GENE CALLAWAY President and Director June ___, 1998
- -------------------------
Gene Callaway
Vice President, Chief Financial
/S/JAMES E. FRAZIER Officer, Secretary and Director June ___, 1998
- -------------------------
James E. Frazier
/S/FRANK H. MAHAN Executive Vice President and Director June ___, 1998
- -------------------------
Frank H. Mahan
/S/PAUL D. MEADOWS Chairman of the Board of Directors June ___, 1998
- -------------------------
Paul D. Meadows
/S/JOSEPH EDWARD MICHAUD Director June ___, 1998
- -------------------------
Joseph Edward Michaud
-18-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
POTOMAC ENERGY (BERMUDA) LTD.:
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1997
and March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations and Accumulated
Deficit for the Period from Inception (April 7, 1997)
to December 31, 1997 and the Three Months Ended
March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity
for the Period from Inception (April 7, 1997)
to December 31, 1997 and the Three Months Ended
March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows
for the Period from Inception (April 7, 1997)
to December 31, 1997 and the Three Months Ended
March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements (March 31, 1998
Information is Unaudited). . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
of Potomac Energy (Bermuda) Ltd.
We have audited the accompanying consolidated balance sheet of POTOMAC
ENERGY (BERMUDA) LTD. (a Bermuda Corporation in the development stage) and
subsidiary as of December 31, 1997, and the related consolidated statements of
operations and accumulated deficit, stockholders' equity and cash flows for the
period from inception (April 7, 1997) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Potomac
Energy (Bermuda) Ltd. and subsidiary as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the period
from inception (April 7, 1997) to December 31, 1997 in conformity with generally
accepted accounting principles.
MURRELL, HALL, MCINTOSH & CO., PLLP
Moore, Oklahoma
May 11, 1998
F-2
<PAGE>
POTOMAC ENERGY (BERMUDA) LTD.
(A Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash $ 102,782 $ 100,097
Accounts Receivable 150,000 --
Marketable Securities 37,777 37,777
------------ ------------
Total Current Assets $ 290,559 $ 137,874
Unevaluated Oil and Gas Interests, Full Cost Method 1,121 1,121
Other Assets 21,222 21,222
------------ ------------
TOTAL ASSETS $ 312,902 $ 160,217
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 121,701 $ 16,701
------------ ------------
Total Liabilities $ 121,701 $ 16,701
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity
Common Stock, $.01 Par Value, 12,000,000 Shares
Authorized and 4,700,000 and 5,500,000 Issued
and Outstanding, Respecitively $ 47,000 $ 55,000
Additional Paid-In Capital 840,000 1,032,000
Deficit Accumulated During Development Stage (695,799) (943,484)
------------ ------------
Total Stockholders' Equity $ 191,201 $ 143,516
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 312,902 $ 160,217
------------ ------------
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
F-3
<PAGE>
POTOMAC ENERGY (BERMUDA) LTD.
(A Development Stage Enterprise)
Consolidated Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Period from Inception
(April 7, 1997)
to Three Months
December 31 Ended
1997 March 31, 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES
Interest Income $ 1,443 $ 1,007
-------------- --------------
Total Revenues $ 1,443 $ 1,007
-------------- --------------
EXPENSES
Professional Fees and Consulting $ 692,557 $ 247,888
Bank Service Charges 591 415
Postage and Delivery 165 389
Shipping 217 -
Travel 2,666 -
Telephone 736 -
Office Supplies 310 -
-------------- --------------
Total Expenses $ 697,242 $ 248,692
-------------- --------------
Net Loss - Deficit Accumulated during
Development Stage $ (695,799) $ (247,685)
-------------- --------------
-------------- --------------
Net Loss per Share $ (0.19) $ (0.05)
-------------- --------------
-------------- --------------
Weighted Average Number of
Common Shares Outstanding $ 3,731,439 $ 5,043,820
-------------- --------------
-------------- --------------
</TABLE>
See Accompanying Notes to Financial Statements
F-4
<PAGE>
POTOMAC ENERGY (BERMUDA) LTD.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
--------------------------------- Accumulated
Shares Amount Paid-In Capital Deficit Total
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
April 7, 1997 -- $ -- $ -- $ -- $ --
Sale of Stock 2,800,000 28,000 384,000 -- 412,000
Shares Issued for Services 1,900,000 19,000 456,000 -- 475,000
Net Loss -- -- -- (695,799) (695,799)
--------------- --------------- --------------- --------------- ---------------
December 31, 1997 4,700,000 $ 47,000 $ 840,000 $ (695,799) $ 191,201
Shares Issued for Services (Unaudited) 500,000 5,000 120,000 -- 125,000
Sale of Stock (Unaudited) 300,000 3,000 72,000 -- 75,000
Net Loss (Unaudited) -- -- -- (247,685) (247,685)
--------------- --------------- --------------- --------------- ---------------
March 31, 1998 (Unaudited) 5,500,000 $ 55,000 $ 1,032,000 $ (943,484) $ 143,516
--------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- ---------------
</TABLE>
See Accompanying Notes to Financial Statements
F-5
<PAGE>
POTOMAC ENERGY (BERMUDA) LTD.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Inception
(April 7, 1997) Three Months
to December 31 Ended
1997 March 31, 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss $ (695,799) $ (247,685)
Adjustments to Reconcile Net Loss to Net Cash Provided
by Operations:
Compensation Expense 475,000 125,000
(Increase) Decrease:
Accounts Receivable (150,000) 150,000
Increase (Decrease):
Accounts Payable 121,701 (105,000)
-------------- --------------
Net Cash Used by Operating Activities $ (249,098) $ (77,685)
-------------- --------------
Cash Flows from Investing Activities
Exploration of Oil and Gas Properties $ (1,121) $ --
Purchase of Investments (37,777) --
Other Assets (21,222) --
-------------- --------------
Net Cash Used by Investing Activities $ (60,120) $ --
-------------- --------------
Cash Flows from Financing Activities
Sale of Stock $ 412,000 $ 75,000
-------------- --------------
Payments on Long-Trem Debt
Net Cash Provided by Financing Activities $ 412,000 $ 75,000
-------------- --------------
NET INCREASE (DECREASE) IN CASH $ 102,782 $ (2,685)
Cash at Beginning of Period -- 102,782
-------------- --------------
CASH AT END OF PERIOD $ 102,782 $ 100,097
-------------- --------------
-------------- --------------
</TABLE>
See Accompanying Notes to Financial Statements
F-6
<PAGE>
POTOMOC ENERGY (BERMUDA) LTD.
Notes to Consolidated Financial Statements
(March 31, 1998 Information is Unaudited)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of Operations - Potomac Energy (Bermuda) Ltd. (Potomac or Company),
a Bermuda corporation was incorporated April 7, 1997, for the sole purpose of
internationally identifying, investigating, exploring and where determined
advantageous developing, refining and marketing of oil and gas.
Development Stage Operations - Potomac is a development stage enterprise
engaging in acquisition, exploration and development of oil and gas projects.
The Company has yet to generate any revenue from oil and gas sales and has no
assurance of future revenues from such sales. Oil and gas exploration and
development is speculative in nature and as such involves a high degree of risk.
The Company plans to spend significant amounts on the acquisition and
exploration of properties. These costs may require the Company to raise
additional capital through debt or equity financing. Such additional financing
may require the encumbrance of Company assets or agreements with other parties
where some of the costs of exploration are paid by others in exchange for an
interest in the property. The Company plans to acquire interests in properties
internationally. Such plans have additional risks because in some cases the
country where the acquisition occurs may be considered politically and/or
economically unstable.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates include depreciation, depletion, and amortization of
proved oil and gas reserves. Oil and natural gas reserve estimates used as the
basis for depletion are inherently imprecise and are expected to change as
future information becomes available.
Income Taxes - The Company is a foreign corporation and is subject to the
income tax laws of the various countries in which it may operate. Branch income
from interests obtained through the association agreements in Columbia, South
America (see Note 2) are subject to Colombian corporate income tax as well as
remittance tax.
Consolidation - The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Potomac Energy (BVI) Ltd. All
material intercompany accounts and transactions have been eliminated.
Fair Value of Financial Instruments - The recorded amounts of cash,
accounts receivable and accounts payable approximate fair value because of the
short-term maturity of these items.
Oil and Gas Interests - The Company follows the full-cost method of
accounting for oil and natural gas properties. Under this method, all costs
incurred in the acquisition, exploration and development, including unproductive
wells, are capitalized in separate cost centers for each country. Such
capitalized costs include contract and concession acquisition, geological,
geophysical and other exploration work, drilling, completing and equipping oil
and gas wells, constructing production facilities and pipelines, and other
related costs.
F-7
<PAGE>
POTOMOC ENERGY (BERMUDA) LTD.
Notes to Consolidated Financial Statements
(March 31, 1998 Information is Unaudited)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Oil and Gas Interests (continued) -
The capitalized costs of oil and gas properties in each cost center
are amortized on composite units of production method based on future gross
revenues from proved reserves. Sales or other dispositions of oil and gas
properties are normally accounted for as adjustments of capitalized costs. Gain
or loss is not recognized in income unless a significant portion of a cost
center's reserves is involved. Capitalized costs associated with acquisition and
evaluation of unproved properties are excluded from amortization until it is
determined whether proved reserves can be assigned to such properties or until
the value of the properties is impaired. If the net capitalized costs of oil and
gas properties in a cost center exceed an amount equal to the sum of the present
value of estimated future net revenues from proved oil and gas reserves in the
cost center and the lower of cost or fair value of properties not being
amortized, both adjusted for income tax effects, such excess is charged to
expense.
Since the Company has not produced any oil or gas, a provision for
depletion has not been made.
Foreign Currency Translation - The majority of all costs associated with
foreign operations are paid in U.S. dollars as opposed to the local currency of
the operations; therefore, the reporting and functional currency is the U.S.
dollar. Gains and losses from foreign currency transactions are recognized in
current net income. Monetary items are translated using the exchange rate in
effect at the balance sheet date; non-monetary items are translated using
historical exchange rates. Revenues and expenses are translated at the average
rates in effect on the dates they occur. No material gains or losses were
incurred during the periods presented.
Organization Costs - Organization costs represent the normal cost of
incorporating the Company. Organization costs are will be amortized on a
straight-line basis.
Net Loss per Share - Net loss per share is calculated based on the weighted
average number of common, and when dilutive, common equivalent shares
outstanding. There were no differences between primary and fully diluted
earnings per share for the periods presented.
Investment Securities - The Company classifies its marketable debt
securities as "held to maturity" if it has the positive intent and ability to
hold the securities to maturity. All other marketable debt securities are
classified as "available for sale". Securities classified as "available for
sale" are carried in the financial statements at fair value. Realized gains and
losses, determined using the specific identification method are included in
earnings; unrealized holding gains and losses are reported as a separate
component of stockholder's equity. Securities classified as held to maturity are
carried at amortized cost.
Interim Financial Statements - The consolidated financial statements as of
March 31, 1998, and for the three months then ended are unaudited and, in the
opinion of management, reflect all adjustments that are necessary for a fair
presentation of the financial position as of such date and the results of
operations and cash flows for the period then ended. All such adjustments are of
a normal and recurring nature.
F-8
<PAGE>
POTOMOC ENERGY (BERMUDA) LTD.
Notes to Consolidated Financial Statements
(March 31, 1998 Information is Unaudited)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. The results of operations for the three months ended March
31, 1998, are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998.
NOTE 2 -- JOINT INTEREST OPERATION
Potomac has entered into a joint venture agreement with Seven Seas
Petroleum Colombia (Seven Seas), a branch of Seven Seas Petroleum, Inc. which is
a publically traded Canadian corporation. Seven Seas has obtained association
contracts for oil and gas reserves identified through preliminary investigation
in the Middle Magdalen Valley Basin in central Colombia, South America. Seven
Seas has been accepted by Ecopetrol, the state owned oil company in Colombia, to
administer the association contracts covering certain properties in Colombia,
South America known as the Rosa Blanca and Montecristo Blocks. Seven Seas owns a
75 percent interest and Potomac owns a 25 percent interest. Seven Seas is
designated as the operator. Upon the successful negotiation of the Association
contracts Seven Seas was required to pay Potomac a participation fee of
$150,000 which was used to offset geophysical survey costs.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Potomac is managed by BV Operating, Ltd., an Oklahoma corporation, in
accordance with a consulting agreement. BV Operating Ltd. (BV) is owned by
common shareholders of Potomac. Potomac pays a fixed rate of $30,000 per month
to BV. BV is responsible for costs and expenses of all offices, salaries and
wages plus applicable burdens and expenses except for directly chargeable items.
The direct charges include labor costs and benefits for field employees employed
on the joint property in Colombia, professional contract services, maintenance
and repair of equipment, insurance, travel and other necessary expenses. The
fixed rate adjusts annually in April and the agreement has a three year term
unless terminated by BV with 90 days notice. The total paid to BV for the year
ending December 31, 1997 was $132,130.
Potomac's Bermuda office is managed by a stockholder. The Company pays a
fee to the stockholder of $1,500 per month, paid quarterly. The agreement
between these parties is cancellable without notice. The total paid during 1997
was $18,000.
Geophysical studies on undeveloped properties were performed during the
year by a company owned by common shareholders of Potomac. Total fees paid to
this company during 1997 were $150,000.
NOTE 4 -- INVESTMENTS
The amortized cost and approximate market value of investment securities at
December 31, 1997 were:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for Sale
Real Estate Investment
Trust $37,777 $ -- $ -- $37,777
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
F-9
<PAGE>
POTOMOC ENERGY (BERMUDA) LTD.
Notes to Consolidated Financial Statements
(March 31, 1998 Information is Unaudited)
NOTE 5 -- SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 1997, Potomac completed a reverse merger with
Midwestern-Oklahoma Energy Resources Corporation. Midwestern is currently a
public company registered on the U.S. Stock Exchange. Shares of Midwestern
common stock will be issued to the shareholders of Potomac in connection with
the merger pursuant to Regulation D (Rule 506) under the Securities Act of 1933.
In connection with the merger Midwestern changed its name to Potomac Energy
Corporation and Potomac merged with and into Potomac Energy Corporation.
Subsequent to December 31, 1997, the Company granted stock options to
purchase 950,000 shares of common stock during various periods, which expire
April, 1999 through December, 2003 at an exercise price of $1.00 except for
50,000 shares which have an exercise price of $.50.
Subsequent to December 31, 1997, the Company entered into a three year
lease for office space . Rental payments under the new lease are $4,000 per
month.
F-10
<PAGE>
EXHIBIT 3.1
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MIDWESTERN-OKLAHOMA ENERGY RESOURCES CORPORATION
Midwestern-Oklahoma Energy Resources Corporation, an Oklahoma corporation
(this "Corporation"), does hereby certify:
FIRST. Midwestern-Oklahoma Energy Resources Corporation, an Oklahoma
corporation, was incorporated on March 10, 1998.
SECOND. This First Amended and Restated Certificate of Incorporation,
which restates and integrates and further amends the provisions of this
Corporation's Certificate of Incorporation, was duly adopted in accordance with
the provisions of Sections 77 and 80 of the Oklahoma General Corporation Act
(the "Act").
THIRD. This Corporation's Certificate of Incorporation is hereby restated
and further amended to read in its entirety as follows:
1. NAME. The name of this corporation is "Midwestern-Oklahoma Energy
Resources Corporation" (this "Corporation"), and, as amended, the name of this
Corporation has been changed to "Potomac Energy Corporation."
2. REGISTERED AGENT AND ADDRESS. The address of this Corporation's
registered office in the State of Oklahoma is 2800 Oklahoma Tower, 210 Park
Avenue, Oklahoma City, Oklahoma 73102-5604. The name of this Corporation's
registered agent at such address is Michael E. Dunn.
3. PURPOSE. The nature of the business or purposes to be conducted
or promoted by this Corporation is to engage in any lawful act or activity for
which corporations may be organized under the Oklahoma General Corporation Act.
The foregoing shall not be held to limit or restrict in any manner the objects
or purposes of this Corporation or the general powers conferred on this
Corporation by the laws of the State of Oklahoma.
4. CAPITALIZATION. The total number of shares of capital stock which
this Corporation shall have the authority to issue is 50,000,000 shares of
Common Stock having a par value of $.001 per share. Each share of Common Stock
shall entitle the registered holder thereof to one vote on all matters brought
before the shareholders of this Corporation for a vote. All shareholders of
this Corporation shall not have a preemptive or preferential right of
subscription to any shares of stock of this Corporation, whether now or
hereafter authorized, or to any obligations convertible into capital stock of
this Corporation, authorized, issued or sold.
5. INCORPORATOR. The name and mailing address of the incorporator
are as follows:
NAME MAILING ADDRESS
Michael E. Dunn 2800 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102-5604
6. POWERS AND PRIVILEGES. In furtherance and not in limitation of
the powers conferred by statute, the Board of Directors is expressly authorized
as follows:
(a) To adopt, amend or repeal the Bylaws of this Corporation;
(b) To authorize and cause to be executed or granted mortgages,
security interests and liens upon the real and personal property of this
Corporation;
(c) To set apart out of any of the funds of this Corporation available
for dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created;
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<PAGE>
(d) By a majority of the whole Board of Directors, to designate one or
more committees, each committee to consist of one (1) or more of the directors
of this Corporation. The Board may designate one (1) or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of a committee. Any such committee, to the extent
provided in the resolution or in the Bylaws of this Corporation, shall have and
may exercise the powers of the Board of Directors in the management of the
business and affairs of this Corporation, and may authorize the seal of this
Corporation to be affixed to all papers which may require it; provided, however,
the Bylaws may provide that in the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member;
(e) When and as authorized by the affirmative vote of the holders of a
majority of the stock issued and outstanding having voting power given at a
shareholders' meeting duly called upon such notice as required by law, or when
authorized by the written consent of the holders of a majority of the voting
stock issued and outstanding, to sell, lease or exchange all or substantially
all of the property and assets of this Corporation, including its goodwill and
its corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or property
including shares of stock in, and/or other securities of, any other corporation
or corporations, as its Board of Directors shall deem expedient and for the best
interests of this Corporation.
7. COMPROMISE OR ARRANGEMENT. Whenever a compromise or arrangement
is proposed between this Corporation and its creditors or any class of them
and/or between this Corporation and its shareholders or any class of them, any
court of equitable jurisdiction within the State of Oklahoma may, on the
application in a summary way of this Corporation or of any creditor or
shareholder thereof or on the application of any receiver or receivers appointed
for this Corporation under the provisions of Section 1106 of Title 18 of the
Oklahoma Statutes or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 1100 of Title 18 of the Oklahoma Statutes, order a meeting of the
creditors or class of creditors, and/or of the shareholders or class of
shareholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
shareholders or class of shareholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the same
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the shareholders or class of
shareholders, of this Corporation, as the case may be, and also on this
Corporation.
8. GENERAL. Meetings of shareholders may be held within or without
the State of Oklahoma, as the Bylaws may provide. The books of this Corporation
may be kept (subject to any provision contained in the statutes) outside the
State of Oklahoma at such place or places as may be designated from time to time
by the Board of Directors or in the Bylaws of this Corporation. Elections of
directors need not be by written ballot unless the Bylaws of the Corporation
shall so provide.
9. INDEMNIFICATION AND INSURANCE. (a) This Corporation shall, to the
fullest extent permitted by Section 1031 of the General Corporation Act of the
State of Oklahoma, as the same exists or may be amended, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said Section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any Bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in their official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent, and shall
inure to the benefit of the heirs, executors and administrators of such person.
No amendment to or repeal of this Section 9 shall apply to, or have any effect
on, the right of indemnification of any officer, director, employee or agent of
this Corporation with respect to any act or omission of such person occurring
prior to any such amendment or repeal.
(b) This Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of this Corporation
or another corporation, partnership, joint venture, trust, limited liability
company, association or other enterprise against any expense, liability or loss,
whether or not this Corporation would
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<PAGE>
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Act of the State of Oklahoma.
10. RELATED PARTY TRANSACTIONS. To the extent permitted by law, no
contract or transaction between this Corporation and one or more of its
directors or officers, or between this Corporation and any other corporation,
partnership, trust, limited liability company, association or other organization
in which one or more of its directors or officers are directors or officers or
have a financial interest, shall be void or voidable solely for this reason, or
solely because the directors or officers are present at or participate in the
meeting of the Board of Directors or committee thereof which authorizes the
contract or transaction, or solely because the directors or officers or their
votes are counted for such purpose.
11. AMENDMENT. This Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon shareholders herein are granted subject to this reservation.
12. BOARD OF DIRECTORS. The powers of the Incorporator shall
terminate upon the election of the Board of Directors of this Corporation. The
number of members of the Board of Directors of this Corporation shall be set
forth in the Bylaws of this Corporation.
13. LIMITED LIABILITY. The private property of the shareholders of
this Corporation shall not be subject to the payment of the debts, liabilities
or obligations of or claims against this Corporation.
14. LIABILITY OF DIRECTORS. To the fullest extent permitted by the
General Corporation Act of the State of Oklahoma, as the same exists or may
hereafter be amended, a director of this Corporation shall not be personally
liable to this Corporation or its shareholders for monetary damages for breach
of fiduciary duty as a director. No amendment to or repeal of this Section 14
shall apply to, or have any effect on, the liability or alleged liability of any
director of this Corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment or repeal.
IN WITNESS WHEREOF, this corporation has caused this Certificate to be
signed by its President and attested by its Secretary this 15th day of June,
1998.
MIDWESTERN-OKLAHOMA ENERGY
RESOURCES CORPORATION
By:/S/CARL W. SWAN
-----------------------------------------
Carl W. Swan, Chief Executive Officer
ATTEST:
/S/JAMES E. FRAZIER
- --------------------------------
James E. Frazier, Secretary
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<PAGE>
EXHIBIT 3.2
BYLAWS
OF
POTOMAC ENERGY CORPORATION
(AMENDED AND RESTATED JUNE 24, 1998)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation
shall be located within or without the state of
incorporation and as may be determined by the Board of
Directors.
Section 2. REGISTERED OFFICE. The registered office of the Corporation
required by law to be maintained in the state of
incorporation may be, but need not be, identical with the
principal office of the Corporation. The address of the
registered office may be changed from time to time by the
Board of Directors.
Section 3. OTHER OFFICES. The Corporation may have offices at such
other places, either within or without the state of
incorporation as the Board of Directors may designate or as
the business of the Corporation may require from time to
time.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of the shareholders
shall be held on a date designated by the Board of
Directors, which shall be within six (6) months next
following the end of the fiscal year of the Corporation, for
the purpose of electing directors and for the transaction of
such other business as may come before the meeting. If the
day fixed for the annual meeting shall be a legal holiday,
such meeting shall be held on the next succeeding business
day.
Section 2. SUBSTITUTE ANNUAL MEETING. If the annual meeting shall not
be held on the day designated for the annual meeting of
shareholders, or at any adjournment thereof, the directors
shall cause the meeting to be held as soon thereafter as
convenient. If there be a failure to hold the annual
meeting of shareholders for a period of thirty (30) days
after the date designated therefor, or if no date has been
designated for a period of thirteen (13) months after the
organization of the Corporation or after its last annual
meeting, the district court may summarily order a meeting to
be held upon the application of any shareholder or director.
The shares of stock represented at such meeting either by
person or by proxy, and entitled to vote thereat, shall
constitute a quorum for the purpose of such meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the President, and shall be called by the
President or Secretary at the request in writing of a
majority of the Board of Directors or, at the written
request of the holders owning of record ten percent (10%) or
more of all shares entitled to vote at the meeting. Such
request shall state the purpose or purposes of the proposed
meeting.
Section 4. PLACE OF MEETINGS. The Board of Directors may designate any
place, either within or without the state of incorporation,
as the place of meeting for any annual meeting or for any
special meeting called by the Board of Directors. A waiver
of notice signed by all shareholders entitled to vote at a
meeting may designate any place, either within or without
the state of incorporation as the place for the holding of
such meeting. If no designation is
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<PAGE>
made or if a special meeting be otherwise called, the place
of meeting shall be the principal office of the Corporation.
Section 5. NOTICE OF MEETINGS. Written or printed notice stating the
time and place of the meeting and, in case of a special
meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten (10) nor more
than sixty (60) days before the date of the meeting, either
personally or by mail, by or at the direction of the
President, the Secretary, or the officer or persons calling
the meeting, to each shareholder of record entitled to vote
at such meeting. If mailed, such notice shall be deemed to
be delivered when deposited in the United States mail
addressed to the shareholder of the Corporation at his
address as it appears on the records of the Corporation,
with postage thereon prepaid. In addition to the foregoing,
notice of a substitute annual meeting shall state that the
annual meeting was not held on the day designated by these
Bylaws and that such substitute annual meeting is being held
in lieu of and is designated as such annual meeting.
When a meeting is adjourned for thirty (30) days or more,
notice of the adjourned meeting shall be given as in the
case of an original meeting. When a meeting is adjourned for
less than thirty (30) days in any one adjournment, no notice
need be given of the time and place of the adjourned meeting
or of the business to be transacted thereat other than by
announcement at the meeting at which the adjournment is
taken.
Section 6. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the
purpose of determining shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment
thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of
Directors may provide that the stock transfer books shall be
closed for a stated period but not to exceed, in any case,
sixty (60) days. If the stock transfer books shall be
closed for the purpose of determining shareholders entitled
to notice of or to vote at a meeting of shareholders, such
books shall be closed at least ten (10) days immediately
preceding such meeting.
In lieu of closing the stock transfer books, the Board of
Directors may fix in advance a date as the record date for
any such determination of shareholders, such date in any
case to be not more than sixty (60) days prior to the date
on which the particular action requiring such determination
of shareholders is to be taken.
If the stock transfer books are not closed and no record
date is fixed for the determination of shareholders entitled
to notice of or to vote at a meeting of shareholders, the
date on which notice of the meeting is mailed or the date on
which the resolution of the Board of Directors declaring
such dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment
thereof except where the determination has been made through
the closing of the stock transfer books and the stated
period of closing has expired.
Section 7. VOTING LISTS. The Secretary shall make, at least ten (10)
days prior to the convening of any shareholders' meeting, a
list of all persons entitled to represent shares at such
meeting, arranging the names alphabetically, with the number
of shares entitled to be voted by each set opposite their
respective names. Such list shall be open to the
examination of any shareholder during ordinary business
hours for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice
of the meeting, or if not so specified, at the place where
the meeting is to be held. The list shall also be produced
and kept at the time and place of the
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<PAGE>
meeting during the whole time thereof, and may be inspected
by any shareholder who is present.
Section 8. QUORUM. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of
shareholders.
The shareholders at a meeting at which a quorum is present
may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to
time by a vote of the majority of the shares voting on the
motion to adjourn; and, at any adjourned meeting at which a
quorum is present, any business may be transacted which
might have been transacted at the original meeting.
Section 9. PROXIES. Shares may be voted either in person or by one or
more agents authorized by a written proxy executed by the
shareholder or by his duly authorized attorney-in-fact. The
appointment of a proxy shall be filed in writing with the
Secretary at, or before, the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the
writing or transmission created pursuant to this Section may
be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original
writing or transmission could be used, provided that such
copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original
writing or transmission.
A proxy is not valid after the expiration of five years from
the date of its execution, unless the person executing it
specifies thereon the length of time for which it is to
continue in force, or limits its use to a particular
meeting. The termination of a proxy's authority by act of
the shareholder shall, subject to the time limitation set
forth herein, be ineffective until written notice of the
termination has been given to the Secretary. A proxy's
authority shall not be revoked by the death or incapacity of
the maker unless, before the vote is cast or the authority
is exercised, written notice of such death or incapacity is
given to the Corporation.
Section 10. VOTING OF SHARES. Each outstanding share of capital stock
entitled to vote shall be entitled to one vote on each
matter submitted to a vote at a meeting of shareholders,
subject to the voting rights and privileges, lack thereof,
or limitations thereon, of the class or series of capital
stock.
At each election for directors, every shareholder entitled
to vote at such election shall have the right to vote, in
person or by proxy, the number of shares standing of record
in his name for each person nominated as a director to be
elected and for whose election he has a right to vote.
Treasury shares, or other shares not at the time
outstanding, shall not, directly or indirectly, be voted at
any shareholders' meeting or counted in calculating the
actual voting power of shareholders at any given time, but
shares of Corporation stock held by the Corporation in a
fiduciary capacity may be voted and shall be counted in
determining the total number of outstanding shares and the
actual voting power of the shareholders at any given time.
Every stock vote at a meeting of shareholders shall be taken
by written ballots, each of which shall state the name of
the shareholder or proxy voting and such other information
as may be required under the procedure established for the
meeting. The Corporation may, and to the extent permitted
by law, shall, in advance of any meeting of shareholders,
appoint one or more inspectors to act at the meeting and
make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of shareholders, the
person presiding at the meeting may, and to the extent
required by law, shall, appoint one or more inspectors to
act at the meeting. Each inspector, before entering upon
the discharge of his
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<PAGE>
duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and
according to the best of his ability. Every vote taken by
ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
Section 11. VOTES REQUIRED. The vote of a majority of the shares voted
at a meeting of shareholders, duly held at which a quorum is
present, shall be sufficient to take or authorize action
upon any matter which may properly come before the meeting
except as otherwise provided by law or by these Bylaws.
Section 12. INFORMAL ACTION BY SHAREHOLDERS. Any action which may be
taken at a meeting of the shareholders may be taken without
a meeting if a consent in writing, setting forth the action
so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the Corporation
by delivery to its registered office in Oklahoma, it
principal place of business, or an officer or agent of the
Corporation having custody of the books in which proceedings
of meetings of shareholders are recorded. Delivery made to
the Corporation's registered office shall be made by hand or
by certified or registered mail, return receipt requested.
Each written consent shall bear the date of signature of
each shareholder who signs the consent and no written
consent shall be effective to take the corporate action
referred to therein unless, within sixty (60) days of the
date of the earliest dated consent delivered to the
Corporation, a written consent or consents signed by a
sufficient number of holder to take action are delivered to
the Corporation in the manner prescribed in the first
paragraph of this Section.
ARTICLE III
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors
constituting the Board of Directors shall be at least one
and such number as the directors may from time to time
determine by resolution or election.
The directors shall be elected at the annual or adjourned
annual meeting of the shareholders (except as herein
otherwise provided for the filling of vacancies) and each
director shall hold office until his death, resignation,
retirement, removal, disqualification, or his successor
shall have been elected and qualified.
Directors need not be residents of the state of
incorporation nor shareholders of the Corporation.
Section 3. VACANCIES. Any vacancy occurring in the Board of Directors
including any vacancy created by an increase in the
authorized number of directors elected by all of the
shareholders having the right to vote as a single class may
be filled by the affirmative vote of a majority of the
remaining directors even though less than a quorum or by the
sole remaining director.
Any director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office. At a
special meeting of shareholders, the shareholders may elect
a director to fill any vacancy not filled by the directors.
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<PAGE>
Section 4. REMOVAL. The entire Board of Directors, or any individual
director, may be removed at any time, with or without cause,
by a vote of the shareholders holding a majority of the
outstanding shares entitled to vote at an annual or special
meeting of shareholders. However, unless the entire Board
is removed, an individual director shall not be removed when
the number of shares voting against the proposal for removal
would be sufficient to elect a director.
Section 5. CHAIRMAN OF BOARD. There may be a Chairman of the Board of
Directors elected by the directors from their number at the
annual meeting of the Board of Directors. The Chairman
shall preside at all meetings of the Board of Directors and
perform such other duties as may be directed by the Board.
Section 6. COMPENSATION. The Board of Directors may compensate
directors for their services as such and may provide for the
payment of all expenses incurred by directors in attending
meetings of the Board.
ARTICLE IV
MEETINGS OF DIRECTORS
Section 1. REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw
immediately after, and at the same place, as the annual
meeting of shareholders. The Board of Directors may
provide, by resolution, the time and place, either within or
without the state of incorporation, for the holding of
additional regular meetings without other notice than such
resolution.
Section 2. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the President or by a majority of
the directors. The person or persons authorized to call
special meetings of the Board of Directors may fix any
place, either within or without the state of incorporation,
as the place for holding any special meeting of the Board of
Directors called by them.
Section 3. NOTICE. Notice of special meetings of the Board of
Directors shall be given to each director not less than
three (3) days before the date of the meeting by any usual
means of communication. All business to be transacted at,
and all purposes of, any regular or special meeting of the
Board of Directors must be specified in the notice or waiver
of notice of such meeting.
Section 4. WAIVER BY ATTENDANCE. Attendance of a director at a meeting
of the Board of Directors shall constitute a waiver of
notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the
transaction of any business because the meeting is not
lawfully called or convened.
Section 5. QUORUM. A majority of the number of directors fixed by or
in accordance with these Bylaws shall constitute a quorum
for the transaction of business.
Section 6. MANNER OF ACTING. Except as otherwise provided in these
Bylaws, the act of the majority of the directors present at
a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 7. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors at which
action on any corporate matter is taken shall be presumed to
have assented to the action taken unless his contrary vote
or abstention is recorded or his dissent is otherwise
entered in the minutes of the meeting or unless he shall
file his written dissent of such action with the person
acting as the Secretary of the meeting before the
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<PAGE>
adjournment thereof or shall forward such dissent by
registered mail to the Secretary promptly after the
adjournment of the meeting. An abstention shall be deemed a
negative vote. Such right to dissent shall not apply to a
director who voted in favor of such action.
Section 8. INFORMAL ACTION BY DIRECTORS. Any action which might be
taken at a meeting of the Board of Directors may be taken
without a meeting if a record or memorandum thereof be made
in writing and signed by all of the members of the Board.
Such writing or memorandum shall be filed with the Secretary
as part of the corporate records.
Section 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members
of the Board of Directors, or any committee thereof, may
participate in a meeting of such Board or committee by means
of conference telephone or similar communications equipment
by means of which persons participating in the meeting can
hear each other and such participation shall constitute
presence in person at such meeting.
Section 10. COMPENSATION OF DIRECTORS. Directors, a such, may receive,
pursuant to resolution of the Board of Directors, fixed fees
and other compensation for services as directors, including,
without limitation, their services as members of committees
of committees of the Board of Directors.
ARTICLE V
COMMITTEES
Section 1. CREATION. The Board of Directors, by resolution adopted by
a majority of directors, may designate one or more
committees, each committee to consist of one or more of the
directors of the Corporation. The Board may designate one
or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting
of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present
at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified
member. Any such committee shall have and may exercise all
the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee
shall have the power or authority in reference to amending
the articles of incorporation (except that a committee, to
the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the
Board of Directors may fix the designations and any of the
preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any
other series of the same or any other class or classes of
stock of the Corporation or fix the number of shares of any
series of stock or authorize the increase or decrease of the
shares of any series), adopting an agreement of merger or
consolidation, recommending to the shareholders the sale,
lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the
shareholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the Bylaws of the
Corporation; and, unless by resolution of the Board of
Directors, no such committee shall have the power or
authority to declare a dividend, authorize the issuance of
stock, or to adopt a certificate of ownership and merger.
Section 2. REMOVAL. Any member of a committee may be removed at any
time with or without cause by a majority of the number of
directors fixed by these Bylaws.
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Section 3. MINUTES. Each committee shall keep regular minutes of its
proceedings and report the same to the Board when required.
Section 4. RESPONSIBILITY OF DIRECTORS. The designation of a committee
and the delegation thereto of authority shall not operate to
relieve the Board of Directors, or any member thereof, of
any responsibility or liability imposed upon it or him by
law.
ARTICLE VI
OFFICERS
Section 1. OFFICERS OF THE CORPORATION. The officers of the
Corporation shall consist of a Chief Executive Officer,
President, a Secretary, a Treasurer and such Vice
Presidents, Assistant Secretaries, Assistant Treasurer, and
other officers as the Board of Directors may from time to
time elect. The same person may at the same time hold any
of the above named offices.
Section 2. ELECTION AND TERM. The officers of the Corporation shall be
elected by the Board of Directors and each officer shall
hold office until his death, resignation, retirement,
removal, disqualification or his successor shall have been
elected and qualified.
Section 3. COMPENSATION OF OFFICERS. The compensation of all officers
of the Corporation shall be fixed by the Board of Directors
and no officer shall serve the Corporation in any other
capacity and receive compensation therefor unless such
additional compensation be authorized by the Board of
Directors.
Section 4. REMOVAL OF OFFICERS AND AGENTS. Any officer or agent
elected or appointed by the Board of Directors may be
removed by the Board of Directors whenever, in its judgment,
the best interests of the Corporation will be served
thereby, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
Section 5. BONDS. The Board of Directors may, by resolution, require
any officer, agent, or employee of the Corporation to give
bond to the Corporation, with sufficient sureties,
conditioned on the faithful performance of the duties of his
respective office or position, and to comply with such other
conditions as may from time to time be required by the Board
of Directors.
Section 6. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
be the principal executive officer of the Corporation and,
subject to the control of the Board of Directors, shall, in
general, supervise and control all of the business and
affairs of the Corporation. He shall, when present, preside
at all meetings of the shareholders. He shall sign, with
the Secretary, an Assistant Secretary, or any other proper
officer of the Corporation thereunto authorized by the Board
of Directors, certificates for shares of the Corporation,
any deeds, mortgages, bonds, contracts, or other instruments
which the Board of Directors has authorized to be executed,
except in cases where the signing and execution thereof
shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the
Corporation, or shall be required by law to be otherwise
signed or executed; and, in general, shall perform all
duties incident to the office of Chief Executive Officer and
such other duties as may be prescribed by the Board of
Directors from time to time.
Section 7. PRESIDENT. The President shall be the chief operating
officer of the Corporation and, subject to the control of
the Board of Directors and supervision of the Chief
Executive Officer, shall, in general, supervise and control
all of the business and affairs of the Corporation. He
shall in the absence of the Chief Executive Officer, when
present, preside at all meetings of the shareholders. He
shall sign, with the Secretary, an Assistant Secretary, or
any other proper officer of the Corporation thereunto
authorized by the Board of Directors, certificates for
shares of the Corporation, any deeds, mortgages, bonds,
contracts, or other instruments
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which the Board of Directors has authorized to be executed,
except in cases where the signing and execution thereof
shall be expressly delegated by the Board of Directors
or by these Bylaws to some other officer or agent of
the Corporation, or shall be required by law to be
otherwise signed or executed; and, in general, shall
perform all duties incident to the office of President
chief operating officer and such other duties as may be
prescribed by the Board of Directors from time to time.
Section 8. VICE PRESIDENTS. In the absence of the Chief Executive
Officer and the President or in the event of their deaths,
inabilities or refusals to act, the Vice Presidents in the
order of their length of service as Vice Presidents, unless
otherwise determined by the Board of Directors, shall
perform the duties of the Chief Executive Officer and the
President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the Chief
Executive Officer and President. A Vice President may sign
certificates for shares of the Corporation. Vice Presidents
shall perform such other duties as from time to time may be
assigned to them by the Chief Executive Officer, President,
or Board of Directors.
Section 9. SECRETARY. The Secretary shall: (a) keep the minutes of the
meetings of shareholders, of the Board of Directors and of
all executive committees in one or more books provided for
that purpose; (b) see that all notices are duly given in
accordance with the provisions of these Bylaws or as
required by law; (c) be custodian of the corporate records
and of the seal of the Corporation and see that the seal of
the Corporation is affixed to all documents the execution of
which on behalf of the Corporation under its seal is duly
authorized; (d) keep a register of the post office address
of each shareholder which shall be furnished to the
Secretary by such shareholder; (e) sign with the Chief
Executive Officer and/or President, certificates for shares
of the Corporation, the issuance of which shall have been
authorized by resolution of the Board of Directors; (f) have
general charge of the stock transfer books of the
Corporation; and (g) in general, perform all duties as from
time to time may be assigned to him by the Chief Executive
Officer, President or by the Board of Directors.
The Secretary shall keep, or cause to be kept in the state
of incorporation at the Corporation's registered office and
principal place of business, a record of the Corporation's
shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by
each.
Section 10. ASSISTANT SECRETARIES. In the absence of the Secretary or
in the event of the Secretary's death, inability or refusal
to act, the Assistant Secretaries in the order of their
length of service as Assistant Secretary, unless otherwise
determined by the Board of Directors, shall perform the
duties of the Secretary, and when so acting shall have all
the powers of and be subject to all the restrictions upon
the Secretary. They shall perform such other duties as may
be assigned to them by the Secretary, by the Chief Executive
Officer, President, or the Board of Directors.
Any Assistant Secretary may sign, with the Chief Executive
Officer or President, certificates for shares of the
Corporation.
Section 11. TREASURER. The Treasurer shall: (a)have charge and custody
of and be responsible for all funds and securities of the
Corporation; receive and give receipts for moneys due and
payable to the Corporation from any source whatsoever, and
deposit all such moneys in the name of the Corporation in
such depositories as shall be selected in accordance with
the provisions of Article VII, Section 4 of these Bylaws;
and (b) in general, perform all of the duties as from time
to time may be assigned to him by the Chief Executive
Officer, President or the Board of Directors.
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The Treasurer shall prepare, or cause to be prepared, a true
statement of the Corporation's assets and liabilities as of
the close of each fiscal year, all in reasonable detail,
which statement shall be made and filed at the Corporation's
registered office or principal place of business in the
state of incorporation within four months after the end of
such fiscal year and thereat kept available for a period of
at least ten years. Such statement shall include, when
applicable, a statement of the then current conversion rate
of any outstanding securities and a statement of the number
of shares covered by any outstanding options and the price
at which the options are exercisable.
Section 12. ASSISTANT TREASURER. In the absence of the Treasurer or in
the event of the Treasurer's death, inability or refusal to
act, the Assistant Treasurer, unless otherwise determined by
the Board of Directors, shall perform the duties of the
Treasurer and when so acting shall have all the powers of
and be subject to all the restrictions upon the Treasurer.
He shall perform such other duties as may be assigned to him
by the Treasurer, the Chief Executive Officer, President, or
by the Board of Directors.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or
execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general
or confined to specific instances.
Section 2. LOANS. No loan shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued
in its name unless authorized by a resolution of the Board
of Directors. Such authority may be general or confined to
specific instances.
Section 3. CHECKS AND DRAFTS. All checks, drafts or other orders for
the payment of money, issued in the name of the Corporation,
shall be signed by such officer or officers, agent or agents
of the Corporation and in such manner as shall from time to
time be determined.
Section 4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit
of the Corporation in such depositories as the Board of
Directors may select.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. CERTIFICATES FOR SHARES. Certificates representing shares
of the Corporation shall be in such form as shall be
determined by the Board of Directors. The Corporation shall
issue and deliver to each shareholder certificates
representing all fully paid shares owned by him.
Certificates shall be signed by the Chairman or Vice
Chairman of the Board of Directors, the Chief Executive
Officer, the President or Vice President and by the
Secretary or an Assistant Secretary. All certificates for
shares shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the
shares represented thereby are issued, with the number and
class of shares and the date of issue, shall be entered on
the stock transfer books of the Corporation.
Section 2. TRANSFER OF SHARES. Transfer of shares of the Corporation
shall be made on the stock transfer books of the Corporation
only if:
(a) the share certificate is endorsed by the
appropriate person or persons; and
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(b) reasonable assurance is given that those
endorsements are genuine and effective; and
(c) the Corporation has no duty to inquire into adverse
claims in connection with the shares or has discharged any
such duty; and
(d) any applicable law relating to the collection of
taxes has been complied with; and
(e) the transfer is in fact rightful or to a bona fide
purchaser.
Section 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the
Corporation alleged to have been lost or stolen or
destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost,
stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in
its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or such owner's legal
representative, to advertise the same in such manner as the
Corporation shall require and/or to give the Corporation a
bond in such sum as the Corporation may direct as indemnity
against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost,
stolen or destroyed.
Section 4. HOLDER OF RECORD. Prior to due presentment for transfer of
the shares, the Corporation may treat the registered owner
as the person exclusively entitled to vote, to receive
notifications and otherwise to exercise all the rights and
powers of an owner.
Section 5. TREASURY SHARES. Treasury shares of the Corporation shall
consist of such shares as have been issued and thereafter
acquired but not canceled by the Corporation. Treasury
shares shall not carry voting or dividend rights.
ARTICLE IX
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
Section 1. RIGHT TO INDEMNIFICATION.
(a) The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation)
by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines, excise taxes
and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful ("Indemnitee"). The
termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of NOLO
CONTENDERE or its equivalent shall not, of itself, create a
presumption that the Indemnitee did not act in good faith
and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had reasonably
cause to believe that his conduct was unlawful.
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(b) The Corporation shall indemnify any Indemnitee who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue
or matter as to which such Indemnitee shall have been
adjudged to be liable to the Corporation unless and only to
the extent that the court in which such action or suit was
brought shall determine upon application that, despite the
adjudication of liability but in view of all the
circumstances of the case, such Indemnitee is fairly and
reasonably entitled to indemnity for such expenses which the
court shall deem proper.
(c) To the extent that an Indemnitee has been
successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsection (a) or
(b) of this section, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred
by him in connection therewith.
(d) Any indemnification under the provisions of
subsection (a) or (b) of this section (unless ordered by a
court) shall be made by the Corporation only as authorized
in the specific case upon a determination that
indemnification of the Indemnitee is proper in the
circumstances because he has met the applicable standard of
conduct set forth in subsection (a) or (b) of this section.
Such determination shall be made (i) by the Board of
Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or
proceedings, (ii) if such a quorum is not obtainable, or,
even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion,
or (iii) by the shareholders.
(e) For purposes of this Article, references to "the
corporation" shall include, in addition to the resulting
corporation, any constituent corporation, including any
constituent of a constituent, absorbed in a consolidation or
merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors,
officers, and employees or agents, so that any person who is
or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request
of such constituent corporation, as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article with respect
to the resulting or surviving corporation as he would have
with respect to such constituent corporation of its separate
existence had continued.
(f) For purposes of this Article, references to (i)
"other enterprises" shall include, without limitation, an
"employee benefit plan" within the meaning of the Employee
Retirement Income Security Act of 1974 ("ERISA") or
otherwise, (ii) "fines" shall include any excise taxes or
penalties assessed on a person with respect to an employee
benefit plan under ERISA or otherwise, and (iii) "serving at
the request of the corporation" shall include any service as
a director, officer, employee or agent of the corporation
which imposes duties on, or involves services, by such
director, officer, employee, or agent with respect to an
employee benefit plan, its participants, or beneficiaries.
Furthermore, for purposes of this Article, a person who
acted in good faith and in a manner he reasonably believed
to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed
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to have acted in a manner "not opposed to the best interest
of the corporation" as referred to in this Article.
(g) The indemnification and advancement of expenses
provided by or granted pursuant to this Article, unless
otherwise provided when authorized or ratified, shall
continue as to an Indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such
Indemnitee.
Section 2. RIGHT TO ADVANCEMENT OF EXPENSES. Expenses incurred by an
Officer or Director in defending a civil or criminal action,
suit or proceeding may be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding
upon receipt of an undertaking (hereinafter an
"undertaking") by or on behalf of such director or officer
to repay such amount if it shall ultimately be determined by
final judicial decision from which there is not further
right of appeal (hereinafter a "final adjudication") that he
is not entitled to be indemnified by the Corporation as
authorized by the provisions of this Article. Such expenses
incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the Board of Directors
deems appropriate.
Section 3. NON-EXCLUSIVITY OF RIGHTS. The indemnification and
advancement of expenses provided by or granted pursuant to
this Article shall not be deemed exclusive of any other
rights to which an Indemnitee seeking indemnification or
advancement of expenses may be entitled under any Bylaw,
agreement, vote of shareholders or disinterested directors
or otherwise, both as to action in his official capacity and
as to action in another capacity while holding such office
or serving as a director.
Section 4. INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of who is or was a director,
officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as
such, whither or not the Corporation would have the power to
indemnify him against such liability under the provisions of
this Article.
Section 5. RIGHT OF INDEMNITEE TO BRING SUIT. In the event a claim
under this Article is not paid in full by the Corporation
within sixty (60) days after a written claim has been
received by the Corporation, the Indemnitee may at any time
thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or in
part in any such suit, the Indemnitee, in addition to
indemnification pursuant to this the other provisions of
this Article, shall be entitled to be paid the expenses of
prosecuting such suit against the Corporation, including
reasonable attorneys' fees and costs. The Corporation shall
be entitled to assert as a defense that the Indemnitee has
not met any applicable standard for indemnification set
forth in the Oklahoma General Corporation Act and the
Corporation shall be entitled to recover any advancement of
expenses upon a final adjudication in (i) any suit brought
by the Indemnitee to enforce a right to indemnification
under the Article (but not in a suit brought by the
Indemnitee to enforce a right to an advancement of
expenses), and (ii) in any suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms
of an undertaking by the Indemnitee. Neither the failure of
the Corporation (including its Board of Directors,
independent legal counsel, or its shareholders) to have made
a determination prior to the commencement of such suit that
indemnification of the Indemnitee is proper in the
circumstance because the Indemnitee has met the applicable
standard of
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conduct set forth in the Oklahoma General Corporation Act,
nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its
shareholders) that the Indemnitee has not met such
applicable standard of conduct, shall create a presumption
that the Indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought
by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking by the Indemnitee,
the burden of proving that the indemnitee is not entitled to
be indemnified, or to such advancement of expenses, under
this Article or otherwise shall be on the Corporation.
ARTICLE X
GENERAL PROVISIONS
Section 1. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its
outstanding shares in cash, property, or its own shares
pursuant to law and subject to the provisions of its
charter.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to be
given to any shareholder or director by law, by the charter
or by these Bylaws, a waiver thereof in writing signed by
the person or persons entitled to such notice, whether
before or after the time stated therein, shall be equivalent
to the giving of such notice.
Section 3. FISCAL YEAR. Unless otherwise fixed by the Board of
Directors, the fiscal year of the Corporation shall be the
fiscal year beginning on the first day of January of each
year and ending on the following thirty-first day of
December.
Section 4. AMENDMENTS. These Bylaws may be altered or repealed at any
regular or special meeting of the shareholders or of the
Board of Directors.
Section 5. CHARTER PROVISIONS. In case of conflict between a provision
in these Bylaws and a provision in the charter of the
Corporation, the charter provision shall govern.
Signed this 24th day of June, 1998.
/S/JAMES E. FRAZIER
-------------------------------------------
James E. Frazier, Secretary
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EXHIBIT 4.2
PLAN OF REORGANIZATION AND AGREEMENT OF MERGER
THIS PLAN OF REORGANIZATION AND AGREEMENT OF MERGER (this "Agreement")
dated this 12th day of June, 1998, between Midwestern-Oklahoma Energy Resources
Corporation, an Oklahoma corporation ("Midwestern"), Potomac Exploration
Acquisition Corporation, an Oklahoma corporation and wholly-owned subsidiary of
Midwestern ("Acquisition Corp") and Potomac Energy (Bermuda) Ltd., a Bermuda
corporation ("Potomac"), (Acquisition Corp and Potomac being sometimes referred
to herein as the "Constituent Corporations").
RECITALS
The respective Boards of Directors of the Constituent Corporations and
Midwestern have determined that the merger of Potomac with and into Acquisition
Corp (which in its capacity as the surviving corporation, is hereinafter
sometimes referred to as the "Surviving Corporation") to be desirable and in the
best interest of the shareholders of Potomac and Midwestern as the sole
shareholder of Acquisition Corp, and desiring to adopt a plan of reorganization
within the meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986,
as amended, have approved this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements contained herein, and in
accordance with the applicable provisions of the Oklahoma General Corporation
Act of the State of Oklahoma (the "Oklahoma Law") and of the Companies Act 1981
of Bermuda (the "Bermuda Law"), each of the Constituent Corporations hereby
agrees that Potomac shall be merged with and into Acquisition Corp (the
"Merger") and that the terms and conditions and consummation of the Merger shall
be as follows:
ARTICLE I
MERGER OF POTOMAC WITH AND INTO ACQUISITION CORP
1.01 EFFECT OF MERGER. At the Effective Time (as defined in Section 4.1
hereof) all and singular the rights, privileges, powers and franchises, as well
of a public or private nature, and all property, real, personal and mixed, of
each of the Constituent Corporations, and all debts due to either of them on
whatever account, including subscriptions to shares and all other things in
action, or belonging to either of them, shall be, by operation of law or
otherwise, taken and deemed to be transferred to, and shall be vested in, the
Surviving Corporation without further act or deed; and all property, rights,
privileges, powers and franchises and all any every other interest shall
thereafter effectively be the property of the Surviving Corporation as they were
of the Constituent Corporations, and the title to any real estate vested by deed
or otherwise in either of the Constituent Corporations shall not revert or be in
any way impaired by reason of the merger; by the Surviving Corporation shall
thenceforth be liable for all debts, liabilities, obligations, duties and
penalties of each of the Constituent Corporations and all said debts,
liabilities, obligations, duties and penalties shall thenceforth attach to the
Surviving Corporation and may be enforced against it to the same extent as if
said debts, liabilities, obligations, duties and penalties had been incurred or
contracted by it. No liability or obligation due or to become due at the
Effective Time, or any claim or demand for any cause then existing against
either of the Constituent Corporations or any shareholder, officer or director
thereof, shall be released or impaired by the merger, and all rights of
creditors and all liens upon property of either of the Constituent Corporations
shall be preserved unimpaired.
1.02 EXECUTION OF ADDITIONAL INSTRUMENTS. From time to time, as and when
requested by the Surviving Corporation, or its successors or assigns, the
officers and directors of Potomac last in office shall
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execute and deliver such deeds and other instruments and shall take or cause to
be taken such further action or other actions as shall be necessary in order to
vest or perfect in or to confirm of record or otherwise the Surviving
Corporation's title to, and possession of, all property, interest, assets,
rights, privileges, immunities, powers, franchises and authority of Potomac and
otherwise carry out the purpose of this Agreement and the officers and directors
of Midwestern are fully authorized in the name of Potomac or otherwise to take
any and all such action.
1.03 CORPORATE OFFICES. Immediately following the Merger, the Surviving
Corporation shall maintain its corporate offices in Oklahoma City, Oklahoma, for
administrative, accounting and public relation functions.
1.04 AVAILABILITY OF MIDWESTERN COMMON STOCK. Midwestern will make
available to Acquisition Corp a sufficient number of shares of Common Stock,
$.001 par value per share, of Midwestern to effect the Merger pursuant to this
Agreement.
ARTICLE II
SURVIVING CORPORATION
2.01 CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION.
At and after the Effective Time, the Certificate of Incorporation and bylaws
of Acquisition Corp shall remain in full force and effect as written at the
Effective Time and shall not be amended in any further respect, by reason of
this Agreement and such Certificate of Incorporation and such bylaws shall be
the Certificate of Incorporation and bylaws of the Surviving Corporation until
amended in accordance with Oklahoma Law.
2.02 BOARD OF DIRECTORS AND OFFICERS. At the Effective Time, (i) Carl W.
Swan, Frank H. Mahan, Gene Callaway, James E. Frazier, Paul D. Meadows and
Joseph Edward Michaud (each of whom are currently members of the Board of
Directors of Potomac) shall become the Board of Directors of the Surviving
Corporation and Midwestern, (ii) the members of the Board of Directors of
Potomac (other than Messrs. Swan, Mahan, Callaway and Frazier) shall resign as
directors of Potomac, (iii) Messrs. Swan, Mahan, Callaway and Frazier shall
become officers of the Surviving Corporation and Midwestern, (iv) the officers
of Potomac (other than Messrs. Swan, Mahan, Callaway and Frazier) shall resign
as officers of Potomac, and (v) the members of the Board of Directors and the
officers of Acquisition Corp and Midwestern immediately prior to the Effective
Time shall resign as members of the Board of Directors and officers of
Acquisition Corp and Midwestern.
2.03 SHAREHOLDER APPROVAL. Prior to consummation of the Merger, this
Agreement must be approved by the shareholder or shareholders of each of the
Constituent Corporations. This Agreement shall be submitted for approval by the
shareholder of Acquisition Corp pursuant to written consent in accordance with
the Oklahoma Law. This Agreement shall be submitted for approval by the
shareholders of Potomac at a special meeting of shareholders or, if applicable,
approved by the shareholders pursuant to written consent in accordance with
Bermuda Law.
ARTICLE THREE
CONVERSION AND EXCHANGE OF SHARES
3.01 CONVERSION OF POTOMAC CAPITAL STOCK. Midwestern shall issue
7,050,000 shares of its Common Stock to the shareholders of Potomac in
connection with the Merger to cause the shareholders of Potomac to hold 92
percent of the issued and outstanding Common Stock of Midwestern immediately
after the Effective Time. Each share of Common Stock of Potomac issued and
outstanding immediately
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prior to the Effective Time shall thereupon be exchanged for and converted into
and become one share of Common Stock of Midwestern. Each share of such Common
Stock issued pursuant to this Section 3.01 shall be fully paid and
nonassessable. Each share of Common Stock of Potomac so converted is herein
sometimes referred to as the "Converted Stock." At the Effective Time,
Midwestern shall assume all obligations and agreements of Potomac under
outstanding stock options and agreements requiring the issuance of Potomac
Common Stock, as identified in Section 5.03 of this Agreement. Each share of
Potomac Common Stock otherwise issuable upon exercise of such stock options or
requiring issuance pursuant to any other agreement by Potomac identified in
Section 5.03 shall at the Effective Time become exercisable for the purchase of
or converted into one share of Common Stock of Midwestern.
3.02 FRACTIONAL SHARES. No fraction of a share of Common Stock of
Midwestern shall be issuable upon conversion of the Common Stock of Potomac in
the Merger and any fractional shares shall be rounded to the next whole share.
3.03 EXCHANGE OF CERTIFICATES. At and after the Effective Time, each
holder of a certificate representing the Converted Stock, upon presentation and
surrender of such certificate or certificates to Midwestern or its transfer
agent, shall be entitled to receive in exchange therefor a certificate or
certificates representing the number of fully paid and non-assessable shares of
the Common Stock of Midwestern to which he, she or it is entitled as provided in
Section 3.01. The Common Stock of Midwestern so received in exchange shall be
registered in such names as the holder of the Converted Stock so exchanged may
request; provided, however, that if any certificate representing shares of the
Common Stock of Midwestern is to be issued in a name other than that in which
the certificate surrendered shall be properly endorsed and otherwise in proper
form for transfer, and the person making such request shall have paid any
transfer or other taxes or established to the satisfaction of Midwestern that
such taxes have been paid or are not payable. Until so presented and
surrendered in exchange for a certificate representing Common Stock of
Midwestern, each certificate which represented issued and outstanding shares of
Converted Stock at the Effective Time shall, except as provided in the following
sentence, be deemed for all purposes to evidence ownership of the number of
whole shares of Common Stock of Midwestern into which such shares of Converted
Stock have been converted pursuant to the Merger. Until surrender of such
certificates in exchange for certificates representing Common Stock of
Midwestern, the holder Converted Stock shall not be entitled to receive any
dividend or other distribution payable to holders of shares of Common Stock of
Midwestern until the holder of the Converted Stock exchanges for certificates
representing the Common Stock of Midwestern, there shall be paid to the record
holder of the certificates representing Midwestern issued upon such surrender,
the amount of dividends or other distributions (without interest) which therefor
became payable and were not paid to such holder with respect to the number of
whole shares of Common Stock of Midwestern represented by the certificates
issued upon such surrender.
3.04 CLOSING OF STOCK TRANSFER BOOKS. The stock transfer books of Potomac
shall be closed upon execution of this Agreement, and no transfer of record and
no further issuance of any of the shares of Common Stock of Potomac shall take
place or be made thereafter.
3.05 RESTRICTION ON TRANSFER OF MIDWESTERN COMMON STOCK. The Common Stock
of Midwestern to be issued and delivered to the shareholders of Potomac pursuant
to this Agreement (i) will be acquired by such shareholders for investment
purposes only without the intent to resell or further distribute such Common
Stock, (ii) will be issued pursuant to exemption from registration under the
1933 Act and the applicable state or other jurisdictional securities acts, (iii)
will not be transferred except pursuant to registration under the 1933 Act and
the applicable state or other jurisdictional securities acts unless pursuant to
exemption from registration under such acts and (iv) the certificates evidencing
the Common Stock of
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Midwestern shall bear appropriate restrictive transfer legends as required
pursuant to the 1933 Act and the applicable state and other jurisdictional
securities acts.
ARTICLE FOUR
EFFECTIVE TIME OF THE MERGER OR AMALGAMATION
4.01 EFFECTIVE TIME. The Merger shall become effective at 5:00 P.M.,
Central Standard Time, on the date when the last of the following actions shall
have been completed:
(i) Each of the Constituent Corporations shall have notified the
other Constituent Corporation in writing that all conditions precedent to
the obligation of such Constituent Corporation to consummate and effect the
Merger have occurred or have been waived;
(ii) A Certificate of Merger shall have been executed, acknowledged
and filed in accordance with the provisions of the Oklahoma Law; and
(iii) Certificate of Amalgamation shall have been issued in accordance
with the provisions of the Bermuda Law.
The time when the Merger shall become effective, as defined by this Section
4.01, is herein called the "Effective Time."
ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES OF POTOMAC
Potomac represents and warrants unto Midwestern and Acquisition Corp as
follows:
5.01 ORGANIZATION. Potomac is a corporation duly organized, validly
existing and in good standing under Bermuda Laws and has the corporate power and
is entitled to own or lease its properties and to carry on its business as, and
in the places where, such properties are now owned or leased and such business
is now conducted. Bermuda is the only jurisdiction in which the property owned
or leased or the business conducted by Potomac would make any such qualification
necessary.
5.02 DELIVERY OF CERTIFICATE OF INCORPORATION AND BYLAWS. Potomac has
delivered to Midwestern complete and correct copies of its Memorandum of
Association and Bye-laws, as certified to by the Secretary or an Assistant
Secretary of Potomac, as in effect on the date hereof.
5.03 CAPITALIZATION. The authorized capital stock of Potomac consists of
(i) 12,000,000 shares of Common Stock, (US)$.01 par value, of which 7,050,000
shares are issued and outstanding. Potomac has reserved (i) 800,000 shares of
its Common Stock for issuance pursuant to exercise of outstanding stock options,
each exercisable at any time to purchase one share of Common Stock for $1.00 per
share on or before December 31, 2003, (ii) 100,000 shares of its Common Stock
for issuance pursuant to exercise of outstanding stock options, each exercisable
at any time to purchase one share of Common Stock for $1.00 per share on or
before April 30, 1999, (iii) 50,000 shares of its Common Stock for issuance
pursuant to exercise of outstanding stock options, each exercisable at any time
to purchase one share of Common Stock for $.50 per share on or before December
31, 2003, and (iv) 500,000 shares of its Common Stock for issuance to directors,
consultants and other third parties as determined in the sole discretion of the
Board of Directors of Potomac. Except as provided herein, there are no other
authorized or outstanding equity securities of Potomac of any class, kind or
character, and there are no outstanding subscriptions, options, warrants or
other agreements or commitments obligating Potomac to issue any additional
shares of its
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capital stock of any class, or any option or right with respect thereto, or any
securities convertible into shares of stock of any class. All outstanding
shares of Common Stock of Potomac are duly and validly authorized and issued,
and have not been issued in violation of any preemptive right of shareholders.
5.04 SUBSIDIARIES. Potomac owns all of the issued and outstanding capital
stock of Potomac Energy (BVI) Ltd., a British Virgin Islands company ("BVI"),
has no treasury stock. There are no other authorized or outstanding equity
securities of BVI of any class, kind or character, and there are no outstanding
subscriptions, options, warrants or other agreements or commitments obligating
BVI to issue any additional shares of its capital stock of any class, or any
option or right with respect thereto, or any securities convertible into shares
of stock of any class. All outstanding shares of Common Stock of BVI are duly
and validly authorized and issued, fully paid and non-assessable and have not
been issued in violation of any preemptive right of shareholders.
5.05 AUTHORIZATION OF AGREEMENT. The Board of Directors of Potomac has
duly approved this Agreement and the transactions contemplated hereby and have
authorized the execution and delivery of this Agreement by Potomac. The
shareholders of Potomac on or before the Effective Time have approved this
Agreement. Potomac has full power, authority and legal right to enter into
this Agreement and to consummate the transactions contemplated hereby.
5.06 CONFLICTING AGREEMENTS. Neither the execution nor the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby in
accordance with the terms of this Agreement, will conflict with, or result in a
breach of, any term of, or constitute a default under, (i) the Memorandum of
Association or Bye-laws of Potomac, or (ii) any material agreement or instrument
to which Potomac is a party, or (iii) any material judgment, decree, order,
statute, rule or regulation to which Potomac is subject, or result in the
creation of material lien, charge or encumbrance on any of the properties of
Potomac. Potomac, to its knowledge, is not in default or would be in default
with lapse of time or notice or both, in respect to any such term.
5.07 DELIVERY OF FINANCIAL STATEMENTS. Potomac has furnished Midwestern
with the following financial statements (hereinafter collectively called the
"Potomac Financial Statements"): the balance sheet of Potomac as of December
31, 1997 (the "1997 Potomac Balance Sheet"), together with statements of income,
stockholders' equity and changes in financial position of Potomac for the period
April 7, 1997 through December 31, 1997 and the notes thereto and certain
supplemental information.
5.08 MARKETABLE TITLE TO ASSETS. Potomac has good and marketable title to
the properties and assets reflected on the 1997 Potomac Balance Sheet as being
owned by Potomac, and all properties and assets thereafter acquired by it,
except to the extent such properties and assets are or were thereafter disposed
of for fair value in the ordinary course of business; all such properties and
assets are free and clear of all liens, charges and encumbrances, except (i)
those set forth or reflected in the 1997 Potomac Balance Sheet, (ii) liens for
taxes not yet due and payable or being contested in good faith, or (iii) defects
in title and liens, charges and encumbrances, if any, as do not materially
detract from the value, or materially interfere with the present or proposed
use, of the property or assets subject thereof or affected thereby, or otherwise
materially impair business operations of Potomac, taken as a whole. The
operation of the properties and business of Potomac in the manner in which they
are now operated do not, to the knowledge of Potomac, violate any zoning
ordinances or municipal regulations in such a way as could, if such ordinances
or regulations were enforced, result in any material impairment of the uses of
the respective properties for the purposes for which they are now operated. All
real and personal property leased by Potomac is held by Potomac under valid,
subsisting and enforceable leases.
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5.9 TAXES AND RETURNS. Potomac has timely filed all federal, state, local
and foreign tax returns required to be filed by it. All taxes and governmental
charges levied or assessed against the property or the business of Potomac have
been paid, other than taxes or charges, the payment of which is not yet due or
which, if due, is not yet delinquent or is being contested in good faith or has
not been finally determined. The amount set up as accruals for taxes on the
1997 Potomac Balance Sheet is sufficient in all material respects for the
payment of all unpaid taxes and governmental charges of all kinds, applicable to
the property or business of Potomac for the period ended on December 31, 1997,
and all periods prior thereto.
5.10 LAW COMPLIANCE. To its actual knowledge, Potomac has complied with
all laws, regulations, licensing requirements and orders applicable to its
business the breach or violation of which could have a material adverse effect
on said business and has filed with the proper authorities, all statements and
reports required by the laws, regulations, licensing requirements and orders to
which it or any of its employees is subject, and Potomac possesses all necessary
licenses, franchises and permits to conduct its business in the manner in which
and in the jurisdictions and places where such businesses are now conducted.
5.11 FINDER'S FEES AND BROKERAGE. No director, officer or employee of
Potomac has incurred or will incur any brokerage, finder's or similar fee in
connection with the merger or the other transactions contemplated by this
Agreement.
5.12 ACCURACY OF INFORMATION. All written information regarding Potomac
previously delivered to Midwestern, including all financial information and
statements provided by Potomac to Midwestern, is true and correct. All
additional information regarding Potomac to be delivered to Midwestern pursuant
to this Agreement will be true and correct. Other than the properties shown on
the Potomac Financial Statements and 1997 Potomac Balance Sheet, there are no
properties, tangible or intangible, which are used in and material to the normal
day-to-day operations of Potomac as conducted by Potomac prior to and on the
date of this Agreement.
5.13 LACK OF MATERIAL MISREPRESENTATION. Potomac represents and warrants
that all the information and documents furnished by Potomac to Midwestern in
connection with this Agreement contain no untrue statement of material facts nor
do they omit material facts necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading.
ARTICLE SIX
REPRESENTATIONS AND WARRANTIES OF MIDWESTERN
Midwestern hereby represents and warrants to Potomac as follows:
6.01 ORGANIZATION. Midwestern is a corporation duly organized, validly
existing and in good standing under the laws of the State of Oklahoma and has
the corporate power and is entitled to own or lease its properties and to carry
on its business as, and in the places where, such properties are now owned or
leased and such business is now conducted. The State of Oklahoma is the only
jurisdiction in which the property owned or leased or the business conducted by
Midwestern would make any such qualifications necessary.
6.02 DELIVERY OF CERTIFICATE OF INCORPORATION AND BYLAWS. Midwestern has
delivered to Potomac complete and correct copies of the Certificate of
Incorporation of Midwestern and its Bylaws, as certified to by the Secretary or
an Assistant Secretary of Midwestern, as in effect on the date hereof.
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6.03 CAPITALIZATION. The total number of shares of capital stock which
Midwestern is authorized to issue is 50,000,000 shares of Common Stock, $.001
par value, of which 23,949,150 shares are issued and outstanding. Midwestern
has no treasury stock. There are no other authorized or outstanding equity
securities of Midwestern of any class, kind or character, and there are no
outstanding subscriptions, options, warrants or other agreements or commitments
obligating Midwestern to issue any additional shares of its capital stock of any
class, or any option or right with respect thereto, or any securities
convertible into shares of any class. All outstanding shares of Common Stock of
Midwestern are duly and validly authorized and issued, and have not been issued
in violation of any preemptive right of shareholders. Immediately prior to the
Effective Time, Midwestern shall cause a 1-for-41.4140846 reverse split of its
Common Stock so that immediately prior to the Effective Time Midwestern shall
have 578,261 shares of Common Stock issued and outstanding, without giving
effect to the elimination of any fractional shares of Common Stock, all
fractional shares shall be rounded to the next whole share.
6.04 SUBSIDIARIES. Other than Acquisition Corp, Midwestern does not have
any subsidiaries.
6.05 AUTHORIZATION OF AGREEMENT. The Board of Directors of Midwestern has
duly approved this Agreement and the transactions contemplated hereby and has
authorized the execution and delivery of this Agreement by Midwestern.
Midwestern has full power, authority and legal right to enter into this
Agreement and to consummate the transactions contemplated hereby.
6.06 CONFLICTING AGREEMENTS. Neither the execution nor the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby in
accordance with the terms of this Agreement, will conflict with, or result in a
breach of, any term of, or constitute a default under, (i) the Certificate of
Incorporation or Bylaws of Midwestern, or (ii) any material agreement or
instrument to which Midwestern is a party, or (iii) any material judgment,
decree, order, statute, rule or regulation to which Midwestern is subject, or
result in the creation of material lien, charge or encumbrance on any of the
properties of Midwestern, other than the merger of Potomac with and into
Midwestern and the other transactions contemplated in this Agreement. Midwestern
is not in default or would be in default with lapse of time or notice or both,
in respect to any such term.
6.07 ASSETS AND LIABILITIES. Each of Midwestern and Acquisition Corp does
not have any asset or liabilities.
6.08 FINDER'S FEES AND BROKERAGE. No director, officer or employee of
Acquisition Corp or Midwestern has incurred or will incur any brokerage,
finder's or similar fee in connection with the merger or the other transactions
contemplated by this Agreement.
6.09 ACCURACY OF INFORMATION. All written information regarding
Midwestern and Acquisition Corp previously delivered to Potomac is true and
correct. All additional information regarding Midwestern and Acquisition Corp
to be delivered to Potomac pursuant to this Agreement will be true and correct.
6.10 LACK OF MATERIAL MISREPRESENTATION. Midwestern represents and
warrants that all the information and documents furnished by Midwestern to
Potomac in connection with this Agreement contain no untrue statement of
material facts nor do they omit material facts necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading.
6.11 VALIDITY OF ISSUANCE. The shares of Common Stock of Midwestern to be
delivered to the shareholders of Potomac pursuant to this Agreement, when
delivered as provided herein, will be validly issued and outstanding, fully paid
and non-assessable.
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ARTICLE SEVEN
COVENANTS OF POTOMAC
Between the date hereof and the Effective Time:
7.01 ACCESS TO ASSETS, PROPERTY AND RECORDS. Potomac will afford to the
officers and authorized representatives of Midwestern reasonable access to the
offices, properties, books and records of Potomac and will furnish Midwestern
with such additional financial and operating data and other information as to
the business and properties of Potomac as may be reasonable necessary for
Midwestern thoroughly to evaluate, prior to the Effective Time, the business
assets, operations and financial conditions of Potomac to include, without
limitation, tax returns filed and those in preparation of Potomac. If, for any
reason, the Merger contemplated by this Agreement is not consummated, Potomac
will use its best efforts to cause all confidential information obtained by it
from Midwestern to be treated as such and will not use such information in a
manner detrimental to Midwestern.
7.02 CONDUCT OF BUSINESS. Potomac shall conduct its business in the usual
and ordinary course consistent with good corporate practices and policies, and
shall use its best efforts to preserve intact the present business organization,
keep available the services of its present officers and employees, maintain its
properties and business and to preserve the good will of employees, customers
and others having business dealings it. Without the prior written consent of
Midwestern, Potomac shall not engage in any activity or enter into any
transaction that would cause any of the representations or warranties set forth
in Article V to be inaccurate if made as of a date subsequent to such activity
or transaction.
7.03 SEC REPORTING COMPLIANCE AND COOPERATION. Potomac will furnish
Midwestern with all information concerning Potomac as may be required for
inclusion any filing made by Midwestern with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "1933 Act") or the
Securities Exchange Act of 1934, as amended ("1934 Act") or otherwise, or any
other governmental or regulatory body in connection with the transactions
contemplated by this Agreement. Potomac represents and warrants that all
information so furnished for such statements and filing shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
7.04 PUBLIC ANNOUNCEMENTS. Potomac will not, without prior consultation
with Midwestern, make any announcement to the public or any statement to its
employees generally concerning the transactions covered by this Agreement.
7.05 NOTIFICATION OF EVENTS. Potomac will promptly give notice to
Midwestern of the occurrence of any event or the failure of any event to occur
that results in a breach of any representation or warranty by Potomac or a
failure by Potomac to comply with any covenant, condition or agreement contained
herein.
7.06 APPROVALS. Potomac will use its best efforts to obtain all licenses,
consents or other approvals required to be obtained by Midwestern or Acquisition
Corp from any appropriate governmental agency or authority or other person in
connection with the carrying out of the transactions contemplated by this
Agreement.
7.07 PERFORMANCES. Potomac will use its best efforts to perform or cause
to be satisfied each covenant or condition to be performed or satisfied by it
pursuant hereto.
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7.08 SHAREHOLDER APPROVAL. Potomac shall call a special meeting of its
shareholders to be held as soon as reasonably practicable after the date of this
Agreement (and give notice thereof as soon as reasonably practicable after the
date of this Agreement or obtain waiver of such notice) for the purpose of
approval of this Agreement and the transactions contemplated in this Agreement.
In lieu of such special meeting of its shareholders, Potomac shall obtain
written consents in lieu of shareholders meeting approving this Agreement and
the transactions contemplated in this Agreement.
ARTICLE EIGHT
COVENANTS OF MIDWESTERN AND ACQUISITION CORP
Between the date hereof and the Effective Time:
8.01 ACCESS TO RECORDS. Midwestern and Acquisition Corp will afford to
the officers and authorized representatives of Potomac access to the books and
records of Midwestern and Acquisition Corp, and will furnish Potomac with such
additional information of Midwestern and Acquisition Corp as may be reasonably
requested by Potomac. If, for any reason, the merger contemplated by this
Agreement is not consummated, Potomac will use its best efforts to cause all
confidential information obtained by it from Midwestern and Acquisition Corp to
be treated as such and will not use such information in a manner detrimental to
Midwestern and Acquisition Corp.
8.02 CONDUCT OF BUSINESS. Midwestern and Acquisition Corp shall not
conduct any business other than in connection with the Merger and the other
transactions contemplated in this Agreement, and then only in the usual and
ordinary course consistent with good corporate practices and policies. Without
the prior written consent of Potomac, Midwestern and Acquisition Corp shall not
engage in any activity or enter into any transaction that would cause any of the
representations or warranties set forth in Article VI to be inaccurate if made
as of a date subsequent to such activity or transaction.
8.03 REGULATORY COMPLIANCE. Midwestern and Acquisition Corp will furnish
Potomac with all information concerning Midwestern and Acquisition Corp as may
be required by any governmental or regulatory agency in connection with the
transactions contemplated by this Agreement. Each of Midwestern and Acquisition
Corp represents and warrants that all information so furnished shall not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
8.04 PUBLIC ANNOUNCEMENTS. Midwestern and Acquisition Corp will not,
without prior consultation with Potomac, make any announcement or other
statement to the public or any statement to its employees generally concerning
the transactions covered by this Agreement.
8.05 NOTIFICATION OF EVENTS. Midwestern and Acquisition Corp will promptly
give notice of the occurrence of any event or the failure of any event to occur
that results in a breach of any representation or warranty by Midwestern and
Acquisition Corp or a failure by Midwestern or Acquisition Corp to comply with
any covenant, condition or agreement contained herein.
8.06 APPROVALS. Midwestern and Acquisition Corp will use their best
efforts to obtain all licenses, consents or other approvals required to be
obtained by Midwestern and/or Acquisition Corp from any appropriate governmental
agency or authority or other person in connection with the carrying out of the
transactions contemplated by this Agreement.
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8.07 PERFORMANCE OF THIS AGREEMENT. Midwestern and Acquisition Corp will
use their best efforts to perform or cause to be satisfied each covenant or
condition to be performed or satisfied by it pursuant hereto.
8.08 SHAREHOLDER APPROVAL. Midwestern hereby specifically covenants and
agrees that it has read and been fully advised as to the meaning and effect of
this Agreement and the Merger to be effected hereby, and that it approves
thereof and by execution of this Agreement hereby votes all of the shares of
Acquisition Corp capital stock which it owns in favor of the Merger and hereby
consents in accordance with the Oklahoma Law to all corporate action required to
consummate the merger and the transactions contemplated in this Agreement
without the necessity for a meeting of the shareholders of Acquisition Corp.
ARTICLE NINE
CONDITIONS TO OBLIGATIONS OF MIDWESTERN,
ACQUISITION CORP AND POTOMAC
The obligations of Midwestern, Acquisition Corp and Potomac to effect the
Merger hereunder are, at their respective elections, subject to the satisfaction
or waiver of the following conditions:
9.01 APPROVALS AND CONSENTS. Prior to the Effective Time, all necessary
orders, consents and approvals shall have been entered by each regulatory
authority having jurisdiction in the premises and all applicable statutory
waiting periods shall have expired, and the consent of any other party necessary
to approve the Merger or to the continued holding by Midwestern and Acquisition
Corp and by Potomac of all rights in, to and under any contract, agreement,
license, permit, franchise, lease or other instrument and any property or
assets, tangible or intangible, reasonably deemed by Midwestern to be material
to Potomac or BVI, taken as a whole, or to be material to Potomac, taken as a
whole, as the case may be, shall have been obtained.
ARTICLE TEN
FURTHER CONDITIONS TO OBLIGATIONS OF
MIDWESTERN AND ACQUISITION CORP
The obligation of Midwestern and Acquisition Corp to effect the Merger
hereunder, at their option, subject to the satisfaction or waiver of the
following further conditions:
10.01 REPRESENTATIONS AND PERFORMANCES. All of the representations and
warranties of Potomac contained in this Agreement shall be true in all material
respects as of the Effective Time as though such representations and warranties
were then made for the first time (other than those representations and
warranties which are specifically made as of a particular date or as of the date
of this Agreement); and Potomac, in all material respects, shall have performed
all obligations and complied with all covenants required by this Agreement to be
performed and complied with by it or them prior to the Effective Time. As of
the Effective Time, Midwestern and Acquisition Corp shall have received a
certificate, dated the date on which the Effective Time is to occur, executed by
the Chairman, President or a Vice President and by the Treasurer or Chief
Financial Officer of Potomac, certifying in such detail as Midwestern and
Acquisition Corp may request as to the accuracy of such representations and
warranties and the fulfillment of such obligations and compliance with such
covenants as of the Effective Time.
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ARTICLE ELEVEN
FURTHER CONDITIONS TO OBLIGATIONS OF POTOMAC
The obligations of Potomac to effect the Merger hereunder is, at their
option, subject to the satisfaction or waiver of the following further
conditions:
11.01 REPRESENTATIONS AND PERFORMANCES. All of the representations and
warranties of Midwestern and Acquisition Corp contained in this Agreement shall
be true in all material respects as of the Effective Time as though such
representations and warranties were then made for the first time (other than
those representations and warranties which are specifically made as of a
particular date or as of the date of this Agreement); and Midwestern and
Acquisition Corp, in all material respects, shall have performed all obligations
and complied with all covenants required by this Agreement to be performed and
complied with by each of them prior to the Effective Time. As of the Effective
Time, Potomac shall have received a certificate dated the date on which the
Effective Time is to occur, executed by the Chairman, President or a Vice
President and by the Treasurer or Chief Financial Officer of Midwestern and
Acquisition Corp certifying in such detail as Potomac may request as to the
accuracy of such representations and warranties and the fulfillment of such
obligations and compliance with such covenants as of the Effective Time.
ARTICLE TWELVE
ABANDONMENT OF MERGER
12.01 TERMINATION AND ABANDONMENT. This Agreement may be terminated and
the merger abandoned at any time prior to the Effective Time:
(a) By mutual agreement of the Boards of Directors of Midwestern and
Acquisition Corp and Potomac;
(b) At the option of the Board of Directors of Potomac in the event
that by April 30,1998, the conditions set forth in Articles Nine and Eleven
shall not have been satisfied or waived;
(c) At the option of the Board of Directors of Midwestern and
Acquisition Corp in the event that by April 30, 1998, the conditions set
forth in Articles Nine and Ten shall not have been satisfied or waived.
12.02 NOTIFICATION. In the event of termination by the Boards of
Directors of Midwestern and Acquisition Corp or Potomac as provided above,
written notice shall forthwith be given to the other parties.
12.03 EFFECT. In the event of termination of this Agreement and
abandonment of the Merger either by Midwestern and Acquisition Corp or by
Potomac as provided in this Agreement, this Agreement shall forthwith become
wholly void and of no effect, and there shall be no liability on the part of
either Midwestern and Acquisition Corp or Potomac, except that the
indemnification agreements relating to payment of expenses set forth in this
Agreement shall survive any such termination and abandonment.
ARTICLE THIRTEEN
SURVIVAL OF REPRESENTATIONS WARRANTIES
AND COVENANTS AND INDEMNIFICATION
13.01 SURVIVAL. The representations, warranties, covenants and agreements
respectively made by Midwestern, Acquisition Corp or Potomac in this Agreement
or on any certificate delivered pursuant to
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the provisions hereof, shall survive, and shall not terminate on, the Effective
Time and the consummation of the transactions contemplated under this Agreement.
13.02 AVAILABLE REMEDIES. Each party expressly agrees that, consistent
with its intention and agreement to be bound by the terms of this Agreement and
to consummate the transactions contemplated hereby, subject only to the
satisfaction of conditions precedent, the remedy of specific performance shall
be available to a non-breaching and non-defaulting party to enforce performance
of this Agreement by a breaching or defaulting party, including, without
limitation, to require the consummation of the Merger pursuant to this
Agreement.
13.03 INDEMNITY. (a) Midwestern and Acquisition Corp, in addition to the
remedies accorded the parties in Section 13.02 above, agree to indemnify and
hold Potomac harmless from and against any and all claims, actions, causes of
action, damages, costs and expenses, including without limitation attorneys'
fees, arising from or relating to a breach by the Midwestern or Acquisition Corp
of the representations, warranties, covenants and agreements set forth in this
Agreement.
(b) Potomac, in addition to the remedies accorded the parties in Section
13.02 above, agrees to indemnify and hold Midwestern and Acquisition Corp
harmless from and against any and all claims, actions, causes of action,
damages, costs and expenses, including without limitation attorneys' fees,
arising from or relating to a breach by Potomac of the representations,
warranties, covenants and agreements set forth in this Agreement.
13.04 RESCISSION AND OTHER RELIEF. Each of Midwestern, Acquisition Corp
and Potomac acknowledge that Midwestern and Acquisition Corp, on the one hand,
and Potomac, on the other hand, would be irreparable damaged and that money
damages and any other remedy available at law would be inadequate to redress or
remedy any loss in the event that any of (i) any misrepresentation, or breach of
warranty under this Agreement, (ii) nonfulfillment or failure to perform any
covenant or agreement under this Agreement, or (iii) related and attributable
to, or asserted against a party hereto, each of Midwestern, Acquisition Corp and
Potomac, in addition to recovering any claim for damages or obtaining any other
remedy available at law, also shall be entitled to rescission of the Merger and
shall be entitled to obtain any other appropriate remedy available in equity or
in law, and that each of Midwestern and Acquisition Corp and Potomac hereby
waives its right to assert and will not assert in defense that any other
adequate legal remedy is available.
ARTICLE FOURTEEN
MISCELLANEOUS
14.01 NOTICES. Any notice, request, instruction, document or other
communication required or permitted to be given under this Agreement after the
date hereof shall be in writing (including telex and telegraphic communication)
by any party hereto to any other party either (as elected by the party giving
such notice) personally delivered or sent by registered or certified mail,
postage pre-paid, return receipt requested, as follows:
(a) If to Midwestern or Acquisition Corp, to
Michael E. Dunn, Esq.
Dunn Swan & Cunningham
2800 First Oklahoma Tower
210 West Park Avenue
Oklahoma City, Oklahoma 73102-5604
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<PAGE>
(b) If to Potomac, to
Mr. Carl W. Swan, Chief Executive Officer
1400 Founders Tower
5900 Mosteller Drive
Oklahoma City, Oklahoma 73112
or to such other address as any party may designate by notice complying with the
terms of this Section. Each such notice shall be deemed delivered (i) on the
date delivered if by personal delivery, (ii) on the date telecommunicated if by
telegraph, (iii) on the date of transmission with confirmed answer if by telex,
telefax or other telegraphic method, and (iv) on the date upon which return
receipt is signed or delivery is refused or the notice is designated by the
postal authorities as not deliverable, as the case may be, if mailed.
14.02 EXPENSES. Midwestern and Acquisition Corp shall separately bear the
expenses of Midwestern and Acquisition Corp, and Potomac shall separately bear
the expenses of Potomac incurred in connection with this Agreement and in
connection with all things required to be done hereunder. Notwithstanding the
foregoing, in the event of the failure to consummate the merger which results
from a misrepresentation or failure to perform a covenant or agreement on the
part of a party hereto (the "defaulting party"), defaulting party shall, in
addition to bearing and paying all costs and expenses incurred by it, bear and
pay all costs and expenses incurred by other parties hereto in connection with
the proceedings relating to the merger.
14.03 AMENDMENT. This Agreement may be amended at any time prior to the
Effective Time by a written instrument executed by Midwestern and Acquisition
Corp, and Potomac with the approval of their respective Boards of Directors.
14.04 KNOWLEDGE DEFINED. Whenever a representation or warranty is made
herein as being "to the actual knowledge of" or "to the knowledge of" or "known"
to or in "the opinion of" a corporation, it is understood that an officer of
such corporation has made or caused to be made (and the results thereof reported
to him) an investigation which is appropriate to determine the accuracy of such
representation or warranty by personnel or agents of such corporation competent
to perform such investigation and to determine the accuracy thereof, and any
such representation or warranty shall be deemed to be inaccurate if any officer
of such corporation on the basis of such investigation, or otherwise, has any
knowledge of any fact that would render such representation or warranty
inaccurate or such opinion inappropriate.
14.05 ENTIRE AGREEMENT. This Agreement and the documents and instruments
referred to herein constitute the entire Agreement between the parties hereto
and supersede all other understandings with respect to the subject matter
hereof. This Agreement shall be governed by and construed in accordance with
the laws of the State of Oklahoma without regard to principles of conflict of
law.
14.06 COUNTERPARTS. For the convenience of the parties hereto and to
facilitate the filing and recording of this Agreement, it may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
14.07 BINDING EFFECT. All of the term and provisions of this Agreement,
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, personal
representatives, legal representatives, heirs, successors and permitted assigns.
14.08 ASSIGNABILITY. No party shall assign his or its rights and/or
obligations hereunder without the prior written consent of each of the other
parties to this Agreement.
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<PAGE>
14.09 HEADINGS. The headings contained in this Agreement are for
convenience of reference only, are not to be considered a part hereof and shall
not limit or otherwise affect in any way the meaning or interpretation of this
Agreement.
14.10 INVALID PROVISIONS. In the event any provision of this Agreement or
any other agreement entered into pursuant hereto is contrary to, prohibited by
or deemed invalid under applicable law or regulation, such provision shall be
inapplicable and deemed omitted to the extend so contrary, prohibited or
invalid, but the remainder thereof shall not be invalidated thereby and shall be
given full force and effect so far as possible. In the event any provision of
this Agreement may be construed in two or more ways, one of which would render
the provision invalid or otherwise voidable or unenforceable and another of
which would render the provision valid and enforceable, such provision shall
have the meaning which renders it valid and enforceable.
14.11 WAIVER OF PERFORMANCE. The failure or delay of any party at any
time to require performance by another party of any provision of this Agreement,
even if known, shall not affect the right of such party to require performance
of that provision or to exercise any right, power or remedy hereunder. Any
waiver by any party of any breach of any provision of this Agreement shall not
be construed as a waiver of any continuing or succeeding breach of such
provision, a waiver of any continuing or succeeding breach of such right, power
or remedy under this Agreement. No notice to or demand on any party in any case
shall, of itself, entitle such party to any other or further notice or demand in
similar or other circumstances.
14.12 ATTORNEYS' FEES AND COSTS. In the event any legal action or other
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default or misrepresentation in connection with any
provision of this Agreement, the successful or prevailing party or parties shall
be entitled to recover reasonable attorneys' fees, sales and use taxes, court
costs and all expenses even though not taxable as court costs (including,
without limitation, all such fees, taxes, costs and expenses incident to
arbitration, appellate, bankruptcy and post-judgment proceedings), incurred in
that action or proceeding, in addition to any other relief to which such party
or parties may be entitled. Attorneys' fees shall include, without limitation,
paralegal fees, investigative fees, administrative costs, sales and use taxes
and all other charges billed by the attorney to the prevailing party.
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<PAGE>
IN WITNESS WHEREOF, Midwestern, Acquisition Corp and Potomac have caused
this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first above written.
"Midwestern" Midwestern-Oklahoma Energy Resources Corporation
A Oklahoma
By: /S/ MICHAEL E. DUNN
----------------------------------------------
Michael E. Dunn, Chief Executive Officer
"Constituent Corporations"
"Acquisition Corp" POTOMAC EXPLORATION ACQUISITION
or "Surviving Corporation" CORPORATION, An Oklahoma Corporation
By: /S/ MICHAEL E. DUNN
----------------------------------------------
Michael E. Dunn, Chief Executive Officer
"Potomac"
POTOMAC ENERGY (BERMUDA) LTD.,
A Bermuda Corporation
By: /S/ CARL W. SWAN
----------------------------------------------
Carl W. Swan, Chief Executive Officer
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<PAGE>
ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
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ASSOCIATION CONTRACT - with Gas Incentives
ASSOCIATION CONTRACT
ASSOCIATE SEVEN SEAS PETROLEUM COLOMBIA
SECTOR: ROSABLANCA
EFFECTIVE DATE 28 February 1998
The contracting parties, namely: on the one part THE "EMPRESA COLOMBIANA DE
PETROLEOS", hereinafter ECOPETROL, an industrial and commercial state-owned
enterprise authorized under Law 165 of 1948, currently ruled by its by laws,
amended by Decree 1209 of 15th June 1994, havin its head office in Santafe de
Bogota, D.C. represented by ENRIQUE AMOROCHO CORTEZ, of legal age, bearer of
citizenship card No 5.555.193 issued in Bucaramanga, domiciled in Santafe de
Bogota, who states that: 1. As president of ECOPETROL, he acts herein on behalf
of said Company, and 2. The ECOPETROL Board of Directors authorized him to enter
into this Contract, as witnessed by Minutes No. 2169. of 16th October 1997; and
on the other part SEVEN SEAS PETROLEUM COLOMBIA, a company organized-pursuant to
the laws of CANADA, hereinafter referred to as "THE ASSOCIATE", with a duly
established Colombian branch and its main domicile in Santafe de Bogota,
pursuant to public deed no 2771 of 28th September 1995, made before the
Sixteenth (16) Notary Public of the Santa Fe de Bogota circuit, represented by
GUSTAVO VASCO MUNOZ of legal age, a citizen of Colombia bearer of identity card
No 17029136 issued in Bogota who represents that: 1. In his capacity as legal
representative he acts on behalf of SEVEN SEAS PETROLEUM COLOMBIA INC and, 2. He
is fully authorized to sign this contract as witnessed by the certificate of
incorporation and legal representation issued by the Chamber of Commerce of
Santafe de Bogota. Under the above conditions, ECOPETROL and the ASSOCIATE
declare they have entered into the contract contained in the following Clauses-
CHAPTER I - GENERAL PROVISIONS
CLAUSE 1 - PURPOSE OF THIS CONTRACT
1.1 The purpose of this contract is to explore the Contract Area and develop
such nationally-owned Hydrocarbons as may be found therein, as described in
Clause 3 below.
1.2 Pursuant to article lst of Decree 2310/1974, ECOPETROL is entrusted with
exploring and developing nationally owned hydrocarbons and may carry out said
activities either directly or through contracts with private parties. Based on
this provision, ECOPETROL and THE ASSOCIATE have agreed to explore the Contract
Area and produce such Hydrocarbons as may be found therein under the
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
Page 2
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terms and conditions set forth in this document, in Appendix "A!' and Appendix
"B" ("Operating Agreement) which are made an integral part hereof.
1.3 Subject to the provisions hereof, it is understood that the rights and
obligations of THE ASSOCIATE regarding the Hydrocarbons produced in the Contract
Area, and its share thereof, are the same as those assigned under Colombian law
to anyone producing nationally-owned Hydrocarbons in the country.
1.4 ECOPETROL and THE ASSOCIATE agree to explore and develop the land of the
Contract Area, to share the costs and risks thereof in the proportion and under
the terms contemplated in this Contract, and the properties they may acquire and
the Hydrocarbons produced and stored shall belong to each Party in the
stipulated proportions.
CLAUSE 2 - APPLICATION OF THE CONTRACT
This Contract applies to the Contract Area whose boundaries are described in
Clause 3 below, or to any portion thereof subject to the terms hereof whenever
Clause 8 has been applied.
CLAUSE 3 - CONTRACT AREA
The Contract Area is called "ROSABLANCA" and covers an extension of one hundred
twenty eight thousand one hundred and eighty eight (128,188) hectares and five
thousand (5,000) square meters, located in the following municipal
jurisdictions: Gamarra, Aguachica, La Gloria, Pelaya and Tamalameque in Cesar
Department; Morales in Bolivar Department- and Carmen in the Northern Santander
Department. This area is described here in below and shown in the map enclosed
as appendix ",N' which is made a part hereof, as well as the corresponding
calculation charts. The reference point is the Geodesic Vertex "TABLAR-848" of
the Agustin Codazzi Geographic Institute whose Gauss flat coordinates origin
Santa Fe de Bogota are- N-1,401.053.89 meters, E1,021,264.81 meters
corresponding to geographic coordinates Latitude 80 13' 31 ".808 North of the
Equator, Longitude 73 0 53'1 6".538 West of Greenwich. From this Vertex, head N
340 9' 25".67 W for 2,237.83 meters until reaching the starting point "A",
whose coordinates are: N-1,402,900.oo meters, E-1,020,000.oo meters. Head NORTH
from point "N' for 27,100.oo meters until reaching Point "B" whose coordinates
are-. N-1,430,000.oo meters E- 1,020,000.oo meters. Head EAST from point "B" for
10,000.oo meters until reaching point "C" whose coordinates are-. N-1,430,000.oo
meters, E-1,030,000.oo meters. Head NORTH from point "C" for 30,000.oo meters up
to point "D" whose coordinates are- N1,460,000.oo meters, E-1,030,000.oo meters.
Go EAST from point "D" for
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
Page 3
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30,000.oo meters until reaching point "E" whose coordinates are N-1,460,000.oo
meters, E-1,060,000.oo meters. Head SOUTH for 35,000.oo meters from point "E"
until reaching point "F" is reached whose coordinates are N-1,425,000.oo meters,
E-1,060,000.oo meters. From point "F" head WEST for 8,000.oo meters up to point
"G" whose coordinates are N-1,425,000.oo meters, E-1,052,000.oo meters. Go WEST
from point G" for 15,478.oo meters up to point "H" whose coordinates are-
N-1,425,000.oo meters, E-1,036,522.oo meters. Take a direction S 10 36' 13".906
W for 4,001.57 meters from point "H" until reaching point "I" whose coordinates
are N-1,421,000.oo meters, E-1,036,410.oo meters. The whole of lines "G-H" and
"H-1" run alongside lines "D-C" and "C-B" of the Bolivar Association Contract
operated by Harken de Colombia Limited. From point "I" head WEST for 10,000.oo
meters up to point "J" whose coordinates are N1,421,000.oo meters,
E-1,026,410.oo meters. From point "J" head SOUTH for 18,100.00 meters until
reaching point "K' whose coordinates are N-1,402,900.oo meters, E-1,026,410.oo
meters. Lines "I-J" and "J-K' run alongside ECOPETROL's Buturama sector. Head
WEST for 6,410.oo meters from point "K' until reaching starting point "A!' which
closes the boundaries. The whole of line "K-A" runs alongside line "B-A" ofthe
Montecristo Association Contract signed with Seven Seas Petroleum Colombia Inc.
Paragraph 1: Whenever somebody files a claim asserting ownership of the
Hydrocarbons in the subsoil within the Contract Area, ECOPETROL shall deal with
the case, assuming such obligations as may arise.
Paragraph 2: If part of the Contract Area extends to areas that are or have been
reserved and declared as falling within the National Park System, THE ASSOCIATE
must meet all conditions imposed by the pertinent authorities in keeping with
Clause 30 (numeral 30.4) hereof. This neither amends the contract nor
constitutes grounds for filing any claim against ECOPETROL.
CLAUSE 4- DEFINITIONS
For Contract purposes, the terms listed below shall have the meaning set out
hereunder:
4.1 Contract Area- The land described in Clause 3 here in above, subject to
Clause 8.
4.2 Field: Portion of the Contract Area where one or more structures exist,
totally or partially overlying, with one or Reservoirs that are producing or
whose Hydrocarbon-producing capacity has been tested. These Reservoirs may be
separated by geological causes such as: synclines, faults, wedging of producing
strata, changes in porosity and permeability- likewise they may be of different
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
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geological ages, separated by strata that is reasonably watertight,
totally/partially overlapping or not overlapping at all.
4.3 Commercial Field- A field that ECOPETROL accepts as able to produce
Hydrocarbons of a quality and quantity that is economically viable in one or
more Production Targets to be defined by ECOPETROL.
4.4 Gas Field: A field that ECOPETROL qualifies as a producer of Natural
Non-Associated Gas (or Free Natural Gas) when defining its commerciality and
using information furnished by THE ASSOCIATE.
4.5 Executive Committee: The body that will supervise, control and approve all
operations and actions performed throughout he contract and to be established
within thirty (30) days following acceptance of the first Commercial Field.
4.6 Direct Exploration Costs: Any monetary expenditures reasonably incurred by
THE ASSOCIATE in seismic surveys and drilling Exploration Wells, as well as for
locations, completion, equipping and testing of such wells. Direct Exploration
Costs do not include administrative or technical support from the Company's head
or central office.
4.7 Joint Account- Accounting records kept pursuant to Colombian law for
crediting or debiting the Parties with their share in the Joint Operation of
each Commercial Field.
4.8 Budgetary Execution: The resources effectively expended and/or committed for
each program and project approved for a given calendar year.
4.9 Structure: The geometrical form with geological closure (anticline, syncline
etc.) that is revealed by formations having accumulations of fluid.
4.10 Effective Date: The sixtieth (60) calendar day following contract
signature, and the starting date for all time limits agreed to herein and
subject to the validity of the same contract.
4.11 Cash Flow: The physical flow of money (income and expenditure) incurred by
the Joint Account to handle the obligations contracted by the Association in the
normal course of operations.
4.12 Associate Natural Gas: Mixture of light hydrocarbons existing in the
Reservoir in the form of a gas layer or in solution and produced together with
liquid hydrocarbons.
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
Page 5
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4.13 Non-Associate Natural Gas (Production of): Those hydrocarbons produced in
gaseous state at surface and reported at standard conditions, with an initial
average (production weighted) Gas/Oil ratio of over 15,000 standard cubic feet
of gas per barrel of liquid Hydrocarbon, and heptane plus (C7 +) molar
composition below 4%.
4.14 Direct Expenses: All expenditures charged to the Joint Account as a result
of payment t personnel directly working for the Association, purchase of
materials and supplies, service contracts made with third parties and any
overhead required by the Joint Operation in the normal course of its activities.
4.15 Indirect Expenses: Those disbursements charged to the Joint Account for
administrative/technical support for the Joint Operation that Operator may
furnished through his own organization.
4.16 Commercial Interest : For Colombian Pesos, it shall be the interest rate
for ninety-day (90) CDs certified by the Banking Superintendency, or whoever
replaces same, applicable to the respective period. In the case of US dollars,
it shall be the prime rate established by CITIBANK New York, or the entity
appointed for this purpose.
4.17 Interest in the Operation: The share in the rights and obligations acquired
by each Party in the exploration and development of the Contract Area.
4.18 Development Investment: Refers to the amount of money invested in goods and
equipment capitalized as Joint Operation assets in a Commercial Field, once the
Parties have accepted the existence thereof.
4.19 Hydrocarbons: Any organic compound consisting mainly of the natural mixture
of hydrogen and carbon, as well as substances related thereto or derived
therefrom, except for helium and rare gases.
4.20 Gaseous Hydrocarbons: All hydrocarbons produced in gaseous state
at the surface and reported at standard conditions (1 atmosphere of
absolute pressure and a temperature of 60 deg. F).
4.21 Liquid Hydrocarbons: Includes crude oil and condensates, as well those
produced in such state as a result of gas treatment when pertinent, reported at
standard conditions.
4.22 Production Targets: Reservoirs located within the Commercial Field
discovered and that have tested as commercial producers.
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
Page 6
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4.23 Joint Operation: The tasks and work performed, or being performed, on
behlf of the Parties and for their account.
4.24 Operator: The person appointed by the Parties to act on their behalf in
directly carrying out the operations needed to explore and produce the
Hydrocarbons discovered in the Contract Area.
4.25 Parties: On the effective Date, ECOPETROL and the ASSOCIATE. Subsequently
and at any time, ECOPETROL on the one part, and THE ASSOCIATE and/or its
assignees on the other part.
4.26 Exploration Period: The term for THE ASSOCIATE to comply with the
obligations set forth in Clause 5 here in below, not to exceed six (6) years
from the Effective Date, except as provided for in Clauses 9 (numerals 9.3, 9.8)
and 34.
4.27 Exploitation Period: The time elapsed from the end of the
Exploration or Retention Period up to the end of the contract.
4.28 Retention Period: Time lapse granted by ECOPETROL when THE ASSOCIATE asks
for more time to start the Exploitation Period of each Gas Field discovered
within the Contract Area, because special conditions mean the field cannot be
developed in the short term and consequently additional time is needed to build
the infrastructure and/or develop the market
4.29 Exploration Well: Any well so designated by THE ASSOCIATE that is to be
drilled or deepened for its account in the Contract Area for the purpose of
seeking new Reservoirs, checking the extension of a reservoir, or establishing
the stratigraphy of an area. In order to comply with the obligations agreed upon
in Clause 5 hereof, the respective Exploration Well will be previously qualified
by ECOPETROL and the ASSOCIATE.
4.30 Development or Exploitation Well : Any well previously scheduled by the
Executive Committee for producing Hydrocarbons discovered in the Production
Targets within each Commercial Field.
4.31 Budget: A basic planning tool earmarking funds for specific projects to be
used within a calendar year or part thereof in order to attain the goals and
targets proposed by the ASSOCIATE or Operator.
4.32 Extensive Production Tests: Operations performed in one o more
producing Exploration Wells to appraise producing conditions and
reservoir behavior.
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
Page 7
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4.33 Reimbursement: Payment of fifty percent (50%) of the Direct Exploration
Costs incurred by THE ASSOCIATE.
4.34 Exploration Work: Operations performed by THE ASSOCIATE in search
for and discovery of hydrocarbons in the Contract Area
4.35 Reservoir: Any sub-surface rock with hydrocarbon accumulation in its porous
space, producing or able to produce hydrocarbons and behaving as an independent
unit with respect to petrophysical and fluid properties and having a single
pressure system throughout.
CHAPTER II - EXPLORATION
CLAUSE 8 - TERMS AND CONDITIONS
5.1.1 During the first two years following Effective Contract Date, THE
ASSOCIATE must reprocess three hundred (300) ) kms. of existing seismic on the
area, acquire/interpret Landsat images and surface Geological and geochemical
work; acquire/process and interpret one hundred (100) kilometers of 2D seismic.
the Area. At the end of the second year, THE ASSOCIATE shall have the option to
relinquish the contract providing it has met the above obligations. If THE
ASSOCIATE wishes to go ahead into the third year, it must relinquish areas so
that it remains with an area not to exceed one hundred thousand (100,000)
hectares.
5.1.2 During the third year, THE ASSOCIATE shall drill one (1) Exploratory Well
to penetrate the potential Hydrocarbon-producing formations in the Area. The
contract shall terminate at the end of this year unless an extension has been
applied for and authorized pursuant to numeral 5.2 of this Clause, or a
commercial field has been discovered, except as set out in Clause 9 (numeral
9.5).
5.2 If THE ASSOCIATE has satisfactorily met the obligations of Clause 5, it may
request ECOPETROL to extend the Exploration Period annually up to three (3)
additional years and during each extension THE ASSOCIATE shal perform
Exploration Work in the Contract Area, consisting of drilling one (1)
Exploration Well until it penetrates the Hydrocarbon producing formations in the
area.
5.3 If, during any year of the Exploration Period, THE ASSOCIATE should decide
to carry out work on the following year's obligations, it must obtain permission
therefor from ECOPETROL. If ECOPETROL agrees, it shall decide
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives
Page 8
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on how such obligations are to be transferred and the amount thereof.
5.4 Throughout the life of this contract, THE ASSOCIATE may carry out
Exploration Work on the areas retained in keeping with Clause 8, and will be
solely responsible for the risks and costs of such activities and thus have
complete and exclusive control thereon. This will not change maximum life of
this contract.
CLAUSE 6 - HANDING OVER INFORMATION DURING EXPLORATION
6.1 When THE ASSOCIATE so requests, ECOPETROL shall supply any information it
holds on the Contract Area. The costs of reproducing and supplying such
information shall be charged to THE ASSOCIATE.
6.2 During the Exploration Period, THE ASSOCIATE shall hand over the following
data to ECOPETROL as such becomes available and in keeping with the ECOPETROL
data supply manual-. all geological/geophysical data, cores, edited magnetic
tapes, processed seismic sections and all supporting field data, magnetic and
gravimetric logs, all of this in reproducible originals; copies of geophysical
reports, reproducible originals of all logs for wells drilled by THE ASSOCIATE,
including the final composite graph for each well and copies of the final
drilling report, including core sample analyses, results of production tests and
any other information relating to the drilling, study or interpretation of any
kind performed by THE ASSOCIATE for the Contract Area without any limitation.
ECOPETROL is entitled to witness any operations and verify the information
listed hre in above doing so at any time and using any procedure it may
consider appropriate,
6.3 The parties agree that all geological, geophysical and engineering
information obtained from the Contract Area while this contract is in force, is
to be held confidential for three (3) years following acquisition thereof.
Thereafter such information shall be released except for any interpretations
thereof made by the Parties. The released information mainly concerns seismic,
potential methods, remote sensors and geochemical data, with respective support
documents, surface and sub-surface mapping, wells reports, electric logs,
formation tests, biostratigraphic/petrophysical/fluid analyses and production
history. However, the parties agree that in each case they may exchange
information with ECOPETROL's associates and non-associates. It is understood
that what is agreed here shall not affect the requirement of providing the
Ministry of Mines and Energy with all the information it requests under current
legal resolutions and regulations. Nonetheless, it is understood and accepted
that the Parties can, at their own discretion, provide their affiliates,
consultants, contractors and financial entities with the information they
require and called for by authorities having jurisdiction on the parties and
their affiliates, as well as by norms established by
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives Page 9 .
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any stock exchange quoting the stock of the parties or related
corporations.
CLAUSE 7 - BUDGET AND EXPLORATION SCHEDULES
Respecting the terms of this contract, THE ASSOCIATE must prepare the programs
and work schedule for exploring the Contract Area, together with a short-term
Budget (following calendar year) and estimated Budget giving an overview for the
next two (2) years. Such overview, programs, time schedules and Budgets shall be
submitted to ECOPETROL for the first time within sixty (60) calendar days
followng contract signature, and thereafter within the first ten (1 0) calendar
days of each year.
THE ASSOCIATE shall give ECOPETROL a quarterly technical and financial report,
listing exploratory work performed, prospects revealed by the information
acquired, the assigned Budget and exploration costs incurred up to date of the
report, commenting in each case on causes of the main variances. When ECOPETROL
so requests, THE ASSOCIATE shall provide explanations on the report doing so at
meetings that can be scheduled every six months. Information submitted by THE
ASSOCIATE in the reports and explanations mentioned in this clause shall under
no circumstances be understood as accepted by ECOPETROL. ECOPETROL may audit
financial information as set out in Clause 22 of Appendix B hereto (Operating
Agreement).
CLAUSE 8 - RESTITUTION OF AREAS
8.1 If a Commercial Field has been discovered in the Contact Area by the end of
the initial three-year exploration period, or of the extensions obtained by THE
ASSOCIATE in keeping with Clause 5 (numeral 5.2), the Contract Area will be
reduced by 50%- two (2) years thereafter the area will be reduced to fifty
percent (50%) of the remaining Contract Area; and two years thereafter, such
area will be reduced to the Commercial Fields(s) that are producing or under
development plus a reserve belt two and a half kilometers (2.5) wide surrounding
each Field and this will be the only part of the Contract Area that continues to
be subject to the terms of this contract. In order to apply this clause, an
imaginary grid or net will be placed over the initial contract area and then
divided into ten rows and columns running north-south, limited by the maximum
and minimum north and east coordinates of the boundaries, and they will define
the cells on which relinquishment of areas referred to in this numeral will be
based. Each time areas are returned, the imaginary grid or net will be modified
in keeping with the new coordinates of the Contract Area.
8.2 THE ASSOCIATE shall decide what areas are tobe returned to ECOPETROL based
on the imaginary grid or net mentioned in the preceding
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ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives Page 1 0.
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numeral. To this end, the relinquishment may be made in one or two lots,
comprising one or more adjoining cells and trying to conserve a single polygon,
unless THE ASSOCIATE shows that this is either impossible or unsuitable, in such
case approval must be obtained from ECOPETROL. Notwithstanding the requirement
to relinquish areas referred to in Clause 8 (numeral 8.1). THE ASSOCIATE is not
obliged to return areas under development or production, including the 2.5 km.
wide belt surrounding said areas, unless development or production are suspended
continuously for over a year without just cause and for reasons attributable to
THE ASSOCIATE, in which case the areas will be returned to ECOPETROL, thus
terminating the contract for said areas of part of the area. These stipulations
are also applicable to development under the sole risk mode.
8.3 Retention Period: If THE ASSOCIATE has discovered a Gas Field and applied
for commerciality thereof as set out in Clause 9 (numeral 9.1), he may
simultaneously ask ECOPETROL for a Retention Period, giving reasons to fully
justify this request.
8.3.1 THE ASSOCIATE must apply for the Retention Period, and ECOPETROL grant
same, prior to the date for final relinquishment of areas referred to in numeral
8.1 hereof.
8.3.2 The Retention Period may not exceed four (4) years. If the initial term
were to be insufficient, ECOPETROL may extend same following a written and
justified application from THE ASSOCIATE, but the initial period plus any
extension may not exceed four (4) years.
CHAPTER III - EXPLOITATION
CLAUSE 9 - TERMS AND CONDITIONS
9.1 To initiate the Joint Operation hereunder, it is considered that
exploitation work starts on the date the Parties accept the existence of the
first Commercial Field or upon compliance with the provision of Clause 9
(numeral 9.5). THE ASSOCIATE shall prove the existence of a Commercial Field by
drilling sufficient wells to reasonably define the hydrocarbon-producing area
and the commerciality of the Field. In this case, THE ASSOCIATE will notify
ECOPETROL in writing about such commercial discovery, furnishing the studies
that have led to this conclusion. ECOPETROL must accept or reject the existence
of such Commercial Field within ninety (90) calendar days from the date THE
ASSOCIATE hands over all support information and makes the technical
presentation. ECOPETROL may request any additional information it deems
necessary within thirty (30) days following submittal of the initial support
information.
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9.2.1 Should ECOPETROL accept the existence of a Commercial Field, it shall so
advise THE ASSOCIATE within the ninety (90) day term referred to in Clause 9
(numeral 9.1) stipulating the area of the Commercial Field. Then it shall begin
to participate in the development of the Commercial Field discovered by THE
ASSOCIATE as set out in the terms of the Contract.
9.2.2 ECOPETROL shall reimburse fifty percent (50%) of the Direct Exploration
Costs incurred by THE ASSOCIATE for its own risk and account in the Contract
Area prior to the date when commerciality studies for the new commercial
discovery were submitted, in keeping with numeral 9.
1. hereof.
9.2.3 The amount of such Direct Costs shall be established in dollars of the
United States of America, the reference date being that when THE ASSOCIATE made
such disbursements-, consequently, the costs incurred in Colombian pesos shall
be liquidated at the market representative rate for such date as certified by
the Banking Superintendency, or entity replacing same.
Paragraph:
Once the amount of Direct Exploration Costs to be reimbursed in United States
Dollars has been established, such will be inflation-adjusted for ech year or
part thereof as of the disbursement date up to the date defined by the Ministry
of Mines & Energy as the initiation of the exploitation period, using the
international inflation rate for the respective year or, failing this, that for
the previous year. The international inflation rate to be used shall be the
annual percentage variation of the consumer price index for industrialized
countries, taken from "International Financial Statistics" published by the
International Monetary Fund (page S63 or replacement) or, failing this, the
publication agreed by the Parties.
9.2.4 As soon as Operator puts the Field on-stream, ECOPETROL shall reimburse
THE ASSOCIATE for Direct Exploration Costs according to Clause 9 (numeral 9.2.2)
with the amount of dollars equivalent to fifty percent (50%) of its direct share
in the total production of such Field, after deducting the royalty percentage.
Paragraph-. For Commercial Gas Fields, ECOPETROL shall reimburse the ASSOCIATE
with the amount of dollars equivalent to one hundred percent (100%) of its
direct share in the total production of such Field, after deducting the royalty
percentage, doing so as soon as Operator puts the Field on-stream.
9.3 If ECOPETROL rejects the existence of the Commercial Field referred to in
Clause 9 (numeral 9.1), it may notify THE ASSOCIATE of additional work it
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considers necessary to demonstrate such existence. The cost of this work may not
exceed TWO MILLION DOLLARS (US$2,000,000) nor last for more than one (1) year,
in which case the Exploration Period for the Contract Area will automatically be
extended by the same period as that agreed by the Parties for the performance of
the additional work requested by ECOPETROL in this Clause but without prejudice
to the reduction of areas stipulated in Clause 8 (numeral 8.1).
9.4 If, upon completion of the additional work requested in Clause 9(numeral
9.3), ECOPETROL accepts the existence of a Commercial Field as stipulated in
Clause 9 (numeral 9.1), it will begin to participate in the development of said
field as stipulated herein, and will reimburse THE ASSOCIATE as set forth in
Clause 9 (numeral 9.2.3-9.2.4) for fifty percent (50%) of the cost of such
additional work referred to in Clause 9 (numeral 9.3) and the work carried out
will become Joint Account property.
9.5 If ECOPETROL continues to reject the existence of a Commercial Field after
the additional work referred to in Clause 9 (numeral 9.3) has been carried out,
THE ASSOCIATE may go ahead with the work it deems necessary to exploit such
field and reimburse itself for two hundred percent (200%) of the total cost of
the work performed at its own risk and account in the respective Field and up to
fifty percent (50%) of the Direct Exploration Costs it incurred prior to
submitting commerciality studies for such Field. For the purposes of this
Clause, the reimbursement will be made with the value of Hydrocarbons produced,
less the royalties established in Clause 13, deducting production, collection,
transportation and sales costs. If THE ASSOCIATE avails itself of the sole risk
modality, it is understood that the exploitation term begins on the date
ECOPETROL notifies it that commerciality is rejected. The dollar equivalence of
disbursements made in pesos will be calculated using the market representative
rate certified by the Banking Superintendency, or entity replacing same, for the
date THE ASSOCIATE made such disbursements. For the purposes of this clause, the
value of each barrel of Hydrocarbon produced in said Field during a calendar
month, shall be the average price per barrel received by THE ASSOCIATE for the
sale of its share in the Hydrocarbons produced in the Contract area during the
same month. The contents of the paragraph of Clause 9 (numeral 9.2.3.) shall
apply to reimbursement of Direct Exploration Costs.
Once THE ASSOCIATE has reimbursed itself with the percentage established erein,
all wells drilled, the facilities and all property acquired by THE ASSOCIATE to
exploit the field and paid as set forth in this Clause, shall become the
property of the Joint Account free of any charge whatsoever, and after ECOPETROL
agrees to participate in the development of such field.
9.6 At any time, ECOPETROL may start to participate in the operation
of the
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field discovered and developed by THE ASSOCIATE, subject to the latter's right
to reimburse itself for investments made at its own expense as stipulated in
Clause 9 (numeral 9.5). Once THE ASSOCIATE has repaid itself, ECOPETROL shall
start to participate in the financial results of the wells developed at the
exclusive expense of THE ASSOCIATE.
9.7 When defining the boundaries of a Commercial Field, consideration will be
given to all geological/geophysical information on such field plus that of all
wells drilled therein or related thereto.
9.8 If THE ASSOCIATE has drilled one or more Exploration Wells pointing to the
possible existence of a Commercial Field by the end of the six-year (6)
Exploration Period referred to in Clause 5 (numeral 5.2), it may ask ECOPETROL
to extend the Exploration Period for the time necessary, but not to exceed one
(1) year, to demonstrate the existence of said Commercial Field, without
prejudice to the provisions of Clause 8.
9.9 If THE ASSOCIATE continues performing the exploration obligations agreed
upon in Clause 5 after one or more fields have been declared commercial, it can
simultaneously exploit such Fields before the end of the Exploration Period
defined in Clause 4.26 but the 22-year Exploitation Period will run as of the
expiry date of the Exploration Period. When ECOPETROL has granted a Retention
Period for Gas Fields, the Exploitation Period for each Field will run from the
expiry date of the respective Retention Period.
9.10 If THE ASSOCIATE shos that Exploration Wells drilled after the Field has
been declared commercial contain additional Hydrocarbon accumulations associated
to said field, it shall ask ECOPETROL to extend the area of the Commercial Field
and its commerciality, following the procedures of Clause 9 (numerals 9.1 and
9.2.1). If ECOPETROL accepts the commerciality, it shall reimburse THE ASSOCIATE
for fifty percent (50%) of the Direct Exploration Costs exclusively related to
the extension of the Commercial Field, as set out in numerals 9.2.3 and 9.2.4.
If ECOPETROL rejects the commerciality, THE ASSOCIATE may reimburse itself for
up to two hundred percent (200%) of the total costs of work performed for, its
own risk and account in exploiting the Exploration Wells that have become
producers and up to fifty percent (50%) of the Direct Exploration Costs it
incurred solely with regard to the commerciality application. Such reimbursement
shall be made with production coming from the producing Exploration Wells, after
deducting the royalty, and following the procedure of Clause 21 (numeral 21.2)
until reaching the mentioned percentages.
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CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS
10.1 The parties agree that THE ASSOCIATE is the Operator and as such shall
control all operations and activities it deems necessary for an efficient,
technical and economic development of Hydrocarbons existing within the
Commercial Field, respecting the restrictions contained in this contract.
10.2 The Operator must follow standard industry practices in performing
development/production work, using the technical methods and systems best suited
to an economic and efficient Hydrocarbon production, and complying with
pertinent legal and regulatory provisions on this matter.
10.3 The Operator shall be considered an entity distinct from the Parties hereto
for all contract purposes, as well as for application of civi, labor and
administrative law, and with regard to its employees as set out in
Clause 32.
10.4 The Operator may resign as such by giving the Parties six-months (6)
advance written notice of the effective date of such resignation. The Executive
Committee shall then appoint a new Operator pursuant to Clause 19 (numeral
19.3.2)
CLAUSE 11 - DEVELOPMENT PROGRAMS AND BUDGETS
11. 1 Within three (3) months following acceptance of a Commercial Field in the
Contract Area, Operator shall present the Parties with a work program and a
Budget for the rest of the calendar year together with a proposed development
plan, to be agreed by the Executive Committee. If there are less than six and a
half (6-1/2) months to run before the end of said year, Operator shall prepare
and submit the Budget and programs for the following calendar year within a term
of three (3) months.
11.1.1 Future Budgets and programs shall be submitted to the Parties in May each
year, and Operator shall send its proposal to the Parties in the first ten (10)
days of May. The Parties shall notify Operator in writing of any changes they
wish to propose, doing so within twenty (20) days of receiving the Budgets and
programs. When this occurs, Operator shall consider such proposals in preparing
the Budget and programs to be submitted for final approval by the Executive
Committee at its ordinary meeting held each July. Should the total Budget not be
approved before July, the Executive Committee shall approve those items on which
there is agreement, and the remainder shall be submitted to the Parties for
subsequent review and final decision as provided for in Clause 20.
11.1.2 The development program shall become a guide for the technical, efficient
and economic exploitation of each Field. It will describe work to be
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carried out and estimated investments and expenses for the next five years, with
details of te annual operating program and Budget for the next calendar year.
11.2 The parties may propose Budget additions or revisions to the Budget but not
more often than every three (3) months except in emergencies. The Executive
Committee shall decide on these proposed revisions or additions at a meeting to
be scheduled within thirty (30) days following submittal thereof.
11.3 The programs and Budget are intended to-
11.3.1 Determine the operations to be carried out during the following calendar
year, as well as expenditures and investments (Budget) the Operator is
authorized to undertake.
11.3.2 Maintain a medium and long-term view of development at each
Field.
11.4 The terms program and Budget refer to the proposed work plan and estimated
expenditures and investments that the Operator shall carry out, such as-
11.4.1 Capital investments in production: drilling for reservoir
development,
workovers or reconditioning of wells and specific production facilities.
11.4.2 General construction and equipment- industrial and camp facilities,
transport and building equipment, drilling and production equipment. Other
construction and equipment.
11.4.3 Maintenance and operating expenses-. production expenses,
geological expenses and administrative overhead for the operation.
11.4.4 Working capital needs
11.4.5 Contingency funds
11.5 Operator shall make all expenditures and investments and handle development
and production in keeping with the programs and Budgets referred to in Clause 1
1 (numeral 1 1. 1), without exceeding the total annual Budget by ten percent (1
0%), except when so authorized by the Parties in special cases.
11.6 The Operator may no start any project on its own initiative, nor charge the
Joint Account with non-Budgeted expenditure exceeding forty thousand United
States dollars (US$40,000), or the equivalent in Colombian currency, per project
or quarter.
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11.7 The Operator is authorized to effect expenses chargeable to the Joint
Account without prior authorization from the Executive Committee when it is a
matter of taking emergency steps to safeguard persons or property of the
Parties, emergency expenses originating in fire, floods, storms or other
disasters; emergency expenses essential for the operation and maintenance of
production facilities, including keeping wells at maximum production efficiency-
emergency expenses essential to protect/safeguard material/equipment needed for
operations. In such cases, the Operator shall call a special meeting of the
Executive Committee as soon as possible in order to obtain approval for
continuing with the emergency measures.
CLAUSE 12 - PRODUCTION
12.1 Whenever necessary and duly approved by the Executive Committee, Operator
shall determine the Maximum Efficiency Rate (MER) for each Commercial Field.
This Maximum Efficiency Rate (MER) shall be the maximum rate for lifting
Hydrocarbons from a reservoir in order to attain maximum final recovery of
reserves. Estimated production should be diminished as necessary to compensate
for real or anticipated operating conditions, such as wells under repair and not
producing, limited capacity of gathering lines, pumps, separators, tanks,
pipeline and other facilities.
12.2 Periodically, at least once a year and with the approval of the Executive
Committee, Operator shall determine the area capable of commercial Hydrocarbon
production in each Field.
12.3 Every three (3) months, the Operator shall prepare and give each Party two
schedules, one showing production share and the other production distribution
for each one over the following six (6) months. The production forecast shall be
based on the Maximum Efficiency Rate (MER), as set forth in Clause 12 (numeral
12.1) and adjusted to the rights of each Party hereunder. The production
distribution schedule shall be based on periodic requests from each Party and in
keeping with Clause 14 (nueral 14.2), with such corrections as may be necessary
to ensure that no Party having capacity to make withdrawals will receive less
than the amount to which it is entitled under Clause 14, and subject to Clauses
21 (numeral 21.2) and 22 (numeral 22.5).
12.4 If any Party foresees that it will be unable to receive the full capacity
of Hydrocarbons set out in the forecast furnished Operator, it shall so advise
the latter as soon as possible. If such reduction is caused by an emergency, the
Party shall notify the Operator within twelve (12) hours following the
occurrence of the respective event. In consequence, the Party concerned shall
provide the Operator with a new receiving schedule based on the reduction.
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12.5 Operator may use the Hydrocarbons consumed in production operations in the
Contract Area, and such shall be exempt from the royalties referred to in Clause
13 (numerals 13.1 and 13.2).
CLAUSE 13 - ROYALTIES
13.1 Liquid Hydrocarbons-. During exploitation of the Contract Area, and before
distributing production among the Parties, Operator shall give ECOPETROL
royalties corresponding to twenty percent (20%) of the certified production of
liquid hydrocarbons coming from said area. ECOPETROL, for its own risk and
account, shall take the royalty production in kind from the tanks belonging to
the Joint Account.
13.2 Gaseous Hydrocarbons- Operator shall give ECOPETROL a royalty in the form
of twenty percent (20%) of the production of gaseous Hydrocarbons reported at
standard conditions. If such Hydrocarbons need to be treated at a gas plant, the
twenty percent (20%) royalty production shall be established as the sum of dry
gas produced at the plants plus the dry gas equivalent of liquid products
produced, considering the conversion factors set out in current legislation.
Regarding fields exploited under the sole risk mode, THE ASSOCIATE shall give
ECOPETROL he royalty percentage of Hydrocarbons.
13.3 ECOPETROL shall use the royalty production to pay the entities legally
appointed to receive the royalties due the State on the full production of the
Commercial Field, doing so in the manner and respecting the time limits set out
in law, and the ASSOCIATE shall in no case be liable for any payments to these
entities.
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF HYDROCARBONS
14.1 The Hydrocarbons produced shall be transported to the jointly-owned tanks
or to other measuring facilities agreed by the Parties, except for those used
and inevitably consumed in operations hereunder. In the absence of an agreement,
the measuring point for gaseous Hydrocarbons shall be- i. The gas line of each
separator when they are not to be treated in gas plants, or ii) at the exit of
the gas plants when such treatment is required. The Hydrocarbons shall be
measured via accepted industry standards and such measurement shall be the basis
for calculating the percentages of Clause 13. Thereafter, the remaining
Hydrocarbons belong to each Party in the proportion specified in this Contract.
14.2 Production Distribution
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14.2.1 After deducting the royalty percentage, the remaining Hydrocarbons
produced in each Commercial Field belong to the parties thus- Fifty percent
(50%) for ECOPETROL and fifty percent (50%) for THE ASSOCIATE until cumulative
production for each Commercial Field reaches 60 million barrels of liquid
Hydrocarbons or 420 giga cubic feet of gaseous Hydrocarbons at standard
conditions, whichever occurs first (1 cubic giga foot = 1 x 10 9- cubic feet)
14.2.2 Notwithstanding the fact that ECOPETROL has classified the Field as being
commercial, when production at each Commercial Field (after deducting the
royalty percentage) exceeds the limits of 14.2.1, distribution among the Parties
will use the R factor as set out hereunder.
1.2..2.1 If liquid Hydrocarbons first reach the limit set out in numeral 14.2.1
hereof, the following table shall apply-.
R FACTOR Production Distribution after Royalties (%)
ASSOCIATE ECOPETROL
0.0 - 1.0 50 50
1.0 - 2.0 50/R 100-50/R
2.0 or more 25 75
14.2..2.2 If gaseous Hydrocarbons first reach the limit set out in numeral
14.2.1 hereof, the following table shall apply-
R FACTOR Production Distribution after Royalties (%)
ASSOCIATE ECOPETROL
0.0 - 2.0 50 50
2.0 - 3.0 50/(R-1) 100-[50/(R-1)]
2.0 or more 25 75
14.2.3 The R factor is defined as the ratio between accrued income and accrued
disbursements made by THE ASSOCIATE for each Commercial Field, as follows-
IA
R -------------------
ID + A - B + GO
Where-
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1A (The Associates Accrued Income)- is the valuation of income accrued by THE
ASSOCIATE for hydrocarbons produced, after royalties, at the reference price
agreed by the Parties, excluding hydrocarbons reinjected in Contract Area
Fields, and those consumed in the operation and burnt gas.
The parties shall jointly establish the average reference price for
hydrocarbons.
Accrued Income will be based on the Monthly Income which, in turn, will be
obtained from multiplying the average monthly reference price by the monthly
production in keeping with respective form issued by the Ministry of Mines &
Energy.
ID (Accrued Development Investment)-. Is fifty percent (50%) of the accrued
development investment approved by the Association Executive Committee. Accrued
Development Investment made prior to the exploitation start-up date of the Field
as defined by the Ministry of Mines and Energy, shall be adjusted to such date
in the same way as Direct Exploration Costs in the paragraph of Clause 9
(numeral 9.2.3).
A. Direct Exploration Cots incurred by THE ASSOCIATE according to Clause o
hereof and adjusted as set out in the paragraph of 9.2.3 .
B. Accrued reimbursement of the afore-mentioned Direct Exploration Costs, in
keeping with Clause 9 hereof.
GO (Accrued Operating Expenses)-. accrued operating expenses approved by the
Association Executive Committee, in the proportion corresponding to the
ASSOCIATE plus the latter's accrued transportation costs. Transportation costs
are investment and operating expenses for transporting hydrocarbons produced in
the Commercial Fields within the Contract Area up to the exportation port or the
place agreed for taking the price to be used in the IA calculation. Such
transportation costs will be jointly determined by the parties once the Fields
that ECOPETROL has declared to be commercial initiate the exploitation stage.
Operating expenses include special levies or similar items directly applied to
Hydrocarbon exploitation in the Contract Area.
All values included in the R factor calculation following the exploitation
start-up date established by the Ministry of Mines & Energy will be taken in
current dollars.
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To this end, expenses in pesos shall be converted to dollars at the Market
Representative Rate certified by the Banking Superintendency, or entity
replacing same, in force on the date the respective disbursements were made.
14.2.4 Calculation of the R Factor: Production distribution based on the R
factor will be applied as of the first day of the third calendar month following
that when the accrued production in the Contract Area reached 60 million barrels
of liquid Hydrocarbons or 420 giga cubic feet of gaseous Hydrocarbons at
standard conditions, in keeping with 14.2.1
The R Factor for calculation each Commercial Field will be based on the
accounting closing for the calendar month when accrued production reached 60
million barrels of liquid Hydocarbons or 420 giga cubic feet of gaseous
Hydrocarbons at standard conditions, in keeping with 14.2.1
The resulting distribution will be applied until 30th June of the following
year. Thereafter, R factor production distribution will be made for one-year
periods (lst July to 30th June) for liquidation thereof based on accrued value
at 31st December of the previous year as shown in the respective accounting
closing.
14.3 In addition to the jointly owned tanks and other facilities, each Party may
build its own production facilities in the Contract Area for its exclusive use
and in keeping with legal regulations. When Hydrocarbons belonging to each Party
are transported and delivered to pipelines and depots that are not jointly
owned, this will be for the risk and cost of the Party receiving such
Hydrocarbons.
14.4 When production sites are not connected to a pipeline, the Parties may
agree to install pipelines up to a point connecting to the pipeline or where the
Hydrocarbons can be sold, this work will be charged to the Joint Account. If the
Parties agree to build such pipelines, they will enter into the contracts they
deem suitable for this purpose and appoint the Operator pursuant to current
legislation.
14.5 Each Party shall own the Hydrocarbons produced and stored as a result of
the operation hereunder and made available to it pursuant to the provisions of
this contract. Likewise, each Party must assume the expense of receiving such
Hydrocarbons in kind or selling or disposing of them separately, as provided for
in Clause 14 (numeral 14.3).
14.6 Should one Party, for any reason, be unable to separately dispose all or
part of the Hydrocarbons to which it is entitled hereunder, or withdraw same
from the Joint Account tanks, the following stipulations shall apply-
14.6.1 If ECOPETROL is the Party that is unable to fully or
partially
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withdra its quota of Hydrocarbons (share plus royalty) pursuant to Clause 12
(numeral 12.3), Operator may continue producing the field and deliver to THE
ASSOCIATE not only the quota to which the latter is entitled based on a hundred
percent (100%) MER operation, but also all the Hydrocarbons that THE ASSOCIATE
chooses and is able to withdraw up to a limit of one hundred percent (1 00%) of
the MER, crediting ECOPETROL for subsequent delivery of the quota it did not
withdraw. However, regarding the volumes not taken that correspond royalties for
the month, ECOPETROL may ask THE ASSOCIATE to pay for the difference between the
Hydrocarbon volume withdrawn and the volumes corresponding to royalties as set
out in Clause 13.1 and 13.2, doing so in United States dollars. It is understood
that any Hydrocarbons withdrawn by ECOPETROL shall first be used for payment in
kind of the royalties, and thereafter, additional withdrawals will be credited
to its share as set out in Clause 14 (numeral 14.2).
14.6.2 If THE ASSOCIATE is unable to fully or partially withdraw its quota under
Clause 12 (numeral 12.3), the Operator shall deliver ECOPETROL not only its
share based on a hundred percent (100%) MER operation, but all those
Hydrocarbons that ECOPETROL is able to receive up to a limit of one hundred
percent (100%) of the MER, crediting THE ASSOCIATE for subsequent delivery of
the quota which it was unable to withdraw.
14.7 When both Parties are able to receive the Hydrocarbons allocated under
Clause 12. (numeral 12.3), the Operator shall proceed as follows. When so
requested by the Party previously unable to receive its quota, it shall deliver
such Party its share in the operation plus at least ten percent (10%) a month of
the monthly production corresponding to the other Party and by mutual agreement
up to one hundred percent (100%) of the non-received quota, until such time when
the total amounts credited to the non-receiving party are offset.
14.8 Subject to legal provisions on this matter, each Party is free at all times
to sel or export is share of Hydrocarbons, in keeping with this contract, or to
dispose thereof in anyway.
CLAUSE 15 - USE OF ASSOCIATE NATURAL GAS
When one or more fields with Associate Natural Gas are discovered, Operator
shall submit a project for using this gas for the benefit of the Joint Account,
this must be done within two (2) years following the starting date for field
exploitation as established by the Ministry of Mines and Energy. The Executive
Committee shall approve the project and establish a schedule for performance
thereof. If Operator fails to submit a project within the two-year period, or
fails to perform
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same within the time limits established by the Executive Committee, ECOPETROL
may take all the Associate Natural Gas coming from the Reservoirs being
exploited and not needed for efficient field production, without having to pay
for same.
CLAUSE 16 - UNIFICATION
When an economically exploitable reservoir extends continuously into another
area or areas located outside the Contract Area, the Operator, ECOPETROL and
other interested parties should agree on a unified development program. Such
program should respect engineering techniques for Hydrocarbon production and be
approved by the Ministry of Mines and Energy.
CLAUSE 17 - INFORMATION SUPPLY AND INSPECTION DURING EXPLOITATION
17.1 The Operator shall give the Parties reproducible originals (sepias) and
copies of the electric, radioactive and sonic logs for the wells drilled,
histories, core analyses, cores, production tests, reservoir studies and other
pertinent technical data, as well as any routine reports made or received in
connection with the operations and activities carried out in the Contract Area,
doing so as these become available.
17.2 Each Party shall be entitled to inspect the wells and facilities in the
Contract Area and related activities, doing so at its own cost, expense andrisk
and through authorized representatives. Such representatives shall have the
right to examine cores, samples, maps, drilling logs, surveys, books and any
other source of information connected with the performance of this contract.
17.3 Operator shall prepare all reports called for by the Colombian government
and hand them over to ECOPETROL so the latter may comply with the provisions of
Clause 29,
17.4 Information and data connected with exploitation operations shall be
treated as confidential, under the same terms as those of Clause 6 (numeral 6.3)
hereof.
CHAPTER IV - EXECUTIVE COMMITTEE
CLAUSE 18 - CONSTITUTION
18.1 Within thirty (30) days following acceptance of the first Commercial Field,
each Party should appoint a representative and his first and second alternates
to the Executive Committee, and notify the other Party in writing of the names
and
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addresses of such persons. The Parties may change the representative or
alternates at any time, but should so notify the other Party in writing. The
vote or decision of each Party representative is binding on said Party. If the
main representative of either Party is unable to attend a Committee meeting, he
will be replaced by the first or second alternate, in that order, and such shall
have the same authority as the principal.
18.2 The Executive Committee will hold ordinary meetings in March, July and
November to review the development program being carried out by Operator, the
development plan and other immediate plans. In the July meeting every year, the
Operator shall submit an annual operating program and the investment and
expenditure Budget for the next calendar year.
18.3 The Parties and Operator may ask that special Executive Committee meetings
be convened to study specific operating conditions. The representative of the
interested party shall give ten (10) calendar days advance written notice o the
data and agenda for such meeting. The meeting may address any matter not
included in the agenda, provided the Party representatives agree.
18.4 For all matters discussed in the Executive Committee, the Party
representatives shall have a vote equal to the percentage held by the respective
party in the Joint Operation. Any decision or resolution taken by the Executive
Committee will only be valid if approved by over fifty percent (50%) of the
total Interest. In keeping with the mentioned procedure, decisions taken by the
Executive Committee shall be compulsory and final for the Parties and for
Operator.
CLAUSE 19 - FUNCTIONS
19.1 The Party representatives shall constitute the Executive Committee which
has full authority and responsibility to establish and adopt production,
development and operations schedules and Budgets for this contract. Operator
shall send a representative to Executive Committee meetings.
19.2 The Executive Committee shall appoint a Secretary to keep complete and
detailed records and minutes of all matters discussed and decisions taken by the
Committee. Party representatives should sign and approve the Minutes within the
ten (10) business days following adjournment of the meeting, otherwise they will
not be valid. Minutes should be delivered to the Parties as soon as possible.
19.3 The Executive Committee has the following duties, among others-.
19.3.1 Adopt its own regulations
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19.3.2 Appoint the Operator in the event of resignation or removal, and issue
regulations to be met by Operator when such is a third party, setting out all
causes for removal.
19.3.3 Appoint an External Auditor for the Joint Account
19.3.4 Approve or reject the annual operations program and expenditure Budget,
any modification or revision thereof, and approve extraordinary expenses.
19.3.5 Establish expenditure policies and norms
19.3.6 Appove or reject expenditure recommended by Operator (not included in
the approved Budget) when such expenditure exceeds forty thousand dollars of the
United States of America (US$40,000) or the equivalent in Colombian currency.
19.3.7 Advise Operator and decide on matters referred to the
Committee.
19.3.8 Create such sub-committees as it deems necessary, setting out their
duties which will be performed under the supervision of the Committee.
19.3.9 Define the type and frequency of drilling, operation and production
reports and any other information that Operator must furnish the Parties
chargeable to the Joint Account.
19.3.10 Supervise handling of the Joint Account
19.3.11 Authorize the Operator to enter into contracts on behalf of the Joint
Operation when the amount thereof exceeds forty thousand dollars of the United
States of America (US$40,000) or the equivalent in Colombian currency.
19.3.12 In general, assume all functions authorized hereunder and not assigned
to another entity or person through a specific clause hereof, or legal or
regulatory provision.
CLAUSE 20 - DECISION WHEN THERE IS DISAGREEMENT IN THE OPERATION
20.1 When the Party representatives cannot agree on a Joint Operation project
that requires approval from the Executive Committee, as set out hereunder, such
matter shall be referred directly to the highest ranking executive of each Party
who
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is resident in Colombia, in order that they may reach a joint decision. If the
Parties reach an agreement or decision on the matter in question within sixty
(60) calendar days after such referral, they shall so notify the Executive
Committee Secretary who should call a meeting within the fifteen (1 5) calendar
days following receipt of the notice and committee members must ratify the
agreement or decision in said meeting.
20.2 If the Parties fail to reach agreement within the sity (60) calendar days
following the consultation, operations may go ahead pursuant to Clause 21.
CLAUSE 21 - SOLE RISK OPERATIONS
21.1 If, at any time, one Party wishes to drill an Exploitation Well that has
not been approved in the operating schedule, it shall so notify the other Party
at least thirty (30) calendar days prior to the next meeting of the Executive
Committee, together with data on location, drilling recommendation, depth and
estimated costs. The Operator shall include this proposal in the Agenda for the
next committee meeting. If the Committee approves the proposal, said well shall
be drilled for the Joint Account- otherwise the Party wishing to drill the well,
hereinafter the participating Party, shall be entitled to drill, complete,
produce or abandon such well at its own risk and for its account. The Party not
wishing to participate in the afore-mentioned operation shall be referred to as
nonparticipating Party. The participating Party should spud the well within one
hundred eighty (180) days following rejection by the Executive Committee. If
drilling does not start within this period, it must be re-submitted to the
Executive Committee. When requested by the participating Party, Operator shall
drill the afore-mentioned well for the risk and account of said Party, provided
Operator considers that such operation will not interfere with normal Field
operations, and that it has received the sums it considers necessary from the
participating Party. If Operator is unable to drill the mentioned well, the
participating Party may drill it directly or via a competent service company
and, in such case, the participating Party will be responsible for the
operation, without interfering in normal Field operations.
21.2 If the well referred to in Clause 21 (numeral 21.1) is completed as a
producer, it shall be administered by Operator and its production, after
deducting the royalty referred to in Clause 13, will belong to the participating
Party. This Party will assume all operating costs for the well untilnet
production value, after deducting costs of production, gathering, storage,
transport and similar, and sales costs, reaches two hundred percent (200%) of
drilling and completion costs. Thereafter, and for all contract purposes, the
well shall belong to the Joint Account as if it had been drilled with the
approval of the Executive Committee and for the
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account of the Parties. For purposes of this Clause, the value of each barrel of
Hydrocarbon produced in the well during a calendar month and prior to deducting
the afore-mentioned costs, shall be the average price per barrel received by the
participating Party for sales of its share of Hydrocarbons produced in the
Contract Area during the same month.
21.3 If one Party at any time wishes to recondition or deepen a well to
Production Targets, or plug a dry hole or a non-commercial producer drilled for
the Joint Account, and such operations have not been included in the program
approved by the Executive Committee, such Party shall notify the other Party of
its intention to recondition, deepen or plug said well. If equipment is not
available at the location, the procedure of Clause 21 (numerals 21.1 and 21.2)
shall apply. If suitable equipment is available at the well site, the Party
wishing to carry out such operation shall notify the other Party which must
reply in a period of forty-eight (48) hours following receipt of such notice, if
no reply is received in this lapse, it shall be understood that the operation is
performed for the risk and account of the Joint Account. If the proposed work is
performed for the sole risk and account of the participating Party, the well
shall be administered in keeping with Clause 21 (numeral 21.2).
21.4 If, at any time, one Party wishes to build new facilities to extract liquid
from the gaseous hydrocarbons and to transport/export Hydrocarbon production,
these will be referredto as additional facilities and such Party shall notify
the other in writing as follows-
21.4.1 General description, design, specifications and estimated costs of the
additional facilities.
21.4.2 Planned capacity
21.4.3 Approximate date of construction start-up and duration thereof. Within
ninety (90) days counted from notification, the other Party shall give written
notice of its decision to participate in such additional facilities or not. If
it does not participate, or fails to reply to the participating Party,
hereinafter the building Party, the latter may proceed with the additional
installation and order the Operator to build/operate/maintain same for the sole
risk and account of the building Party, without hindering normal Joint
Operations. The building Party may negotiate with the other Party on using these
facilities for the Joint Operation. While the facilities are operated for the
risk and account of the building Party, the Operator shall charge the latter
with all operating/maintenance costs therefor, doing so in keeping with
generally accepted accounting principles.
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CHAPTER V - JOINT ACCOUNT
CLAUSE 22 - MANAGEMENT
22.1 Subject to other provisions set out herein, Exploration expenses shall be
for the risk and account of THE ASSOCIATE.
22.2 Once the Parties accept the existence of a Commercial Field, and subject to
the provisions of Clauses 5 (numerals 5.2) and 13 (numerals 13.1 and 13.2), the
rights or Interest in Contract Area Operation shall be owned thus ECOPETROL
fifty percent (50%) and THE ASSOCIATE fifty percent (50%). Thereafter, all
expenses, payments, investments, costs and liabilities made and contracted for
operations hereunder and Direct Exploration Costs made by the ASSOCIATE prior to
acceptance of each Commercial Field and extensions thereto, in keeping with
Clause 9 (numeral 9.10), shall be charged to the Joint Account. Exept as set
out in Clauses 14 (numeral 14.3) and 21, all assets acquired or used thereafter
for operating the Commercial Field shall be owned and paid for by the Parties as
set out in this clause.
22.3 The Parties shall pay Operator their share of budget requirements, doing so
in the currency in which expenditure is to be disbursed, that is Colombian pesos
or United States dollars as called for by Operator in keeping with programs and
Budgets approved by the Executive Committee. This payment shall be made in the
first five (5) days of each month and at the bank chosen by Operator. When THE
ASSOCIATE lacks sufficient Colombian pesos to cover its pesos share, ECOPETROL
may supply these funds and have them credited to its dollar obligation, using
the market representative rate certified by the Banking Superintendency, or the
entity acting in this capacity, on the day that ECOPETROL should make the
respective payment, provided such transaction is legally acceptable.
22.4 The Operator shall give the Parties a monthly statement showing the funds
advanced, expenses incurred, outstanding liabilities and a report on all debits
and credits made to the Joint Account, this report should follow Appendix B
hereto. The statement and report should be submitted monthly within the fifteen
(15) calendar days following the end of each month. If the payments mentioned
under Clause 22 (numeral 22.3) are not made within stipulated term and Operator
chooses to pay same, the delinquent Party shall pay commercial interest in the
same currency for the time of such delay.
22.5 If one Party fails to pay the Joint Account on the due date, it shall be
considered thereafter as the delinquent Party and the other as the Prompt party.
If
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Page 28.
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the Prompt party were to pay both its own share and that of the delinquent
Party, after sixty (60) days of delay, it shall be shall be entitled to receive
frm Operator the full share of the delinquent Party in the Contract Area
(excluding royalty percentage). This will continue until production provides the
prompt Party with a net income from sales equal to the sum not paid by the
delinquent Party, plus annual interest at the Commercial rate as of the sixtieth
(60) day following the delinquency date. Net income is understood as the
difference between the sales price of the Hydrocarbons taken by the prompt
Party, less the cost of transport, storage, loading and other reasonable
expenses disbursed by such Party in selling such production. The prompt Party
may exercise this right at any time after thirty (30) calendar days of having
notified the delinquent Party in writing of its intention to take part or all
such Party's production.
22.6.1 All Direct Expenses of the Joint Operation will be charged to the Parties
in the same proportion as for production distribution after royalties.
22.6.2 Indirect Expenses will be charged to the Parties in the same proportion
as for Direct Expenses set out in 22.6.1 hereof. These expenses shall be the
result of applying the equation a+m (X-b) to the total annual amount for
investment and direct expenditures (excluding technical and administrative
overhead).
Where:
x Is total annual investments and expenditures "a", "m", and "b" are constants
whose values are set out in the table hereunder depending on the amount of
annual investment and expenditures
INVESTMENTS AND EXPENDITURE - CONSTANT VALUES
<TABLE>
<CAPTION>
x (US$) a(US$) m(fract) "b"(US$)
<S> <C> <C> <C> <C> <C>
1 0 25,000,000 0 0.10 0
2 25,000,001 50,000,000 2,500,000 0.08 25,000,000
3 50,000,001 100,000,000 4,500,000 0.07 50,000,000
4 100,000,001 200,000,000 8,000,000 0.06 100,000,000
5 200,000,001 300,000,000 14,000,000 0.04 200,000,000
6 300,000,001 400,000,000 18,000,000 0.02 300,000,000
7 400,000,001 onwards 20,000,000 0.0 400,000,000
</TABLE>
The equation will be applied once a year in each case, applying the constants
that correspond to the total sum of annual investments and expenditure.
22.7 Either Party may review or question the monthly statements of account
referred to in Clause 22 (numeral 22.4) from the time they are received up to
two years following the end of the respective calendar year, clearly indicating
the
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corrected or questioned items and the reasons therefor. Any account that has not
been corrected or questioned in this period, shall be considered as final and
correct.
22.8 The Operator shall keep accounting books, vouchers and reports for the
Joint Account, in Colombian pesos and according to Colombian law. Any credit or
debit to the Joint Account shall follow the accounting procedure set out in
Appendix B which is a part hereof. In the event of any discrepancy between said
accounting procedure and the terms of the contract, the latter shall prevail.
22.9 Operator may sell material or equipment during the first twenty (20) years
of the Exploitation Period, or the first twenty eight (28) years in the case of
a Gas Field, crediting the proceeds to the Joint Account when the amount does
not exceed five thousand dollars of the United States of America (US$5,000) or
the equivalent in Colombian currency. In any calendar year, operations of this
type may not exceed fifty thousand dollars of the United States of America
(US$50,000) or the equivalent in Colombian currency. The Executive Committee
must approve sales of real estate or those exceeding the afore-mentioned
amounts. These materials or equipment shall be sold at a reasonable price
considering their condition.
22.10 All machinery, equipment or other assets or chattels purchased by Operator
for contract performance and charged to the Joint Account shall belong to the
Parties in equal shares. However, if one arty decides to terminate its interest
in the contract during the first seventeen (1 7) years of the Exploitation
Period, except as set out in Clause 25th, said Party must sell all or part of
its share in said items to the other Party at a reasonable commercial price or
at book value, whichever is lower. If the other Party is not interested in
purchasing them within ninety (90) days following the formal sales offer, the
withdrawing Party shall be entitled to assign its interest in said machinery,
equipment, and items to a third party. If THE ASSOCIATE wishes to withdraw after
seventeen (17) years of the Production Period have elapsed, its rights in the
Joint Operation shall pass to ECOPETROL free of charge, once the latter has
accepted.
CHAPTER VI - CONTRACT DURATION
CLAUSE 23 - MAXIMUM DURATION
This contract shall last for a maximum period of twenty eight (28) years running
from the Effective Date and broken down thus: up to six (6) years for the
Exploration Period in keeping with Clause 5 and subject to Clause 9 (numerals
9.3 and 9.8); and twenty-two years for the Exploitation Period counted from the
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termination date of the Exploration Period. It is understood that when the
Exploration Period is extended as provided for in this contract, this shall
never signify an extension to the total twenty-eight (28) year term, except as
stipulated in paragraph I hereunder.
Paragraph 1: The Exploitation Period for Gas Fields discovered in the Contract
Area shall have a maximum duration of thirty (30) years counted from the expiry
date of the Exploration Period, or of the Retention Period. In any case, the
total contract term for such Fields cannot exceed forty (40) years counted from
the Effective Date.
Paragraph 2: Notwithstanding the above, at least five (5) years prior to the
expiry of the Exploitation Period for each Field, ECOPETROL and THE ASSOCIATE
will study onditions for continuing exploitation beyond the term stipulated in
this Clause. If the Parties agree to continue with such exploitation, they will
define the terms and conditions therefor.
CLAUSE 24 - TERMINATION
This contract shall terminate in the following cases:
24.1 Upon expiry of the Exploration Period if THE ASSOCIATE has not discovered a
Commercial Field, except as set out in Clauses 9 (numerals 9.5 and 9.8) and 34.
24.2 Upon expiry of contract duration, as stipulated in Clause 23.
24.3 At any date when THE ASSOCIATE so wishes and provided it has met its
obligations stipulated in Clause 5th, and all others contracted
hereunder.
24.4 For the special causes set out in Clause 25th.
CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION
25.1 ECOPETROL may unilaterally declare this contract terminated at any time
prior to expiry of the period agreed to in Clause 23, in the following cases.
25.1.1 Death or dissolution of THE ASSOCIATE or its assignees.
25.1.2 If THE ASSOCIATE or its assignees were to transfer this
contract, fully or partially, without giving compliance to the
provisions of Clause 27.
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25.1.3 For financial incapacity of THE ASSOCIATE and its assignees which shall
be assumed when bankruptcy proceedings are filed.
25.1.4 When THE ASSOCIATE defaults on its obligations contracted under this
contract.
Upon expiry of each period defined for exploratory work, THE ASSOCIATE shall
submit a written report showing performance of the obligations for the
respective period. If such have not been performed, THE ASSOCIATE shall be given
sixty (60) calendar days to diligently perform same in keeping with good
petroleum practices. If such period is insufficient, the Parties may mutually
agree to establish a longer period for performance. If the agreed work has still
not been performed at the end of this new extension, there will b default and
consequently ECOPETROL may proceed as set out in clause 25.3
25.2 When unilateral termination is declared, the rights of THE ASSOCIATE set
out in this contract will lapse, both as interested Party and as Operator, if at
such time the ASSOCIATE is acting in both capacities.
25.3 ECOPETROL may only declare unilateral termination of this contract when it
has given the ASSOCIATE or its assignees sixty (60) calendar days advance
written notice thereof, clearing stating the reasons for such decision, and when
THE ASSOCIATE has failed to provide ECOPETROL with satisfactory explanations or
to correct the default in contract performance. This does prevent THE ASSOCIATE
from filing any appeal it considers to be in order.
CLAUSE 26 - OBLIGATIONS IN EVENT OF TERMINATION
26.1 When the contract is terminated under Clause 24th during the Exploration,
Retention or Exploitation Periods, THE ASSOCIATE shall hand over the buildings,
pipelines, transfer lines and other movable items belonging to the Joint Account
(located in the Contract Area), leaving any producing wells in production, and
all of this will pass to ECOPETROL free-of-charge together with the
rights-of-way and assets acquired for the contract, even though these may be
located outside the Contract Area.
26.2 If this contract is terminated for any reason after the first
seventeen (17) years of the Production Period, all interest of THE
ASSOCIATE in the machinery, equipment or other assets or movables used
or purchased by THE ASSOCIATE or the OPERATOR for contract performance,
shall pass to ECOPETROL free-of charge.
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26.3 If this contract terminates in the first seventeen (17) years of the
Exploitation Period, the terms of Clause 22 (numeral 22.10) shall apply.
26.4 If this contract is terminated unilaterally at any time, all chattels and
real estate acquired exclusively for the oint Account shall pass to ECOPETROL
free-of-charge.
26.5 Upon contract termination at any time and for any reason, the Parties
commit to give satisfactory compliance to their legal obligations both among
themselves and with third parties, as well as those contracted hereunder.
CHAPTER VII - MISCELLANEOUS PROVISIONS
CLAUSE 27 - ASSIGNMENT RIGHTS
27.1 THE ASSOCIATE is entitled to fully or partially cede or transfer its
rights, interests, and obligations in the Association Contract to another
person, company or group, with the consent of the Minister of Mines & Energy and
the President of ECOPETROL
Consequently, THE ASSOCIATE must notify the Ministry of Mines & Energy and the
President of ECOPETROL via a certified document of any project that implies
total/partial assignment or transfer of its interest, rights and obligations
hereunder, indicating essential points of the transaction such as possible
assignee, price, interest, rights and obligations to be assigned, scope of the
operation etc. The Minister of Mines & Energy and President of the Empresa
Colombiana de Petroleos - ECOPETROL shall have thirty (30) business days to
exercise their discretionary powers and appraise the possible assignees, and
subsequently take a decision without being obliged to give reasons therefor. In
any case, the criterion of the Minister of Mines & Energy shall prevail.
27.2 If the ASSOCIATE has not received a reply thirty (30) business after
submitting the application to the Minister of Mines & Energy, it will be
understood for all purposes that such has been approved.
27.3 Assignments made during the Exploration Period among companies legally
established in Colombia shall not be subject to the above mentioned procedure,
they shall be formalized by written authorization from ECOPETROL and signing the
respective document.
27.4 Any change in the contractual relations between THE ASSOCIATE and ECOPETROL
resulting from direct, total or partial transactions of the interest,
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quotas or stock of the former must also be approved by the Minister of Mines and
Energy and President of ECOPETROL.
27.5 However, such changes shall not require authorization from the Minister of
Mines and Energy and Ecopetrol in the following cases-.
27.5.1 When the transactions are made in an open stock exchange.
27.5.2 When the transfer/cession is the result of matters beyond the control of
the ASSOCIATE or the companies that control or direct same, such as governmental
decisions, judicial sentences, division and award of assets and auctions.
27.5.3 When the negotiations take place between companies that control or direct
THE ASSOCIATE, or their subsidiaries or affiliates, or between companies making
up a single economic group, it suffices to notify the Minister of Mines & Energy
and ECOPETROL of such assignment or cession in a timely way.
27.6 Except for the above cases, any cession, transfer, negotiation, transaction
or operation referred to in this Clause that is made without approval or consent
of the Minister of Mines & Energy and the President of ECOPETROL, when called
for, shall give rise to the application of Clause 25th of the Association
Contract.
27.7 If the operations carried out under this Clause give rise to taxes under
Colombian law, such shall be paid.
CLAUSE 28 - DISAGREEMENT
28.1 Whenever there is a discrepancy or contradiction in interpreting the
clauses hereunder as compared to those of Appendix B known as the Operating
Agreement, the former shall prevail.
28.2 Disagreements of a legal nature arising among the Parties with regard to
contract interpretation and performance and that cannot be resolved in a
friendly way, shall be referred to the decision of the jurisdictional branch of
Colombian public power.
28.3 Any difference of a technical nature arising among the parties with regard
to contract interpretation and performance and that cannot be resolved in a
friendly way shall be refered to the final decision of experts appointed thus:
one by each Party and a third chosen by the first two. If the latter are unable
to reach agreement on such third expert, either Party may ask the Board of
Directors of the Colombian Society of Engineers - SCI - having its head office
in Santafe de
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Bogota to appoint same.
28.4 Any difference of an accounting nature arising among the parties with
regard to contract interpretation and performance and that cannot be resolved in
a friendly way shall be referred to the final decision of experts who should be
public accountants appointed thus- one by each Party and a third chosen by the
first two. If the latter are unable to reach agreement on such third expert,
either Party may ask the Central Board of Accountants of Bogota to appoint same.
28.5 Both Parties declare that the decision of the experts shall have the force
of a settlement among themselves, and consequently shall be final.
28.6 If the Parties fail to agree on whether the controversy is of a legal,
technical or accounting nature, such shall be considered legal and subject to
Clause 28th (numeral 28.2).
CLAUSE 29 - LEGAL REPRESENTATION
Without impairing the legal rights of the ASSOCIATE as set out in law or in this
Contract, ECOPETROL shall represent the Parties with Colombian authorities in
matters regarding the development of the Contract Area, whenever such is called
for, furnishing government offices and entities with all information and reports
they may legally require. Operator must prepare the respective reports and hand
them over to ECOPETROL. Any expenses incurred by ECOPETROL to attend matters
referred to in this Clause shall be charged to the Joint Account. When such
expenses exceed five thousand dollars of the United States of America (US$5,000)
or the equivalent in Colombian currency, the Operator must first approve same.
Regarding any reations with third parties, the Parties represent that neither
the provisions of this or any other Clause in the contract, implies granting a
general power-of-attorney, nor that the Parties have set up a civil or
commercial association or any other relationship whereby either Party may be
held jointly liable for the acts or failure to act of the other Party, or have
authority or mandate to commit the other Party with regard to any obligation.
This contract refers to operations within the Republic of Colombia and while
ECOPETROL is an industrial and commercial company belonging to the Colombian
State, the Parties agree that THE ASSOCIATE, if such were the case, may choose
to be excluded from the provisions of sub-chapter K entitled Partners and
Partnerships of the Internal Income Code of the United States of America. The
ASSOCIATE may make such choice in a suitable way.
CLAUSE 30 - RESPONSIBILITIES
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30.1 The Operator shall perform operations hereunder in a manner that is
diligent, responsible, efficient, economically and technically sound and in
keeping with internationally accepted industry practices for this type of
operation, it being understood that at no time shall it be liable for errors of
judgment, or loss or damage that is not directly attributable to it.
30.2 Liabilities contracted by ECOPETROL and THE ASSOCIATE hereunder with third
parties shall not be joint, therefore each Party is individually liable for its
share in the expenses, investments and obligations resulting therefrom.
30.3 Operator alone shall be liable with third parties for expenses incurred and
contracts entered into for amounts exceeding forty thousand United States
dollars (US$40,000) or the equivalent in Colombian currency when such have not
been duly authorized by the Executive Committee, except as ruled in Clause 1 1
(numeral 11.7) and therefore it shall assume the full cost theref. When the
Executive Committee accepts such expenditure, it will pay Operator for the work,
study or purchase in keeping with the guidelines it has set out in this respect.
If the Executive Committee rejects the expense or asset, Operator if possible
should withdraw same and reimburse the partners for any expense incurred in such
withdrawal. When Operator is unable or refuses to withdraw the assets, the
resulting equity increase or profit from such expenditure or contract shall
belong to the Parties in proportion to their share in the Operation.
30.4 Ecological Control. In performing work hereunder, THE ASSOCIATE should
comply with the provisions of the National Code for Renewable Natural Resources
and Environmental Protection and other legal provisions on this matter. THE
ASSOCIATE undertakes to carry out a permanent prevention plan to guarantee
conservation and restoration of natural resources within the zones where it
carries out Exploration, development and transport hereunder.
THE ASSOCIATE should make these plans and programs known to the communities and
to national and regional entities involved in this matter. Likewise, specific
contingency plans should be established to deal with emergencies and take
pertinent remedial action. To this end, THE ASSOCIATE should coordinate plans
and action with the authorized entities.
THE ASSOCIATE must prepare the respective Budgets and programs as set out in the
pertinent clauses of this contract.
All costs incurred shall be assumed by THE ASSOCIATE in the Exploration Period
and in sole risk operations during the Exploitation Period. During the
Exploitation Period these costs will be charged to the Joint Account and shared
by both Parties.
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CLAUSE 31 - TAXES, LEVIES AND OTHERS
Taxes and levies related to Hydrocarbon production, caused after the Joint
Account has been set up but before the Parties receive their prouction share,
shall be charged to the Joint Account. Each Party shall be exclusively liable
for its own taxes on income, capital and similar.
CLAUSE 32 - PERSONAL
32.1 When THE ASSOCIATE is Operator, it should consult ECOPETROL before
appointing the Manager for Operator.
32.2 According to the terms hereof, and subject to norms to be established,
Operator shall be free to appoint the personnel needed for operations hereunder,
and may fix salary, duties, categories and conditions thereof. Operator shall be
diligent in training Colombian personnel needed to replace the foreign personnel
that it considers necessary for operations hereunder. In any case, Operator
shall comply with legal provisions on the proportion of local and foreign
personnel.
32.3 Transfer of Technology: THE ASSOCIATE commits to assume the cost of a
program to train ECOPETROL professionals in areas related to contract
performance.
In the Exploration Period, this obligation could be met by training in- geology,
geophysics and related areas, reserve appraisal, reservoir characterization,
drilling and production, among others. Supervised training should take place
throughout the initial exploration period and its extension by integrating the
ECOPETROL professionals to the work group THE ASSOCIATE sets up for either the
Contract Area or other similar activities.
If THE ASSOCIATE wishes to resign as set out in Clause 5, it must have first
given compliance to these training programs.
The Association Executive Committee shall establish the scope, duration, place,
participants, conditions and other aspects of training during the Exploitation
Period.
THE ASSOCIATE shall assume all costs of supervised training during the
Exploration Period, except for labor costs of the professionals attending same.
During the Exploitation Period both parties shall assume these costs via the
Joint Account.
<PAGE>
ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives Page 37.
- --------------------------------------------------------------------------------
PARAGRPH: To comply with Technology Transfer called for hereunder, THE
ASSOCIATE commits to run annual supervised training programs for Ecopetrol
professionals for each of the first three years of the Exploration Period, in an
amount of fifty thousand (US$50,000) United States dollars per year. ECOPETROL
and THE ASSOCIATE shall first agree on the subject and type of training. If the
Exploration Period is extended, the supervised training will be similar to that
set out here.
32.4 During the Exploitation Period, Operator may perform any work through
contractors, subject to the Executive Committee approval when the amount of the
contract exceeds forty thousand dollars of the United States of America
(US$40,000) or the equivalent n Colombian currency.
CLAUSE 33 - INSURANCE
The Operator shall take all insurance called for under Colombia law. Likewise,
it shall require any contractor engaged in work hereunder to obtain such
insurance as the Operator considers necessary and keep same in force. Likewise,
Operator shall take such additional insurance as the Executive Committee deems
suitable.
CLAUSE 34 - FORCE MAJEURE or FORTUITOUS CIRCUMSTANCES
The obligations referred to hereunder shall be suspended for such time as either
Party is unable to fully or partially perform same because of unforeseen events
that constitute force majeure or fortuitous circumstances, such as strikes,
shutouts, wars, earthquakes, floods or other catastrophes, laws, decrees or
government regulations that prevent procurement of essential materials and, in
general, any non-financial reason that effectively impedes work, even when not
listed above, but that affects the Parties and is outside their control. If
force majeure or fortuitous circumstances prevent one Party from performing its
duties hereunder, it should immediately notify the other Party, setting out the
causes of
<PAGE>
ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives Page 38.
- --------------------------------------------------------------------------------
such impediment. Under o circumstances shall force majeure or fortuitous
circumstances extend or prolong the total period of exploration, retention or
exploitation beyond maximum contract term set out in Clause 23rd. However, any
force majeure event during the six (6) year exploration period set out in Clause
5 and which lasts for over thirty consecutive days, shall extend this six-year
(6) period for the same time as that of the impediment.
CLAUSE 25 -APPLICATION OF COLOMBIAN LAW
The Parties establish Santa Fe de Bogota, Republic of Colombia, as the domicile
for all contract purposes. This contract is fully ruled by Colombian law and THE
ASSOCIATE accepts the jurisdiction of Colombian courts and waives diplomatic
claim regarding its rights and duties hereunder, except in the case of denial of
justice. It is understood there shall not be denial of justice when THE
ASSOCIATE as Party or Operator has had access to all remedies and means of
action that may be exercised with the jurisdictional branch of public power
under Colombian law.
CLAUSE 36 - NOTICES
Notices or communications among the Parties regarding this contract must be sent
to the following addresses and mention the pertinent clauses in order to be
considered valid:
ECOPETROL - Carrera 13 No. 36-24, Santafe de Bogota, Colombia
THE ASSOCIATE - Calle 114 No. 9-01, Torre A, of.707 Santafe de Bogota,
Colombia
Any change of address shall be notified to the other Party in advance.
CLAUSE 37 - VALUATION OF HYDROCARBONS
Payments or reimbursements referred to in Clauses 9 (numerals 9.2 and 9.4) and
22 (numeral 22.5) shall be made in dollars of the United States of America or in
Hydrocarbons, based on the price in force and the restrictions existing or to be
applied under Colombian law for sale of the dollar portion of hydrocarbons
coming from the contract area and destined for domestic refining.
CLAUSE 38 - HYDROCARBON PRICES
38.1 Hydrocarbons belonging to the ASSOCIATE hereunder and destined for domestic
refining or supply shall be paid for at the refinery here they are to be
processed or at the receiving station agreed to by the Parties, in keeping with
current governmental measures or those replacing same.
<PAGE>
ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives Page 39.
- --------------------------------------------------------------------------------
38.2 Differences arising in the application of this Clause shall be settled via
the means set out in this Contract.
CLAUSE 40 - DELEGATION AND ADMINISTRATION
In keeping with ECOPETROL regulations, its President delegates the
administration of this contract to the Vice President for Exploration and
Production, with power to take all action pertinent to contract performance. The
Vice-President of Exploration and Production may exercise this delegation via
the Assistant Vice President for Joint Operations.
CLAUSE 41 -VALIDITY
This contract must be approved by the Ministry of Mines & Energy in order to be
valid (and the incorporation and approval of the Colombian branch, if
pertinent).
In witness whereof, the parties sign in the presence of witnesses in Santa Fe de
Bogota, on the 30th day of the month of December nineteen hundred and
ninety-seven (1997)
EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL
ENRIQUE AMOROCHO CORTEZ
President
SEVEN SEAS PETROLEUM COLOMBIA INC.
GUSTAVO VASCO MUNOZ
Legal Representative
Witnesses
<PAGE>
ROSABLANCA ASSOCIATION CONTRACT - with Gas Incentives Page 40.
- --------------------------------------------------------------------------------
EMPRESA COLOMBIANA DE PETROLEOS
Calculation of area, direction and distances using Gauss coordinates,
origin
Santafe de Bogota.
Data and results of ROSABLANCA sector
<TABLE>
<CAPTION>
Point Norte East Distance Dif. N. Dif. E Direction
<S> <C> <C> <C> <C> <C> <C>
A 1,402,900 1,020,000 27,100 27,100 0.00 North
B 1,430,000 1,020,000 10,000 0.0 10,000 East
c 1,430,000 1,030,000 30,000 30,000 0.00 North
D 1,460,000 1,030,000 30,000 0.00 30,000 East
E 1,460,000 1,060,000 35,000 -35,000 0.00 South
F 1,425,000 1,060,000 8,000 0.00 - 8,000 West
G 1,425,000 1,052,000 15,478 0.00 -15,478 West
H 1,425,000 1,036,522 4,001.57 -4,000 -112 Si 36.13.0.906w
I 1,421,000 1,036,410 10,000 0.00 -10,000 West
J 1,421,000 1,026,410 18,100 -18,100 0.00 South
K 1,402,900 1,026,410 6,410 0.00 -6,41 0.00 West
A 1,402,900 1,020,000
</TABLE>
Polygonal area: 128,188 hectares, 5,000 M2
<PAGE>
<TABLE>
<CAPTION>
CONTENTS Page
<S> <C>
PART I - TECHNICAL ASPECTS ......................................... 1
Section One - Exploration
CLAUSE 1 INFORMATION TO BE SUPPLIED DURING EXPLORATION ............. 1
CLAUSE 2 AREAS DEVOLUTION .......................................... 4
Section Two - Production ........................................... 1
CLAUSE 3 EXTENSIVE PRODUCTION TESTS ................................ 5
CLAUSE 4 COMMERCIAL FIELD .......................................... 6
CLAUSE 5 OWN RISK MODALITY ......................................... 6
CLAUSE 6 OPERATIONS INSPECTION ..................................... 7
CLAUSE 7 PRODUCTION ................................................ 7
CLAUSE 8 HYDROCARBON DISTRIBUTION AND AVAILABILITY ................. 7
CLAUSE 9 EXPORT HYDROCARBON SUPPLY ................................. 8
PART II - ACCOUNTING AND FINANCIAL ASPECTS ......................... 8
Section One - Programs and Budgets
CLAUSE 10 EXPLORATION PROGRAMS AND BUDGETS ......................... 8
CLAUSE 11 PRODUCTION PROGRAMS AND BUDGETS .......................... 8
CLAUSE 12 BUDGET MANUAL ............................................ 8
CLAUSE 13 INCOME BUDGET ............................................ 9
CLAUSE 14 EXPENSES BUDGET .......................................... 10
CLAUSE 15 OTHER PROVISIONS ......................................... 17
Section Two. Accounting procedures ................................. 17
CLAUSE 16 ACCOUNTING PROCEDURE ..................................... 20
CLAUSE 17 CASH CALLS, BILLS AND ADJUSTMENTS ........................ 21
CLAUSE I8 CHARGES .................................................. 23
CLAUSE 19 CREDITS .................................................. 27
CLAUSE 20 DISPOSAL OF EXCESS MATERIAL AND EQUIPMENT ................ 28
CLAUSE 21 INVENTORY ................................................ 28
CLAUSE 22 AUDIT .................................................... 30
CLAUSE 23 FEES TABLE ............................................... 30
CLAUSE 24 CONTRIBUTIONS IN KIND .................................... 32
PART III - ADMINISTRATIVE ASPECTS AND SUNDRY PROVISIONS ............ 32
Section One - The Executive Committee
CLAUSE 25 OPERATING CONDITIONS ..................................... 32
Section Two - Subcommittees
CLAUSE 26 SUBCOMMITTEES ORGANIZATION ............................... 33
Section Three - Operator
CLAUSE 27 RIGHTS AND OBLIGATIONS ................................... 34
Section Four - Contracting Procedures .............................. 35
CLAUSE 28 SUPPLIERS REGISTER AND LIST OF PROPONENTS ................ 35
CLAUSE 29 TENDER PROCEDURES ........................................ 35
CLAUSE 30 CONTRACT AWARD AND PURCHASE ORDERS ....................... 37
CLAUSE 31 CONTRACTS AND PURCHASE ORDERS MANAGEMENT ................. 39
CLAUSE 32 INSURANCE ................................................ 40
CLAUSE 33 FORCE MAJEURE OR ACTS OF GOD ............................. 40
CLAUSE 34 OPERATION AGREEMENT REVISION ............................. 41
</TABLE>
<PAGE>
EXHIBIT B TO THE OPERATION AGREEMENT
ASSOCIATION CONTRACT "ROSA BLANCA" SECTOR
EXHIBIT B - OPERATION AGREEMENT
EXHIBIT TO "ROSABLANCA" ASSOCIATION CONTRACT
Entered into between EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL and SEVEN SEAS
PETROLEUM COLOMEBIA INC., with Effective Date on the 28th day of
the month of February, of nineeen hundred ninety-eight (1998, hereinafter the
Contract.
PART I- TECHNICAL FACTORS.
CLAUSE 1 - INFORMATION SUPPLY DURING EXPLORATION
Geological and geophysical information to be supplied by the ASSOCIATE to
ECOPETROL shall be provided according to international standards accepted by
the industry, compatible with standards applied by ECOPETROL (included in
ECOPETROL Information Supply Manual) to enable regional sedimentary basins
evaluation. To complement Contract Clause 6 (section 6.2) the ASSOCIATE or the
Operator shall deliver to ECOPETROL, as obtained, the following information
associated to exploration activities conducted by the ASSOCIATE:
1.1 Geological, geophysical, magnetometric, gravimetric, remote sensors,
electric meters information and in general any Exploration Work conducted by
the ASSOCIATE in development of the Contract, shall be submitted in magnetic
media, original and reproducible copy with the respective support information,
including acquisition and interpretation maps, acquired data processing and
interpretation.
1.2 Processed seismic section for each line, obtained in two scales, together
with an interpretation report containing: information used, background, seismic
programs, geological information and geophysical, geological and economic
considerations supporting technical conclusions and recommendations.
1.3 Two (2) sets of seismic lines magnetic tapes, one of them containing
demultiplexed information and the other containing stack information and the
respective support
<PAGE>
information and processing report. In the event of vibration a copy of the field
tape instead of demultiplexed tape shall be delivered.
1.4 Seismic programs shooting points map in reproducible sepia and copy,
containing coordinates and elevations identification. This information shall
also be supplied in magnetic tape.
1.5 Magnetic and gravimetric profiles and residual maps in reproducible
originals, copies and magnetic tapes including all information generated.
1.6 Seismic, gravimetric and magnetometri interpretation report, together
with all interpreted sections profiles and maps submitted in accordance with
ECOPETROL standards for this type of information.
1.7 Geological, structural, isopachous, isolitic, facies, seismic, etc. maps
of the Contract Area in reproducible sepia and copies in scales determined by
ECOPETROL for each basin.
1.8 Before well drilling: Intention to drill (Ministry of Mines and Energy
Form 4-CR), drilling program, well location map, prospect area isochrone or
structural map and drilling geological prognosis, duly approved by the Ministry
of Mines and Energy. Exploration wells location shall be referred to the
seismic maps on which basis the prospect was defined. At each Exploration Well
to be drilled in the Contract Area, a geodesic precision point accepted by
"Instituto Geografico Agustin Codazzi - IAGC", obtained by satellite shall be
materialized with its respective azimuth line.
1.9 Daily drilling and geology reports. These reports shall be directly
delivered to ECOPETROL, preferably via fax and shall contain basic well
information, drilling conditions, drilling fluid properties, Hydrocarbon
expressions as obtained, penetrated geological formations description and daily
and accumulated costs together with the program to be developed.
<PAGE>
The ASSOCIATE or the Operator shall report sufficiently in advance to ECOPETROL
on electric logging, cores sampling and test to be performed for ECOPETROL to
send a representative to witness all operations.
1.10 Copy of bi-weekly reports forwarded to the Ministry of Mines and Energy
(Form 5CR).
1.11 Final geology report: This report is mandatory for any well drilled in the
country, whether exploration, stratigraphic or development and shall be
submitted in Spanish by a registered geologist no later than ninety (90) days
after well completion or abandonment; the report shall include the following
information by chapters;
1.11.1 A summary of all activities developed during drilling
1.11.2 Well location and 1:250,000 scale maps
1.113 Stratigrapy: Shall include the stratigraphic column, environments
determination and each drilled formation age.
1.11.4 Biostratigraphy: shall include dispersion charts, analysis conducted
and potential correlation.
1.11.5 Geochemistry: shall include all analysis performed both on ditch
samples and each of the recovered cores.
1.11.6 Electric logging: shall include all RW, SW determination
calculations. Speed logging analysis shall be included in this chapter.
1.11.7 Formation tests: shall include all results obtained from each of the
tests taken and water and Hydrocarbon laboratory analysis.
1.11.8 The Final Geological Report shall be accompanied of the following
exhibits:
Exhibit A: Description of ditch samples taken every ten (IO) feet.
Exhibit B: Detailed description of cores and wall samples recovered.
Exhibit C: All cores and wall samples lab analysis.
Exhibit D: Composed graphic log in reproducible sepia and copy in 1:500 scale.
For the different lithologies included in the composed graph log symbols used
for such cases by the American Association of Petroleum Geologists (AAPG) shall
be used.
Exhibit E: Final report issued by the well logging company, including the
"Grapholog".
1.12 Reproducible sepias and copies of each well logs including speed logging
in 1:200 and 1:500 scales. Additionally deliver magnetic tapes in LIS format
containing all
<PAGE>
logs, accompanied of computer tabulates using forms provided by ECOPETROL for
such cases.
1.13 Formation and/or production tests report including bottom pressure
analysis (open and closed well).
1.14 Shall deliver to ECOPETROL two sets of ditch samples, one of them unwashed
taken every thirty (30) feet and the other dry taken every ten (10) feet
including a detailed lithological samples description.
1.15 Coring report, when performed, including a detailed description thereof
and all analysis performed. Together with this report the ASSOCIATE shall
deliver to ECOPETROL photographs and fifty percent (50%) core.
1.16 Report al materials used for drilling.
1.17 Biostratigraphic reports including the respective dispersion chart. These
analyses shall be performed for Exploration wells considering this information
defines sedimentation environments and each drilled formation age. This type
of analyses may also be performed on the different cores recovered.
1.18 Geochemical ditch, wall and core samples analysis.
1.19 Official well completion, plugging or abandonment report (form 6CR or 10A
CR) and in general, any other report referring to well completion (subsequent
work, multiple completion).
1.20 Final well report. Shall include all engineering information and a final
geologic report summary. Shall be submitted in Spanish no later than ninety
(90) days after well completion or abandonment, and approved by a duly
registered Petroleum engineer.
1.21 Copy of the Annual Technical report (Geology and Geophysics and
Engineering Report) including the respective supports, submitted to the
Ministry of Mines and Energy according to applicable legal regulations.
1.22 Any other engineering or geology study conducted.
CLAUSE 2 - AREAS DEVOLUTION
Areas to be returned ECOPETROL by the ASSOCIATE, according to Contract Clause
8, shall be, as far as possible, regular polygonal lots to facilitate
boundaries determination without prejudice of commercial areas.
SECTION TWO - PRODUCTION
CLAUSE 3 - EXTENSIVE PRODUCTION TESTS
The following will be the procedures applied to extensive Hydrocarbon
production tests management previous Commercial Field acceptance.
3.1 For obtained volumes management and handling, tests permit shall have been
obtained from the Ministry of Mines and Energy and accepted by ECOPETROL.
3.2 Production obtained from tests will be distributed according to
proportions provided under the Contract Clause 14 (section 14.2), after
discounting twenty percent (20%) royalties, according to Contract Clause 13;
ECOPETROL will be responsible of direct payment thereof.
3.3 Test volumes produced will be recovered from the well during he maximum
test period approved by the Ministry of Mines and Energy under the respective
permit, discounting any Hydrocarbon volume consumed for operations.
3.4 The ASSOCIATE will be responsible of one hundred percent (100%) expenses
incurred during the production test period, which shall be charged as higher
well value and taken as direct cost for reimbursement purposes, according to
disbursement origin.
3.5 The ASSOCIATE shall enter into the necessary agreements with the transport
to provide Hydrocarbon transportation. Hydrocarbon ECOPETROL is entitled to
plus royalties transportation will be paid by ECOPETROL after receiving the
respective bills and supports.
3.6 ECOPETROL shall have advanced knowledge of the Hydrocarbon transportation
contract and shall approve it before extensive production tests start.
3.7 The ASSOCIATE shall maintain ECOPETROL duly informed about the production
test program and shall deliver any permits required from government
authorities, as well as any other information as obtained.
3.8 In the event Hydrocarbon is used for reimbursement, bills shall be
submitted each month from well production start.
<PAGE>
CLAUSE 4 - COMMERCIAL FIELD
4.1 After the ASSOCIATE has obtained sufficient information related to Field
development, the ASSOCIATE shall conduct a study to define petrophysical
parameters, better productive area boundaries and reserves calculation. The
study shall be conducted by the ASSOCIATE, at its expense, applying available
technical methods in the country or abroad; and when the circumstances so
require the pertinent revisions shall be made.
4.2 For new facilities or expansions/modifications, basic production and
detailed engineering design shall be submitted to the Technical Subcommittee
for consideration.
4.3 Production facilities engineering shall be contracted with domestic
companies except if in the opinion of the Technical Subcommittee technological
complexity requires assistance from a foreign company, preferably in consortium
with a domestic company.
4.4 Fial mechanical completion of wells to become Joint Account property shall
be agreed by the Technical Subcommittee. Such Exploration Wells Reimbursement
will be subject to Contract Clause 9 (sections 9.2.2, 9.2.3 and 9.2.4).
4.5 Regarding dry Exploration Wells, the ASSOCIATE shall abandon subject to
applicable legal and environmental regulations.
CLAUSE 5 - OWN RISK MODALITY
5.1 Reimbursement refers to two hundred percent (200%) total work developed at
the ASSOCIATE's own expense and risk to produce the respective Field and up to
fifty percent (50%) Direct Exploration Costs incurred by the ASSOCIATE at its
own expense and risk within the Contract Area before the respective Field
commercial feasibility studies submittal date. ECOPETROL shall audit to
determine reimbursable investments.
5.2 During the Own Risk Field production, the ASSOCIATE shall deliver to
ECOPETROL a quarterly report including all technical, economic, legal and
administrative information such as contracts entered into, wells completion,
flow lines,
<PAGE>
production facilities, metering systems, storage capacity, production wells,
restriction orifices, production reports, economic studies, etc. Different
Contract Clause and clarifications herein are understood fully applicable in the
event of Contract Clause 21 "One of the Parties Own Risk Operations" for timely
information, technical reserves control and all other administrative activities
purposes.
CLAUSE 6 - OPERATIONS INSPECTION
Regarding activities developed in the Contract Area inspection and audit,
ECOPETROL will have the right to send its representatives to the field. The
ASSOCIATE or the Operator shall provide the officer designated by ECOPETROL
stay conditions similar to those provided it engineers.
CLAUSE 7 - PRODUCTION
7.1 The Operator shall also deliver to the Parties any information on
technical production improvements developed during the Production Period.
7.2 For Hydrocarbon losses and environmental damage control and prevention,
the Operator and the Parties shall tak the necessary measures applying methods
generally accepted by the Oil industry to prevent Hydrocarbon losses or
spilling in any way during drilling, production, transportation and storage
activities.
7.3 The Operator shall keep daily Hydrocarbon consume, if any, operation
records and shall submit a monthly Hydrocarbon consume report accompanied of
forms provided by the Ministry of Mines and Energy for such purpose.
CLAUSE 8 - HYDROCARBON DISTRIBUTION AND AVAILABILITY
Pursuant to Contract Clause 14 (section 14.4), the Operator shall be responsible
of metering, sampling and controlling Hydrocarbon quality in accordance with
standards and methods accepted by the oil industry (ASTM, AGA, and API) and
applicable legal regulations referring to net Hydrocarbon received and delivered
at standard conditions volumes calculation.
Hydrocarbon volumes accepted by the Operator for transportation will be
determined using meters installed by the Operator for such purpose in receiving
stations and points of delivery.
<PAGE>
CLAUSE 9 - EXPORT HYDROCARBON SUPPLY
For Contract Clause 14 purposes, the ASSOCIATE Hydrocarbon exports shall take
into consideration primarily country needs before exporting Hydrocarbon subject
to legal regulations on the matter.
PART II - ACCOUNTING AND FINANCIAL MATTERS
SECTION ONE - PROGRAMS AND BUDGETS
CLAUSE 10 - PRODUCTION PROGRAMS AND BUDGET
10.1 Pursuant to Contract Clause 7, the ASSOCIATE shall deliver to ECOPETROL
within sixty (60) days following Contract signature date, the programs,
schedule of activities and the budget to be executed in the short term (the
following year) and the following two (2) years estimated budget projection
broken down by type of Exploration Work to be developed and indicating the
disbursement currency. After the first year, the ASSOCIATE shall submit the
aforementioned information within the first ten (10) calendar days each year.
10.2 The ASSOCIATE shall submit on a quarterly basis, within fifteen (15)
calendar days following the respective quarter end, the echnical and financial
report provided in Contract Clause 7.
CLAUSE 11 - PRODUCTION PROGRAMS AND BUDGETS
1 1.1 For Contract Clause I 1 effects, the Operator shall submit a Field
development plan proposal envisaging in detail the short and mid term. The
short term budget shall be submitted by year and by quarter to facilitate
execution and to prepare the respective treasury flows.
11.2 The Operator shall submit to ECOPETROL the Commercial Field organization
chart which shall be agreed at Technical Subcommittee level and approved by the
Executive Committee.
CLAUSE 12 - BUDGET MANUAL
Standards and procedures listed below constitute the budget manual applicable
to Budgets preparation, submittal and control during production of Commercial
Field or
<PAGE>
Fields discovered in development of the Contract. This manual has three (3)
parts, as follows:
12.1 Income budget
12.2 Expense budget
12.3 Other provisions
CLAUSE 13 - INCOME BUDGET
This budget is in turn divided into two (2) sections: current income budget and
capital contributions.
13.1 Current Income
Covers all contributions regularly obtained to the favor of the Joint Account
and foreseeable by the Operator. Includes the following items as the case may
be:
13.1.1 Sale of products:
Income from Operator Hydrocarbon sales to one of the Parties or to third
parties on behalf of the Association (such sales are understood other than each
of the Parties participation in the Association).
13.1.2 Services Provided:
Covers all services provided by the Operator to one of the Parties or to third
parties, according to fees agreed by Subcommittees and approved by the
Executive Committee.
13.1.3 Disposal of assets or materials:
Covers equipment or materials sold by the Operator to the Parties or to third
parties subject to this Agreement Clause 20 (section 20.2) provisions.
13.1.4 Other income
Includes all funds received by the Operator and destined to the Joint Account,
on the account of transitory financial investments and all other income
projected by theOperator.
13.2 Capital contributions:
Refers to all contributions received by the Operator on the account of cash
calls delivered by the each of the Parties according to Contract participation.
Such income is designated cash calls and is managed on the basis of procedures
provided under this Agreement Clause 15 (section 15.5).
<PAGE>
CLAUSE 14 - EXPENSE BUDGET
As previous step to budget preparation, the Executive Committee will have the
respective Subcommittees determine general policies and parameters to be taken
into account to prepare the budget plan for the respective Commercial Field.
The expense or appropriations budget includes the operation expenses budget and
the investment budget. Each of these Budgets will be prepared according to
monetary origin, whether pesos or dollars.
14.1 Operation Expenses Budget
The operation budget will be prepared by the Operator on the basis of standards
and policies on the matter issued by the Association Executive Committee
pursuant to Contract Clause 19 (section 19.3.5) and on the basis of economic
parameters and indexes defined by the Joint Operation as the most
representative for the budget term.
14.1 Preparation Procedure
The Operator shall submit the operation expense budget identifying Joint
Operation needs and broken down by expense item according to classification
provided in this Agreement Clause 14 (section 14.1.2).
Cost factors used to evaluate the different activities programmed to be
developed during the Budget year will refer to actual figures known upon budget
preparation or the best information available. In all cases the operation
expenses budget will be calculated taking into consideration costs required by
units which directly provide their services to the Joint Operation and shall
be, therefore, one hundred percent (100%) assumed by the Joint Account and
charged to the Parties in the proportion provided under Contract Clause 22
(section 22.6.1). Indirect Expenses to be assumed by the Joint Account will be
charged to the Parties and determined s provided under Contract Clause 22
(section 22.6.2).
<PAGE>
14.1.2 Expenses Budget Classification
For all expenses budget submittal purposes, the budget will be divided into
programs, groups and expense items. Budget expense programs represent
homogeneous activities required to develop the Joint Operation, including
programs associated to investment. Each of the programs numerical and
sequential expense groups reflect the expense objective, shall be duly
supported and explained and separated by expense item. The following are major
expense items to be used
14.1.2.1 Organization chart expenses
Salaries
Fringe Benefits and parafiscal contributions
14.1.2.2 Operation materials and supplies
Repair and maintenance materials
14.1.2.3 Contracted services
Technical field operation and maintenance services
Services provided by the Operator
Other services
14.1.2.4 Overhead
Equipment and Office leases
Shared expenses
Insurance
Utilities
Assistance to the community
Other overhead
14.1.2.5 Environmental management
<PAGE>
Materials
Contracted services
Other expenses
14.1.2.6 Aggregated value tax - IVA
14.1.2.7 Indirect expenses
14.1.3 Calculation base
Operation expenses budget calculation basis will be the following:
The salaries and fringe benefits budget will be calculated on the basis of
organization charts approved for the Association and estimates will be subject
to this Agreement Clause 18 (section 18.1.1). Salaries, fringe benefits and all
other voluntary bonus to domestic and foreign personnel will be separately
listed by disbursement origin for Association Subcommittees and Executive
Committee information purposes.
Materials and supplies costs estimates will be based on actual prices or
updated quotations and, in general on the basis of the best information
available.
Import expenses will be based on subsequently imported materials and/or
equipment FOB prices taking into account the following factors: freight,
insurance, Colombian ports use taxes, import taxes and all other import
expenses.
Contraced operation and maintenance services value will be estimated on the
basis of contracts entered into or to be entered into by the Joint Operation
upon Budget preparation.
Indirect expenses to be assumed by the Joint Account for services provided or
to be provided by the Operator will be calculated according to procedures
provided in Contract Clause 22 (section 22.6.2).
The environmental expenses budget objective is to appropriate the necessary
annual funds to comply with environmental regulations.
Overhead will be calculated on the basis of concrete needs required by the
Joint Operation in development of its normal activities. Shared expenses are
disbursements to be assumed by the Joint Account as a result of facilities
and/or services shared by
<PAGE>
Fields or Associations. The budget and these Joint Account charges shall be
recommended by the Association Subcommittee and approved by the Executive
Committee. Assistance to the community will be budgeted on the basis of
petitions from interested parties and policies dictated by the Executive
Committee. Under special conditions so deserving the Operator will have the
right to accept petitions according to procedures, previous notice to each of
the Parties.
14.1.4 Budget execution.
Operation expenses budget execution will be based on the following
considerations:
14.1.4.1 All services, purchases or contracts charged to the Joint Account as
operation expenses shall be budgeted and fully justified.
14.1.4.2 If the service or activity to be contracted does not imply
disbursements exceeding the limits provided for the Joint Operation, the
Operator will be fully autonomous to contract subject to internal
responsibility and authority procedures.
14.1.4.3 Purchases, contracts or any other act implying a higher partial or
global cost exceeding limits provided shall be previously submitted to the
Association Technical Subcommittee for study and recommendation.
14.1.5 Budget Execution Control.
Expenses budget execution control will be the responsibility of the Opeator
which shall monitor correct expenses appropriation.
During the first fifteen (I 5) calendar days following the respective quarter
end, the Operator shall prepare a budget report explaining budget execution
results, which report shall contain:
14.1.5.1 Accumulated expenses to date broken down by expense item provided
under this Agreement Clause 14 (section 14.1.2).
14.1.5.2 Special comments on items which execution has significantly deviated
with respect to the average budget or quarterly estimate.
14.1.5.3 Projected expenses to be disbursed on a quarterly basis or the
remaining year.
14.1.5.4 Justification of potential budget additions, adjustments or transfers
the Operator deems convenient or if proposed by one of the Parties.
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14.2 Investment budget
Will be each of the programs and investment projects to be developed by the
Joint Operation basic planning, execution and control tool and will be the
means to estimate funds required to develop the different programs approved by
the Executive Committee.
14.2.1 The investment budget will include the respective entries for the
following items:
14.2.1.1 Acquisition of lasting goods, materials and services required to
develop the different projects determined by the Association.
14.2.1.2 Acquisition of major equipment and tools destined to Association
workshops with the purpose of guaranteeing normal operations development.
14.2.1.3 Constructions and/or buildings expansion as required by operations,
including facilities destined to Joint Account staff.
14.2.2 Investment budget classification
For investment budget submittal purposes, the budget will be grouped by
programs and projects. Each Budget programs in numerical order will reflect
groups of common objective projects to be developed by the Operator for the
Joint Operation. Each Program project in numerical sequential order will be
duly supported and explained. The following are major activities and project
types to be used:
14.2.2.1 Development wells
Pumping or surface equipment, recompetion and services to wells potentially
capitalized.
Production wells
Locations
14.2.2.2 Production facilities
Hydrocarbon collection system
Storage system
Hydrocarbon treatment system
Improved recovery system
Pumping Stations
Transfer lines
Other
14.2.2.3 Civil works
Roads
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Bridges
Construction (camps, workshops, warehouses, offices)
14.2.2.4 Other assets
Automotive equipment
Fire fighting equipment
Communications equipment
Office equipment
Electromechanical maintenance equipment
Major tools
Cleaning or workover equipment
14.2.2.5 Special Projects
Environmental management
Deposits studies
Simulation studies
Interference tests
14.2.2.6 Warehouses
For projects
For maintenance materials
14.2.2.7 Each of these project may be divided into as may subprojects as
necessary, always maintaining uniform identification to be finally submitted by
project, according to the above classification and using for such purpose forms
provided by ECOPETROL, which may be adapted by mutual agreement of the Parties
by the Financial Subcommittee. With the purpose of further clarifying
investment budget preparation, the following shall be taken into consideration:
14.2.2.7.1 Maintenance projects
Refers to all investments in equipment, materials and constructions destined to
maintain the facilities in efficient operation conditions subject to original
capacity and yield limits.
14.2.2.7.2 Expansion projects
Are investments with the purpose of increasing facilities capacity, increasing
authorized automotive equipment number, office equipment, etc.
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14.2.2.7.3 Special Projects
Will include all projects which value, importance for industrial activities or
impact at the social or ecological level deserves a special classification.
14.2.3 Each and all investment budget projects shall be fully justified and
analyzed before including in the general budget. In this sense, the Operator
shall prepare an initial investment project containing the following general
information:
Needs analysis
Project jutification
General project description
Estimated investment value
Schedule of activities
Project critical route
Economic assessment
The initial investment project containing the above information in addition to
any other information deemed necessary for evaluation, will be jointly studied
by Association Subcommittees which will recommend or object project feasibility
on the basis of policies dictated by the Executive Committee.
After the Subcommittees have recommended a given project, such project will be
included in the general budget to the approved by the Association Executive
Committee.
All general information included in each project justification will be recorded
in a technical-financial Exhibit to serve as support to budget submittal and
approval by the Executive Committee.
14.2.4 Budget consolidation
After determining Joint Operation needs, the Operator will consolidate each of
the Commercial Fields expenses and investment budget according to
classification provided in this Agreement Clause 14 (sections 14.1.2 and
14.2.2, respectively) and will submit to the Executive Committee for final
approval. Both the expense budget and the investment budget will be listed in
four (4) columns showing dollars origin accrual and
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pesos origin accrual, a dollar consolidated and a pesos consolidated, on the
basis of the respective year exchange rate projection.
Additionally, the Operator shall prepare, for information purposes, a schedule
of disbursements indicating short term funds requirements broken down by
quarter and currency origin, at group expense and investment program level.
14.2.5 Budget execution
In all cases the Operator is empowered to make all operation expenses and
investments required by the Joint Operation according to approved Budget not to
exceed ten percent (10%) appropriations assigned to each expense group and to
each project during the respective budget term (Contract Clause I 1, section
11.5). Budget execution will be the responsibility of the different Operator
units subject o previously determined execution schedule.
Appropriations assigned each project will be identified using a previously
defined code to be used in all documents associated to Budget Execution
procedures.
14.2.6 Budget Control.
The Operator will be responsible of developing each of the programs and
investment projects and shall account for execution thereof subject to approval
conditions.
Additionally, the Operator will be responsible of monitoring timely and correct
projects development. In the event any trouble preventing normal projects
development arises, the Operator shall forthwith report such trouble in writing
to the Parties for trouble encountered to be solved. The Operator, as the
person responsible of the development plan, programs and projects, shall
prepare quarterly reports on budget and technical progress thereof to be
delivered to each of the Parties for study and subsequent approval by the
Association Executive Committee.
The quarterly report shall be prepared and submitted by the Operator within
fifteen (15) calendar days following each quarter end and shall contain the
following information:
Period covered by the report.
Project code and description
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Total project budget
Financial progress from start to closing date. Investments by current year
project accumulated to date.
Technical work progress
Quarterly projection of work to be developed for the remaining year, for
information purposes.
14.2.7 Investments during the Retention Period
Investments during the Retention Period will be asswned by the Association
Joint Account or by the ASSOCIATE, depending on whether ECOPETROL has accepted
Field commercial feasibility.
CLAUSE 15 - OTHER PROVISIONS
15.1 Budget additions.
In the event during Budget execution appropriations approved by the Executive
Committee would require additions, the Parties may be required extraordinary
amendments to be ratified by the Executive Committee at its next meeting.
Expenses and investment Budgets additions or transfer requests may be
periodicaly submitted when the Executive Committee holds its regular meetings.
However, the Executive Committee will have the right to meet on an
extraordinary basis to discuss budget issues any time a special situation so
deserves.
Therefore, every time a budget revision is requested, the Operator shall start
the respective procedures duly in advance submitting the requests to the
respective Subcommittee for study and subsequent recommendation to the
Executive Committee.
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In any case, budget addition requests shall be fully justified explaining the
reasons originating appropriated entries variation and including the respective
technical and financial exhibits provided in this Agreement Clause 14 (section
14.2.3).
15.2 Budget transfers.
Appropriations carried from one year to the next due to projects not concluded
during the budgeted term (for reasons such as lack of equipment, import
procedures, bad weather, etc.) will be deemed budget transfers.
Non developed project full value will be carried to the following year budget
and will be subject to Executive Committee approval. These projects will be
expressly included in the budget taking into account the disbursement schedule
provided in this Agreement Clause 15 (section 15.4). Additionally, budget
transfers will originate an exhibit explaining budget transfer causes and how
will the budget be executed within the next term.
15.3 Approvals.
The Executive Committee will be the body in charge of approving the programs and
the budget recommended by Association Subcommittees and to authorize the
Operator to purchase or contract on behalf of the Association all goods and
services required by the Joint Operation.
15.4 Disbursement schedule.
Together with the budget recommended by the Association Subcommittees, the
Executive Committee will approve the quarterly budget submitted by the Operator
for the immediately following year which will serve as the basis to calculate
monthly cash calls.
15.5 Cash calls.
Cash calls or funds advances will be placed by the Operatorto each of the
Parties on the basis of obligations assumed by the Joint Operation for the
month immediately following the cash call, consulting the Budget approved by
the last Executive Committee
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and the projected cash flow. Cash calls under this Clause will be deposited in a
bank account opened by the Operator for such purpose to be exclusively used by
the Joint Operation. Cash calls preparation and submittal shall be subject to
the following requirements:
15.5.1 Preparation
On the basis of the approved budget and obligations assumed by the Association
in the subsequent month, the Operator will prepare cash calls taking into
account the following conditions:
15.5.1.1 The Operator will place a separate cash call for each of the
producing Commercial Fields in the Contract Area, identifying pesos and dollars
expenses and investments according to projected disbursement origin.
15.5.1.2 The cash call shall be open by programs and project in the event of
investments and by group and expense item in the event of expenses, as shown in
the budget approved by the Executive Committee.
15.5.1.3 For each of the projects and expense group listed in the cash call to
be considered, it must be included in the budget; otherwise, total cash call
value will be discounted.
15.5.1.4 Projects and expense groups budgeted value shall be sufficient.
Nonetheless, in special cases, the value appropriated for the term may be
exceeded by ten percent (10%) according to Contract Clause I 1 (section 11.5).
15.5.2 Submittal
Every cash call will be submitted for processing using the form previously
agreed by the Parties in the Financial Subcommittee and shall show actual and
estimated expense charges and will include the following documents:
15.5.2.1 Cash call letter
15.5.2.2 Cash call form showing each of the programs, projects or expense item
financial status on cash call date, and
15.5.2.3 General comments of the technical nature identifying cash call
destination for major projects or expense items.
<PAGE>
SECTION TWO - ACCONTING PROCEDURES
CLAUSES 16 - ACCOUNTING PROCEDURE
From Exploration Period start the ASSOCIATE shall deliver to ECOPETROL on a
quarterly basis within fifteen (15) calendar days following each quarter end,
the exploration costs report provided in Contract Clause 7, expressly
identifying Direct Exploration Costs subject to reimbursement pursuant to
Contract Clause 9.2.2, as detailed in the budget indicating the disbursement
currency and a US dollars consolidated. Additionally, and in the same report
the ASSOCIATE shall include the preliminary accumulated value to be included as
R Factor denominator provided in Contract Clause 14 (section 14.2.3), clearly
showing Direct Exploration Costs detail and calculation parameters applied. It
is hereby understood that Direct Exploration Costs reported by the ASSOCIATE
will only be firm after ECOPETROL has audited and accepted such costs.
During the Production period. credits and charges incurred by the interested
Parties and covering operations defined in the Contract, will be subject to the
following conditions: All charges will go to the Joint Account to be opened as
provided under Contract Clause 22.
The Joint Account defined in Contract Clause 4 (section 4.7) will be divided
into three major records as follows:
16.1 General Joint Account (clarification, charges and entries). This account
will record all movement as detailed below and will be fully distributed to the
Parties on a monthly basis, in the proportion of fifty percent (50%) to
ECOPETROL and fifty percent (50%) to the ASSOCIATE with respect to investments,
and in the proportion provided in Contract Clause 22 (sections 22.6.1 and
22.6.2) for Direct Expenses and Indirect Expenses, that is, will serve as the
basis for monthly billing as therein provided, leaving a zero (0) balance each
month. All accounting transactions associated to this account will be recorded
by the Operator in Colombian pesos subject to the laws of the Republic
<PAGE>
of Colombia, but the operator will have the right to, in turn, kee ancillary
records showing disbursements incurred in any currency other than Colombian
pesos.
16.2 Operation Joint Account. This account will record cash calls received
from the Parties and credit charges associated to their billing and shall show
all times a balance to the favor or against each of the Parties, as the case
may be. This account will be divided into sub-accounts according to
transaction currency origin, whether pesos of dollars.
16.3 Joint property records. The Operator shall keep under the Joint Account
records of all goods acquired and subject to inventory indicating each asset in
detail, acquisition date and original cost. Accounts mentioned in this
Agreement Clause 16 (sections 16.1, 16.2 and 16.3) will form part of the
Operator's official accounting records but shall not mix with accounting
records other than the Joint Account. The three accounts will be subject to
this Agreement Clause 22.
16.4 The Operator shall deliver to ECOPETROL on a monthly basis, together with
information provided in this Agreement Clause 17 (section 17.2.2) in the form
of a separate exhibit, R Factor parameters and calculation pursuant to Contract
Clause 13 (section 14.2.3).
CLAUSE 17 - CASH CALLS, BILLING AND ADJUSTMENTS
17.1 Cash calls. Although the Operator will pay and discharge in the first
place all costs and expenses incurred according to the Contract, charging each
Party's participation percentage, it is hereby agreed, with the purpose of
funding such participation, that each of the Parties, upon request from the
Operator and as provided further below, shall deliver cash calls to the
Operator, from Commercial Field acceptance by the Parties and no later than
within the first five (5) calendar days each month, the respective month's
estimated operations expenses portion. The cash call shall be accompanied to
detailed information as provided under clause 15 (section 15.5.1.2) hereof Such
cash calls will be made in US dollars or Colombian pesos, according to needs
contemplated in the budget and cash alls prepared by the Operator. The
Operator shall place the cask call within the first twenty (20) calendar days
the month immediately prior to the month when the cash call is to be delivered.
If the Operator would have to incur in extraordinary expenses not contemplated
under the monthly cash call, the Operator shall make special cash calls to the
Parties covering
<PAGE>
such disbursements participation. Each participant shall advance its
proportional funds within fifteen (15) calendar days following the Operator cash
call.
17.2 Billing
17.2.1 The Operator shall prepare an initial bill to ECOPETROL after each
Commercial Field acceptance covering fifty percent (50%) Direct Exploration
Costs incurred before submitting each discovered Commercial Field commercial
feasibility studies, which costs have been audited and accepted by ECOPETROL
according to Clause 22 hereof. Exploration wells costs will include all costs
incurred to drill, terminate and test in the event of producing wells and dry
Exploration Wells abandonment costs. Said bill shall also include fifty
percent (50%) additional work costs provided in Contract Clause 9 (section 9.3)
which will be paid according to said Clause. Said bill shall include a costs
summary separately stating the investment and expenses currency, that is,
Colombian pesos or US dollars.
17.2.2 From the initial bill date on, the Operator will bill the Parties, within
fifteen (15) calendar days following the last day each month, its proportional
participation in costs and expenses for the month. Bills shall list Operator
accounting procedures details, including a detailed accounts summary, separately
listing costs and expenses originated in dollars or in pesos.
17.3 Adjustments. Bills will be adjusted by the Operator and the Parties after
subtracting cash calls in dollars and pesos.
If any of the Parties' cash calls differ from their participation in actual
costs determined for each period, the difference will be adjusted in the
following month's bills.
17.4 Bills acceptnce. Bills payment will not affect the Parties right to
oppose or inquire about bills accuracy subject to Contract Clause 22 (section
22.7) provisions.
CLAUSE 18 - CHARGES
Subject to limitations described below, the Operator will charge the Joint
Account and bill each of the Parties according to percentages provided under
this Agreement Clause 16 (section 16. 1), the following expenses:
<PAGE>
18. 1 Labor
18.1.1 Domestic and foreign employees
18.1.1.1 Operator's employees salaries if directly working for the Joint
Operation, including overtime, night overcharge, Sundays and holidays and the
respective compensation rest payment and in general any salary payment.
18.1.1.2 Fringe benefits, indemnification, insurance, subsidies and bonus and
in general any benefit other than salary granted workers and/or their families
or dependents, whether individually or collectively or granted in virtue of the
work contract, the law agreements and/or arbitration awards, with the exception
of housing plans in which respect a special agreement will be required. Some
of the above could be the following, among other: severance, vacation,
retirement and disability pensions, benefits granted retired personnel and
their families, benefits and assistance in the event of illness and
professional or non professional, accidents, service bonuses, life insurance,
contract termination indemnification, union assignments, all type of bonuses,
assignments and savings, health and/or education assistance and social security
in general. Additionally, contributions to Instituto Colombiano de Bienestar
Familiar -ICBF (Family Welfare), Servicio Nacional de Aprendizaje - SENA
(National Apprenticeship Service), Instituto de Seguros Sociales - ISS (Social
Security) and other similar required.
18.1.1.3 All expenses incurred on behalf of the Joint Operation for camp
maintenance and operation, field offices or services facilities. These
expenses also include - not taxatively but for information purposes - expenses
listed below regardless of wheter services are provided gratuitously or for
remuneration, or whether to workers, their dependents or relatives or whether
voluntary or mandatory. Some of such services are:
18.1.1.3.1 Medical, pharmaceutical, surgical or hospital services.
18.1.1.3.2 Camp and complete services therein, including repair and hygiene.
18.1.1.3.3 Training and qualification costs
18.1.1.3.4 Workers entertainment
18.1.1.3.5 Schools for workers, their children and dependent relatives.
18.1.1.3.6 Security or social assistance plans and camp surveillance.
<PAGE>
18.1.1.4 Expenses and services listed in the above Clause 18 (sections
18.1.1.1, 18.1.1.2 and 18.1.1.3) are understood with charge to the Joint
Account in the event applicable regulations, collective labor agreements and/or
arbitration awards directly or jointly applicable to contractors
subcontractors, intermediaries and/or their employees at the service of the
operation.
18.1.1.5 Regarding retirement pensions and disability assistance, the
Executive Committee will have the right to proceed according to the Social
Security and Pensions system provided by Law 100 of 1993 and all other
regulating provisions.
18.2 Materials and supplies
Materials and supplies required to develop operations will be charged to the
Joint Account. Materials and supplies shall be acquired and stored in the
project warehouse or the maintenance material warehouse as convenient for the
operation and credited the operation at book cost as they leave the warehouse
to be used. Capital equipment units will be directly charged to the Joint
Account. The book value is determined as follows:
18.2.1 Book value
Book value is understood as the last average price for warehouse stock on the
basis of costs taken from imports calculation worksheets or local cost, as
follows:
18.2.1.1 For imported materials, equipment and supplies the book value shall
include net manufacturer or supplier bill cost, purchase cost, freight and
delivery charges at supply site and port of embarkation, freight o destination
port, insurance, import duties or any other tax, cargo handing from the ship to
customs warehouse and transportation to operations site.
18.2.1.2 For locally acquired materials, equipment and supplies the book value
shall include net seller bill plus sales tax, purchase cost, transportation and
insurance and similar costs paid to third parties from the purchase place to
operations site.
18.2.1.3 Materials will be charged to the Joint Account according to
acquisition currency origin to be subsequently charged to each of the Parties.
18.2.2 Materials devolution to the Joint Account warehouse, as the case may be.
<PAGE>
Materials, equipment and supplies returned to the Joint Operation warehouses
value will be estimated following the same procedures.
18.2.2.1 New materials will be recorded at book value.
18.2.2.2 The Operator will have the right to reincorporate used materials, in
good operating conditions and equipment fit to be subsequently used with no
need for repairs to the respective warehouse at seventy five percent (75%) book
value, crediting the respective Joint Account project.
18.2.2.3 The Operator will have the right to reincorporate repaired used
materials, in good operating conditions to the respective warehouse at fifty
percent (50%) book value. When such materials are used again will be charged
at the new book value.
18.2.3 Sales by the Parties. Materials, equipment and supplies value sold
by the Parties to the Joint Operation will be estimated on the basis of
replacement cost agreed by the Parties. The respective transportation costs
will be assumed by the Joint Operation. In the event of Joint Operation sales
to one of the Parties, goods value will be estimated on the basis of
replacement cost agreed by the Parties and transportation costs will be assumed
by the buying Party.
18.2.4 Local Materials transportation
18.2.4.1 Materials shipped by an external carrier at cost according to the
carrier company bill.
18.2.4.2 Materials shipped in carrier units property of theParties, at the
rates calculated to cover actual expenses, according to this Agreement Clause
18 (section 18.2 and 23 (section 23. 1. 1).
18.2.5 Canceled, postponed or changed projects. In the event stock
accumulated in the warehouse due to projects approved by the Parties change,
postponing or cancellation, such materials cost will be charged to the
warehouse account. Such materials may be sold to third parties according to
this Agreement Clause 20 (section 20.2.1) and the produce credited to the Joint
Account.
Excess material from projects, if such material purchase has been directly
charged, shall be returned to the warehouse upon such projects completion and
credited to the
<PAGE>
respective project. The Operator shall report such transaction to the Parties at
regular Financial Subcommittee meetings when held.
18.3 Travel expenses
All travel expenses incurred on behalf of the Joint Operation by domestic or
foreign personnel, such as transportation, hotels, feeding, etc.
18.4 Service units and facilities
Services provided using equipment and facilities property of either of the
Parties will be charged to the Joint Account at reasonable rates as provided in
this Agreement Clause
23. Rates determined shall apply until amended by mutual agreement.
18.5 Services
Services provided the Joint Operation by third parties, including contractors,
at actual cost. Likewise, technical services such as lab analyses and special
studies requiring Technical Subcommittee recommendation and Executive Committee
approval.
18.6 Repairs
Repairs to equipment or goods property of any of the Parties destined for Joint
Operation use, except if such costs have been previously charged under leases
or otherwise.
18.7 Litigation
Joint Operation expenses associated to actual or threatened litigation
(including investigation and proof taking), attachments release, awards or
court decisions, legal claims and claim filings, accidents compensation,
arrangements in the event of death and funeral, provided such charges have not
ben acknowledged by an insurance company or covered by the respective charges
provided in this Agreement Clause 18
<PAGE>
(section 18. 1. 1). In the event legal counseling is provided on such matters by
permanent or external attorneys whose full or partial remuneration has been
included in indirect expenses, no additional service charges will be recorded
but will be charged to Direct Costs incurred for such proceedings.
18.8 Joint Operation propertied and equipment loss or damage. All costs and
expenses required to replace or repair losses or damages caused by fire,
floods, storm, robbery or any similar act. The Operator shall notify the
Parties in writing any losses or damages suffered, as soon as practical.
18.9 Taxes and leases
All taxes paid or accrued in development of the Joint Operation will be charged
to the Joint Account, subject to applicable legal provisions.
The Joint Account will also be charged leases, rights of way and
indemnification paid on improvements, soil occupation, etc.
18.10 Insurance
18.10.1 Insurance premiums on insurance taken for the benefit of operations
subject to the Contract together will all expenses and indemnification accrued
and paid, and all losses, claims and other expenses not covered by insurance
companies, including legal counseling mentioned in this Agreement Clause 18
(section 18.7) well be charged to the Joint Account.
18.10.2 In the event no insurance has been taken aforementioned actual
expenses incurred and paid by the Operator will also be charged to the Joint
Account.
CLAUSE 19- CREDITS
19.1The Operator shall credit the Joint Account the following income items:
<PAGE>
19.1.1 Insurance returns associated to the Joint Operation which premiums
have been charged to said operations.
19.1.2 Geological information sales previously authorized by the Parties
provided associated recoveries have not been charged to the Joint Account.
19.1.3 The sale of properties, plants, equipment and materials property of
the Joint Operation.
19.1.4 Lease rents rceived, customs taxes or transportation claims refunds,
etc. shall be credited to the Joint Operation if rents or refunds associate to
such operation.
19.1.5 Any other operational income or contracts authorized by the Executive
Committee for the Joint Account service.
19.2 Warranty
In the event of defective equipment when the Operator has received the
respective adjustment from the manufacturer or its agents, such amount will be
credited to the Joint Operation.
CLAUSE 20 - DISPOSING OF MATERIAL AND EXCESS EQUIPMENT
20.1 Excess materials and equipment
The Operator shall inform the Parties in writing about any Joint Operation
excess materials or equipment, thirty (30) days after completing the inventory
provided in Clause 21 hereof Each of the Parties shall designate a
representative to review the condition thereof and to determine which materials
or equipment may be sold. In the event of usable materials or equipment
ECOPETROL will have the first option and the ASSOCIATE will have the second
option; such options shall be exercised within sixty (60) days following notice
date. In the event the aforementioned parties do not buy the Operator shall
notify them in writing and will proceed to auction.
<PAGE>
20.2 Disposing of Capital equipment and materials: pursuant to Contract Clause
22 (section 22.9) The Operator will have the right to sell materials and
equipment property of the Joint Account subject to the following conditions:
20.2.1 Major material and capital equipment sold by the Operator and
previously charged to the Joint Account will be subject to previous Executive
Committee approval. The produce thereof will be credited to the Joint Account.
For such purpose only, major materials are defined as any assets which
estimated sale value exceeds forty thousand US dollars (US$40,000) or the
equivalent Colombian currency.
20.2.2 Minor materials charged to the Joint Account and not required for
operations or reincorporated to the respective warehouse may be sold by the
Operator and the produce theref credited to the Joint Account.
20-2.3 Any assets which cost or estimated value exceeds forty thousand US
dollars (US$40,000) or the equivalent Colombia currency abandonment or
dismantling requires previous Executive Committee authorization.
20-2.4 None of the Parties will have the obligation to purchase the other
Party's interest in excess materials, whether new or used. Disposal of major
excess materials, such as towers, tanks, engines, pumping units and piping will
be subject to Executive Committee
approval. The Operator will, however, have the right to reject damaged or
unusable materials in any way.
20.2.5 All taxes accrued by reason of Joint Account materials or assets sale
or disposal shall be the responsibility of the Operator with charge to the
Joint Account.
CLAUSE 21 - INVENTORY
Upon request from ECOPETROL the Operator shall submit the necessary information
to analyze warehouse stock and the Parties shall agree upon joint participation
to control inventories. The Operator shall provide any facilities required by
ECOPETROL to take a fixed assets physical inventory at the Association
facilities, previous Financial Subcommittee agreement on the date, time and
number of persons designated to take said inventory.
<PAGE>
21.1 Inventory and Audit
Subject to applicable regulations and no less than once every three (3) years
the Operator shall take all Joint Operation assets inventory.
21.2 The notice of intention to take an inventory shall be given by the
Operator in writing to the Parties one (1) month in advance to said inventory
taking date for the Parties to be represented. But if one of the Parties is
not present the inventory so taken by the Operator shall be no less valid.
21.3 The Operator shall provide the Parties copy of each inventory including
copy of the reconciliation and will submit results to the Association
Subcommittees which shall study the report and propose action to be taken on
the matter.
21.4 Excess and shortage inventory adjustments will be reported to the Executive
Commttee for consideration and approval.
21.5 At midnight on the last day of the Exploration Period provided, the Parties
shall take an inventory of both material in the warehouse property of the Joint
Account and extracted products in the collection batteries and piping from
collection batteries to storage tanks or in storage tanks all within production
fields, and such inventories will be distributed to the Parties, after deducting
royalties, in the proportion provided under Contract Clause 13.
CLAUSE 22 - AUDIT
Subject to Clause 17 (section 17.4) hereof the Parties will have the right to
have their own Auditors or representatives examine and control Operator's
accounting books and records associated to properties and operation activities
thereof. However, with the purpose of facilitating Direct Exploration Costs
revision under this Agreement Clause 17 (section 17.2. 1) as soon as the
Operator notifies the Parties any reimbursable Exploration Work initiation, the
ASSOCIATE or the Operator shall permit, previous due notice, ECOPETROL auditors
to periodically examine such Exploration Work accounts, for the mentioned
revision to have been performed under the best conditions and time when the
Commercial Field is declared. During audits herein provided representatives
from the General Accountant of the Republic will have the right to participate
if such body deems convenient. Such audit costs and expenses will be paid by
the interested Party.
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22.1 After the audit report has been delivered, the ASSOCIATE or the Operator
will have a maximum six (6) months term to answer or sustain objections
submitted; upon said term expiration if the Operator has not answered,
objections will be deemed accepted and consequently the audit will proceed
accordingly. Audit notes or comments not resolved within the three (3)
following months will be resolved according to Contract clause 20.
CLAUSE 23 - FEES TABLE
23.1 Subject to limitations provided above, services provided the Joint
Operation by facilities exclusively owned byECOPETROL or the ASSOCIATE will be
charged the respective fees with the purpose of recovering actual costs. Such
costs shall include normal work, salaries, fringe benefits, depreciation costs
and other operation expenses taking the following into account:
23.1.1 The transportation units fee usually calculated on the basis of operation
time shall include loading and unloading time, the time spent waiting for
loading and the time spent waiting to be unloaded. Transportation unit charges
assigned the operation shall include Sundays and holidays, except if out of
service for repairs.
23.1.2 In the event material required for the mentioned operations is
transported together with other material by fluvial or land carrier exclusively
owned by ECOPETROL or the ASSOCIATE the charge shall be based on transported
tons at rates which shall not exceed commercial rates.
23.2 Equipment and tools lease fees
The procedure to calculate equipment and tools property of the Parties leases,
excluding drilling equipment and major equipment which fees must be separately
calculated and approved by the Executive Committee, shall cover a depreciation
value in addition to a maintenance value and the procedure will be the
following:
23.2.1 Equipment description, model, number, purchase date and original cost.
23.2.2 Site where the equipment will be used, reasons for leasing and
estimated use period.
<PAGE>
23.2.3 Annual equipment depreciation value, calculated on the basis of
depreciated book value and remaining useful life (minimum book value to be
considered will be ten percent (10%) original cost or the salvage value).
23.2.4 The annual maintenance value will be a percentage of the original
cost which will range from five percent (5%) for new equipment to fifteen
percent (15%) for depreciated equipment, depending on depreciation period, for
instance:
Equipment A: (Five [5] years useful life)
Period (years) 1, 2, 3, 4, 5: one hundred percent (I 00%) depreciated equipment.
Maintenance: 5, 6, 7, 8, 9: 15 %
Equipment B: (Tn [10] years useful life)
Period (years) 1, 2, 3, 4, 5, 6, 7, 8, 9, 10: one hundred percent (100%)
depreciated equipment.
Maintenance: 5, 6, 7, 8, 9, 10, 1,, 12, 13, 14, 15: 15%
Note: Useful life period and depreciation will be determined on the basis of
accounting practices applicable to oil operations.
23.2.5 Annual lease fee equals the value provided under Clause 23 (section
23.2.3) hereof plus the value specified in section 23.2.4 hereof.
23.2.6 Monthly or daily equipment lease fee will be as provided under Clause
23 (section 23.2.5)hereof divided into twelve (12) or three hundred and sixty
five 365, as the case may be.
23.2.7 No "standby" fee will be charged but this fee will be charged in the
event of third parties.
23.2.8 The above lease fees do not include transportation, installation,
operation, lubricants and fuel costs which will be charged the operation
equipment is destined to.
23.2.9 The above lease fees will apply to eventual equipment and tools one
hundred percent (100%) property of the ASSOCIATE or the Operator and vice
versa.
23.2.10 In each case, the Technical Subcommittee will recommend the Executive
Committee the need to use leased equipment and the Financial Subcommittee will
have the right to apply the fee system recommended herein.
<PAGE>
23.2.11 Equipment lease fee will be calculated in US dollars but the
respective bill will be in pesos at the rate agreed by the Parties.
23.2.12 Warehouses and fixed assets lease fee.
For full or partial use of warehouses property of one of the Parties or the
Joint Operation lease fee calculation the procedure agreed by the Financial
Subcommittee will apply.
CLAUSE 24 - CONTRIBUTIONS IN KIND
ECOPETROL or the ASSOCIATE shall contribute in kind any materials deemed
convenient as agreed between the Parties.
PART III - ADMINISTRATIVE ISSUES AND SUNDRY PROVISIONS
SECTION ONE - THE EXECUTIVE COMMITTEE
CLAUSE 25 - OPERATING CONDITIONS
In development of its functions the Executive Committee shall comply with
conditions provided in Cotract Clause 19, as follows:
25.1 The Executive Committee will be alternatively chaired by the Parties
starting with ECOPETROL.
25.2 The Executive Committee shall designate its Secretary alternating people
designated by ECOPETROL and the ASSOCIATE. The Chairman and the Secretary will
be members of the same Party.
25.3 The Executive Committee shall hold regular meetings during the months of
March, July and November, and shall hold extraordinary meetings any time the
Parties and/or the Operator deem necessary. At said meetings the production
program developed by the Operator, the development plan and immediate plans
will be discussed. This Executive Committee may be attended by each of the
Parties counselors as deemed convenient, being understood each of the companies
shall designate the less possible number of people.
25.4 In the event of Executive Committee regular meetings, the representative
chairing the coming meeting shall notify all other representatives (principal
and alternates) from the other Party and the Operator ten (10) calendar days in
advance indicating the meeting time and place and matters to be discussed
(agenda).
<PAGE>
25.5 In development of Contract Clause 18 (section 18.3), during both regular
and extraordinary Executive Committee meetings, matters to be discussed and not
included in the agenda may be discussed during the meeting previous agreement
of the Parties representatives attending the Committee.
SECTION TWO - SUBCOMMITTEES
CLAUSE 26 - SUBCOMMITTEES ORGANIZATION
In development of the function provided under Contract Clause 19 (section
19.3.8), the Executive Committee will have the right to designate any advisory
subcommittees deemed necessary. In any case the Executive Committee shall
designate a Technical Subcommittee and a Financial Subcommittee.
The above subcommittees will be the organizations in charge of controlling and
defining Contract technical, financial and legal recommendations to the
Executive Committee and shall be governed by the Contract and this Agreement.
ach subcommittee shall issue its own internal regulations to be approved by
the Executive Committee.
Section Three - Operator
CLAUSE 27 - RIGHTS AND OBLIGATIONS
27.1 Pursuant to Contract Clause 30, the Operator has the right to conduct Joint
Operations by itself or retaining subcontractors subject to general Executive
Committee direction. In any case, the Operator will be responsible of the Joint
Operation according to Contract provisions.
27.2 Some of the Operator's obligations are the following, among other:
27.2.1 To prepare, submit and implement the development plan, expenses budgets
and exploration/ production programs as well as expenses approval.
27.2.2 To direct and control all operation expenses statistical and accounting
services.
27.2.3 To plan and obtain all services and materials required for good Joint
Operation development.
27.2.4 To provide all techniques and assistance required for good Joint
Operation development.
<PAGE>
27.2.5 To plan tax effects and to comply with all tax obligations derived from
operations developed and to provide a timely report to the Parties in their
respective proportion.
27.3 The Operator shall not have the right to constitute any lien on Joint
Operation properties.
27.4 Operator resignation will be without prejudice of any right, obligation or
responsibility acquired during the time the Operator acted in such condition; if
the Operator resigns or is removed before obligations provided under the
Contract have been satisfied, the Joint Account shall not be charged any
expenses incurred by such change. But if the Executive Committee approves, these
costs and expenses may be charged to the Joint Account.
27.5 If the Operator has been removed or if its resignation has been accepted,
for obligations transfer purposes ECOPETROL will audit the Joint Account and
take an inventory of all Joint Operation properties. Said inventory will be
used for devolution and accounting purposes as regards said obligations
transfer procedures. All costs and expenses incurred with espect to inventory
taking and audit shall be charged to the Joint Account.
27.6 The Operator shall not be responsible for any loss or damage caused by
Joint Operation except if such losses or damage are imputable to:
27.6.1 The Operator's fault
27.6.2 The Operator's default to take and maintain any of the insurance required
under Contract Clause 33, except if the Operator has made every possible effort
to obtain and maintain such insurance with fruitless results, which case shall
be timely notified to the Parties.
SECTION FOUR - CONTRACTING PROCEDURES
CLAUSE 28 - SUPPLIERS REGISTER AND LIST OF PROPONENTS
28.1 The Operator will be responsible of keeping an updated suppliers register,
classified according to the different activities required by the operation and
shall determine qualification criteria applicable to companies to be included in
the list of proponents. The Technical Subcommittee will have the right to review
criteria before approving the list of proponents.
<PAGE>
28.2 ECOPETROL will have the right to review the Operator suppliers register on
an annual basis and will have the right to have the Technical Subcommittee
suggest including or excluding suppliers from the record. The above
notwithstanding, ECOPETROL will have the right, any time, by duly motivated
petition, to require individuals or entities to be removed from the record.
28.3 In any cases implying invitations to bid for contracting purposes the
suppliers register shall be consulted placing the act on record in the
respective document.
28.4 Individuals or entities listed in the suppliers register shall evidence
technical, moral and economic solvency in addition to experience not only
regarding the company but also its partners and technicians working for such
companies on a steady basis.
28.5 On the basis of the above parameters, the Operator shall keep a qualified
suppliers register, which shall be periodically updated according to their
performance.
CLAUSE 29 - TENDER PROCEDURE
29.1 Responsibility. The Operator will be resposible of preparing duly in
advance the invitation to bid and will submit it to the Technical Subcommittee
for consideration.
29.2 The list of entities invited to bid will be prepared on the basis of
Suppliers Register information.
29.3 If the estimated contract value subject to bidding exceeds US$40,000, the
Operator shall invite no less than three (3) companies. If this would not be
possible, justification will be placed on record in the recommendation report to
the Technical Subcommittee.
29.4 The Operator shall endeavor to invite no more than 6 companies to bid with
the purpose of preventing excessive tender evaluation costs and also to give
participant companies a better opportunity to be awarded the respective
contract.
29.5 Being all other factors equivalent, the priority order to have the right to
be included in the list of proponents will be: Companies organized and domiciled
in the Department or Departments where the Commercial Field or Fields is or are
located - Colombian companies domiciled outside the Department or Departments
where the Commercial Field or Fields is or are located, but having a branch in
the Department - Colombian companies with their main domicile outside the
Department or Departments where the Commercial Field or Fields is or are located
not having a branch in said
<PAGE>
Department Foreign companies with a branch organized in Colombia - Foreign
companies without a branch in Colombia.
29.6 Companies invited to bid list will also take into account companies
technically and commercially qualified which have not been provided the
opportunity to participate in similar tenders in the past.
29.7 The Operator shall prepare the tender Reference Terms and will submit them
to the Technical Subcommittee for consideration, duly in advance.
29.8 Tender Reference Terms shall clearly specify that:
29.8.1 Costs will be one of the criteria to be taken into account for
contract award and
management:
29.8.2 All tenders exceeding such activity actual cost will be disqualified.
29.8.3 ender evaluation will take into consideration factors other than
costs, which factors will be included in the Reference Terms
29.8.4 Offers shall be submitted according to invitation to bid Reference
Terms and if this requirement is not complied with the offer may be considered
invalid.
29.8.5 The invitation to bid will include a detailed price table to be
filled out by proponents to facilitate proposals evaluation.
29.9 The list of proponents will be reviewed and approved by the Technical
Subcommittee before delivering to parties invited.
29.10 As soon as the Reference Terms have been distributed, the following
rules will apply:
29.10.1 Any original Reference Terms information, amendment or clarification
will be delivered all proponents. The Operator Purchases and Supplies Unit will
be responsible of such changes. Changes must be duly justified by written
document.
29.10.2 No proponents shall be added or removed from the proponent list
originally approved by the Technical Subcommittee.
29.10.3 Every proponent who does not comply with tender procedures and rules,
or who violates the Operator business ethics code will be forthwith
disqualified.
29.11 All invitation to bid contents and form shall meet "Documentation
Submitted to the Technical Subcommittee Form" procedure requirements and shall
be submitted to the Technical Subcommittee for consideration.
<PAGE>
29.12 Internal approvals required by the Operator and ECOPETROL will depend
on contract estimated value on the basis of their respective internal
procedures.
CLAUSE 30 - CONTRACT AWARDING AND PURCHASE ORDERS
30.1 The Operator will be responsible of awarding contracts and purchase
orders. For this purpose the Operator shall submit its recommendation to the
Technical Subcommittee which is the body in charge of approving and will be
ratified by the Executive Committee if awarded value equals or exceeds
US$40,000.
30.2 Value: Awarding will be based on the best global value. The lowest price
is not always the best, because value will lso take into consideration
proponents programming and quality, experience, reputation, and Colombian
contents. In the event the contract is not awarded to the lower value offer,
such decision shall be justified.
30.3 Written justification. The Operator shall submit a written recommendation
to the Technical Subcommittee justifying each contract and purchase order
awarded if the value equals or exceeds US$40,000. Such justification shall
include a summary of proposals submitted commercial and technical evaluation
and the basis for Operator recommendation.
30.4 Direct contracting: Direct contracting shall be supported and submitted in
writing to the respective Subcommittees clearly stating justification. The
Operator will have the right to contract directly with no need for tender in
any of the following events:
30.4.1 In the event only one supplier is available within the term required to
meet project schedule;
30.4.2 In the event there is no equivalent or satisfactory substitute for the
item or service previously directly contracted.
30.4.3 In the event the service or work derives from previous service or work or
in the event of and addition to a contract or purchase order opened within the
past ninety (90) days and if commercial conditions have not been modified or
when a recent tender evidences justify awarding with no need for tender.
30.4.4 In the event the Operator has standardized a specific item or service
for all applications within its operations area and there is only one known
supplier for such item or service.
<PAGE>
30.4.5 In the event only one item or service is deemed meeting Operator's
requirements within the specified delivery ten-n.
30.4.6 In the event an item or service is obtained for testing or evaluation.
30.4.7 In the event of an emergency. The Operator shall notify ECOPETROL at the
Technical Subcommittee immediately following such emergency.
30.5 Partial awards: A tender may be partially awarded two or more bidders,
provided the following conditions are fully satisfied:
305.1 The possibility to partially award is clearly specified in the Invitation
to Bid
30.5.2 Favored bidders have met Invitation to Bid requirements
30.5.3 Partial award reflects the best items or services to be obtained value
30.5.4 Any work scope change or awarding criteria shall be clearly communicated
to all proponents before partial award.
30.6 Rejected offers: The Operator will have the right to declare the tender
void when the Technical Subcommittee finds motives justifying such decision
and/or if offers are distant from actual costs.
30.7 Notice to non favored bidders: Awarding results will be notified all
participants in writing.
30.8 Clarification: During the evaluation period, the Operator will have the
right to require clarifications from proponents. The Technical Subcommittee
shall approve significant commercial clarifications. No new approval from the
Technical Subcommittee will be required in the event of technical
clarifications. Clarifications capable of affecting the tender shall be notified
all proponents in writing.
CLAUSE 31 - CONTRACT MANAGEMENT AND PURCHASE ORDERS
31.1 The Operator will be responsible of managing contracts and purchase orders
and of execution thereof.
31.2 Contracts or purchase orders management basis will consist in execution
thereof, which shall include agreed costs, schedules and quality requirements.
31.3 The operator shall keep written record of all original contract
amendments, Each contract costs change impact will be evaluated by the Operator
and negotiated with the supplier or contractor before changing contract price.
<PAGE>
31.4 If the proposed change exceeds US$40,000 or 10% originally approved value
not to exceed the US$40,000 limit the change will have to be submitted to the
Technical Subcommittee for consideration.
31.5 The Operator shall be responsible of Costs Control.
31.6 Any additional work or item within contract terms shall be authorized by
the Operator Project or Operations Manager, who shall consult with the Purchase
and Logistics Departmnt or substituting units before amending the contract in
any way. This double responsibility ensures change process integrity. In the
event changes imply amending the contract text, such changes will be subject to
the Operator Legal Department approval.
31.7 Quality control will be managed subject to the QA/QC ("Quality Assurance
and Quality Control) process which shall include independent work inspection and
monitoring at the right time during work development.
31.8 Procedures applied by the Operator to control costs are described in a
Costs Control procedure.
31.9 The Parties will be delivered a monthly report on work progress accompanied
of costs documentation and schedules including major contracts and purchase
orders originally agreed budget variations analysis.
31.10 After major contracts and purchase orders have been completed a
detailed analysis will be conducted to evaluate experiences learned and
applicable to similar contracts or purchase orders to improve their control.
CLAUSE 32 - INSURANCE
For the purposes of Contract Clause 33, as regards insurance, the Operator
shall deliver to ECOPETROL the following information for ECOPETROL to insure
fifty percent (50%) Commercial Field assets.
32.1 Assets description, separated as far as possible in the following way:
31.1.1 Offices, camps and other non industrial assets.
31.1.2 Collection stations specifying tanks (quantity and capacity) and
other equipment
31.1.3 Sundry warehouses and other facilities
<PAGE>
NOTE: External pipelines and wells are not covered by the fire policy because
in such case ECOPETROL directly assumes the risk.
32.2 Assets value indicating only the portion property of ECOPETROL value and
indicating the full value percentage it represents.
32.3 Geographical location
32.4 Reception date from the time the risk is transferred to the Joint
Operation.
CLAUSE 33 - FORCE MAJEURE OR ACTS OF GOD
Contract Clause 34 only suspends compliance with specific obligation of the
Parties if development thereof is impossible due toevents of force majeure or
acts of God. Additionally, obligations associated to goods, properties,
production facilities etc. are only suspended if affected by such circumstances.
The affected Party shall notify force majeure termination detailing damages
magnitude and corrective actions affecting the system.
CLAUSE 34 - OPERATION AGREEMENT REVISION
This Operation Agreement may be revised when the Parties deem convenient, upon
request from either of them; the Executive Committee is fully empowered to
review and amend this Agreement. This Operation Agreement will be in force until
one of the following events occurs:
34.1 Contractor termination
34.2 Written agreement of the Parties
34.3 Entering into a new Agreement
In witness the Parties sign this Operation Agreement in ECOPETROL contract
paper on the 30th day of the month of December 1997.
EMPRESA COLOMBIANA DE PETROLEOS "ECOPETROL"
Enrique Amorocho Cortes
President
SEVEN SEAS PETROLEUM COLOMBIA INC.
Gustavo Vasco Munoz
Legal Representative
<PAGE>
EXHIBIT 10.2
ASSOCIATION CONTRACT - WITH GAS INCENTIVES
ASSOCIATION CONTRACT
ASSOCIATE: SEVEN SEAS PETROLEUM COLOMBIA
SECTOR: MONTECRISTO
EFFECTIVE DATE: 28 FEBRUARY 1998
The contracting parties, namely: on the one part THE "EMPRESA COLOMBIANA DE
PETROLEOS", hereinafter ECOPETROL, an industrial and commercial stateowned
enterprise authorized under Law 165 of 1948, currently ruled by its bylaws,
amended by Decree 1209 of 15th June 1994, having its head office in Santafe de
Bogota, D.C. represented by ENRIQUE AMOROCHO CORTEZ, of legal age, bearer of
citizenship card No 5.555.193 issued in Bucaramanga, domiciled in Santafe de
Bogota, who states that- 1. As president of ECOPETROL, he acts herein on behalf
of said Company, and 2. The ECOPETROL Board of Directors authorized him to enter
into this Contract, as witnessed by Minutes No. 2169. of 16th October 1997- and
on the other part SEVEN SEAS PETROLEUM COLOMBIA INC., a copany organized
pursuant to the laws of CANADA, hereinafter referred to as "THE ASSOCIATE", with
a duly established Colombian branch and its main domicile in Santafe de Bogota,
pursuant to public deed no. 2771 of 28th September 1995, made before the
Sixteenth (16) Notary Public of the Santa Fe de Bogota circuit, represented by
Gustavo Vasco Munoz of legal age, a citizen of Colombia, bearer of identity card
No. 17.029.136 issued in Bogota, who represents that: 1. In his capacity as
Legal Representative he acts on behalf of SEVEN SEAS PETROLEUM COLOMBIA INC.
and, 2. He is fully authorized to sign this contract as witnessed by the
certificate of incorporation and legal representation issued by the Chamber of
Commerce of Santafe de Bogota. Under the above conditions, ECOPETROL and the
ASSOCIATE declare they have entered into the contract contained in the following
Clauses-
CHAPTER 1 - GENERAL PROVISIONS
CLAUSE 1 - PURPOSE OF THIS CONTRACT
1.1 The purpose of this contract is to explore the Contract Area and develop
such nationally-owned Hydrocarbons as may be found therein, as described in
Clause 3 below.
1.2 Pursuant to article l of Decree 231011974, ECOPETROL is entrusted with
exploring and developing nationally owned hydrocarbons and may carry out said
activities either directly or through contracts with private parties. Based on
this provision, ECOPETROL and THE ASSOCIATE have agreed to explore the Contract
Area and produce such Hydrocarbons as may be found therein under the terms and
conditions set forth in this document, in Appendix "A" and Appendix "B"
("Operating Agreement) which are made an integral part hereof.
1.3 Subject to the provisions hereof, it is understood that the rights and
obligations of THE ASSOCIATE regarding the Hydrocarbons produced in the Contract
Area, and its share thereof, are the same as those assigned under Colombian law
to anyone producing nationally-owned Hydrocarbons in the country.
1.4 ECOPETROL and THE ASSOCIATE agree to explore and develop the land o the
Contract Area, to share the costs and risks thereof in the proportion and under
the terms contemplated in this Contract, and the properties they may acquire and
the Hydrocarbons produced and stored shall belong to each Party in the
stipulated proportions.
CLAUSE 2 - APPLICATION OF THE CONTRACT
This Contract applies to the Contract Area whose boundaries are describes in
Clause 3 below, or to any portion thereof subject to the terms hereof whenever
Clause 8 has been applied.
<PAGE>
CLAUSE 3 - CONTRACT AREA
The Contract Area is called "MONTECRISTO" and covers an extension of one
hundred fifty one thousand nine hundred and thirty three (151,933) hectares
and five thousand nine hundred and fifty (5,950) square meters, located in
the following municipal jurisdictions: municipal jurisdiction of San Alberto,
San Martin, Aguachica, Rio de Oro and Gonzales in Cesar Department; Morales
and Simiti in Bolivar Department; Puerto Wilches, Rio Negro, and Sabana de
Torres in Santander Department. The reference point is the Geodesic Vertex
"TABLAR848" of the Agustin Codazzi Geographic Institute, and the Gauss flat
coordinates origin Santa Fe de Bogota are: N-1,401.053.89 meters,
E-1,021,264.81 meters corresponding to geographic coordinates Latitude 8" 13'
31".808 North of the Equator, Longitude 730 53'1 6".538 West of Greenwich.
Starting from this Vertex, head N 340 9' 25".673 W for 2,237.83 meters until
reaching the starting point "A" whose coordinates are: N-1,402,900.oo meters,
E-1,020,000.oo meters. From point "A" head EAST for 6,410.oo meters until
reaching Point "B whose coordinates are: N-1,402,900 meters E 1,026,410
meters. The whole of line "A-B" runs alongside fine "A-K' of the "Rosablanca"
Association Contract signed with Seven Seas Petroleum Colombia Inc. Head EAST
from point "B" for 2,790.oo meters until reaching point "C" whose coordinates
are- N-1,402,900 meters, E-1,039,200.oo meters. The whole of line "B-C" runs
alongside the "Buturama" block belonging to Ecopetrol. Head SOUTH from point
"C" for 27,200.oo metrs until reaching point "D" whose coordinates are
N-1,375,700.oo meters, E-1,029,200.oo meters. Head EAST from point "D" for
23,120.oo meters until reaching point "E" whose coordinates are
N-1,375,700.oo meters, E-1,052,320.oo meters. The lines "C-D" and "D-E" run
alongside lines "Q-P" and "P-O" of the Bolivar 'Association Contract operated
by Harken de Colombia Limited. From point "E" head S 1 1 0 6' 13".551 E for
4,088.76 meters until reaching point "F" whose coordinates are N1,371,687.78
meters, E-1,053,107.44 meters. The whole of line "E-F" runs alongside
Concession 1120 "Tisquirama". Head @ 4" 53'00".460 W for 14,183.60 meters
from point "F" until reaching point "G" whose coordinates are N1,357,555.67,
E-1,051,900.oo meters. The whole of line "F-G" runs alongside line "G-F" of
the "Torcoroma" Association Contract operated by Repsol Exploration Colombia
S.A. Head WEST from point "G" for 5,867.32 meters until reaching point "H"
whose coordinates are N-1,357,555.67 meters, E-1,046,032.68 meters. Take a
direction S 35 less than' 14' 51".407 W from point "H" for 8,027.36 meters
until reaching point "I" whose coordinates are N-1,351,000.oo meters,
E-1,041,400.oo meters. From point "I" head SOUTH for 4,900.oo meters up to
point "J" whose coordinates are: N-1 I 346,100.oo meters, E 1,041.400.oo
meters. The whole of lines "G-H","H-I" and "I-J" run alongside lines "A-F",
"F-E" and "E-D" of the Tisquirama Association Contract operated by Petroleos
del Norte S.A. Head S 89" 54'54". 1 96 E from point "J" for 8,094.01 meters
until reaching point "K' whose coordinates are N1,346,088.oo meters,
E-1,049,494 meters. Head 400 34'27".390 W from point "K' for 19,274.23 meters
until reaching point "L" whose coordinates are N1,331,448.oo meters,
E-1,036,957.40 meters. Head S 260 20' 16".725 E from point "L" for 2,096.62
meters until reaching point "M" whose coordinates are N1,329,569.02 meters,
E-1,037,887.60 meters. The whole of lines "K-L" and "L-M" run alongside the
Playon block belonging to Ecopetrol. From point "M" head N 890 59" 59.605 W
for 20,887.60 meters until reaching point "N" whose coordinates are
N-1,329,569.06 meters, E-1,017,000.oo meters. Head NORTH from point "N" for
15,030.94 meters until reaching point "O" whose coordinates are N1,344,600.oo
meters and E-1,017,000.oo meters. The whole of line "M-N" runs alongside the
"La Cira-infantas" block belonging to Ecopetrol. Head EAST from point "O" for
3,000.oo meters until reaching point "P" whose coordinates are N1,344.600.oo
meters, E-1,020,000.oo meters. Head NORTH from point "P" for 58,300.oo meters
until reaching starting point "A:' and thus close the boundaries.
PARAGRAPH 1: Whenever somebody files a claim asserting ownership of the
Hydrocarbons in the subsoil within the Contract Area, ECOPETROL shall deal with
the case, assuming such obligations as may arise.
PARAGRAPH 2- lf part of the Contract Area extends to areas that are or have been
reserved and declared as falling within the National Park System, THE ASSOCIATE
must meet all conditions imposed by the pertinent authorities in keeping with
Clause 30 (numeral 30.4) hereof. This neither amends the contract nor
constitutes grounds for filing any claim against ECOPETROL.
<PAGE>
CLAUSE 4- DEFINITIONS
For Contract purposes, the terms listed below shall have the meaning set
out hereunder-
4.1 CONTRACT AREA-. The land describes in Clause 3 hereinabove, subject to
Clause 8.
4.2 FIELD: Portion of the Contract Area where one or more structures exist,
totally or partially overlying, with one or Reservoirs that are producing or
whose Hydrocarbon-producing capacity has been tested. These Reservoirs may be
separated by geological causes such as: synclines, faults, wedging of producing
strata, changes in porosity and permeability; likewise they may be of different
geological ages, separated by strata that is reasonably watertight, totally,
partially overlapping or not overlapping at all.
4.3 COMMERCIAL FIELD- A field that ECOPETROL accepts as able to produce
Hydrocarbons of a quality and quantity that is economically viable in one ormore
Production Targets to be defined by ECOPETROL.
4.4 GAS FIELD: A field that ECOPETROL qualifies as a producer of Natural
Non-Associated Gas (or Free Natural Gas) when defining its commerciality and
using information furnished by THE ASSOCIATE.
4.5 EXECUTIVE COMMITTEE: The body that will supervise, control and approve all
operations and actions performed throughout the contract and to be established
within thirty (30) days following acceptance of the first Commercial Field.
4.6 DIRECT EXPLORATION COSTS: Any monetary expenditures reasonably incurred by
THE ASSOCIATE in seismic surveys and drilling. Exploration Wells, as well as for
locations, completion, equipping and testing of such wells. Direct Exploration
Costs do not include administrative or technical support from the Company's head
or central office.
4.7 JOINT ACCOUNT: Accounting records kept pursuant to Colombian law for
crediting or debiting the Parties with their share in the Joint Operation of
each Commercial Field.
4.8 BUDGETARY EXECUTION: The resources effectively expended and/or committed for
each program and project approved for a given calendar year.
4.9 STRUCTURE: The geometrical form with geological closure (anticline, syncline
etc.) that is revealed by formations having accumulations of fluid.
4.10 EFFECTIVE DATE: The sixtieth (60) calendar day following contract
signature, and the starting date for all time limits agreed to herein and
subject to the validity of the same contract.
4.11 CASH FLOW- The physical flow of money (income and expenditure) incurred by
the Joint Account to handle the obligations contracted by the Association in the
normal course of operations.
4.12 ASSOCIATE NATURAL GAS: Mixture of light hydrocarbons existing in the
Reservoir in the form of a gas layer or in solution and produced together with
liquid hydrocarbons.
4.13 NON-ASSOCIATE NATURAL GAS (PRODUCTION OF): Those hydrocarbons produced in
gaseous state at surface and reported at standard conditions, with an initial
average (production weighted) Gas/Oil raio of over 15,000 standard cubic feet
of gas per barrel of liquid Hydrocarbon, and heptane PIUS (C7 +) molar
composition below 4%.
4.14 DIRECT EXPENSES: All expenditures charged to the Joint Account as a result
of payment to personnel directly working for the Association, purchase of
materials and supplies, service contracts made with third parties and any
overhead required by the Joint Operation in the normal course of its activities.
<PAGE>
4.15 INDIRECT EXPENSES: Those disbursements charged to the Joint Account for
administrative/technical support for the Joint Operation that Operator may
furnished through his own organization.
4.16 COMMERCIAL INTEREST: For Colombian Pesos, it shall be the interest rate for
ninety-day (90) CDs certified by the Banking Superintendency, or whoever
replaces same, applicable to the respective period. In the case of US dollars,
it shall be the prime rate established by CITIBANK New York, or the entity
appointed for this purpose.
4.17 INTEREST in THE OPERATION: The share in the rights and obligations acquired
by each Party in the exploration and development of the Contract Area.
4.18 DEVELOPMENT INVESTMENT- Refers to the amount of money invested in goods and
equipment capitalized as Joint Operation assets in a Commercial Field, once the
Parties have accepted the existence thereof.
4.19 HYDROCARBONS: Any organic compound consisting mainly of the natural mixture
of hydrogen and carbon, as well as substances related thereto or derived
therefrom, except for helium and rare gases.
4.20 GASEOUS HYDROCARBONS- All hydrocarbons produced in gaseous state at the
surface and reported at standard conditions (1 atmosphere of absolute pressure
and a temperature of 60 deg. F).
4.21 LIQUID HYDROCARBONS- lncludes crude oil and condensates, as well as those
produced in such state as a result of gas treatment when pertinent, reported at
standard conditions.
4.22 PRODUCTION TARGETS: Reservoirs located within the Commercial Field
discovered and that have tested as commercial producers.
4.23 JOINT OPEATION: The tasks and work performed, or being performed, on
behalf of the Parties and for their account.
4.24 OPERATOR: The person appointed by the Parties to act on their behalf in
directly carrying out the operations needed to explore and produce the
Hydrocarbons discovered in the Contract Area.
4.25 PARTIES: On the effective Date, ECOPETROL and the ASSOCIATE. Subsequently
and at any time, ECOPETROL on the one part, and THE ASSOCIATE and/or its
assignees on the other part.
4.26 EXPLORATION PERIOD- The term for THE ASSOCIATE to comply with the
obligations set forth in Clause 5 herein below, not to exceed six (6) years from
the Effective Date, except as provided for in Clauses 9 (numerals 9.3, 9.8) and
34.
4.27 EXPLOITATION PERIOD: The time elapsed from the end of the Exploration or
Retention Period up to the end of the contract.
4.28 RETENTION PERIOD: Time lapse granted by ECOPETROL when THE ASSOCIATE asks
for more time to start the Exploitation Period of each Gas Field discovered
viithin the Contract Area, because special conditions mean the field cannot be
developed in the short term and consequently additional time is needed to build
the infrastructure andlor develop the market
4.29 EXPLORATION WELL: Any well so designated by THE ASSOCIATE that is to be
drilled or deepened for its account in the Contract Area for the purpose of
seeking new Reservoirs, checking the extension of a reservoir, or establishing
the stratigraphy of an area. In order to comply with the obligations agreed upon
in Clause 5 hereof, the respective Exploration Well will be previously qualified
by ECOPETROL and the ASSOCIATE.
4.30 DEVELOPMENT OR EXPLOITATION WELL : Any well previously scheduled by the
Executive Committee for producing Hydrocarbons discovered in the Production
Targets within each Commercial Field.
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4.31 BUDGET: A basic planning tool earmarking funds for specific projects to be
used within a calendar year or part thereof in order to attain the goals and
targets proposed by the ASSOCIATE or Operator.
4.32 EXTENSIVE PODUCTION TESTS- Operations performed in one or more producing
Exploration Wells to appraise producing conditions and reservoir behavior.
4.33 REIMBURSEMENT: Payment of fifty percent (50%) of the Direct Exploration
Costs incurred by THE ASSOCIATE.
4.34 EXPLORATION WORK- Operations performed by THE ASSOCIATE in search for and
discovery of hydrocarbons in the Contract Area
4.35 RESERVOIR: Any sub-surface rock with hydrocarbon accumulation in its porous
space, producing or able to produce hydrocarbons and behaving as an independent
unit with respect to petrophysical and fluid properties and having a single
pressure system throughout.
CHAPTER 11 - EXPLORATION
CLAUSE 5 - TERMS AND CONDITIONS
5.1.1 During the first two years following Effective Contract Date, THE
ASSOCIATE must reprocess five hundred (500) kms. of existing seismic on the
area, acquire/interpret Landsat images and surface Geological and geochemical
work; acquire/process and interpret one hundred (100) kilometers of 2D seismic.
At the end of the second year, THE ASSOCIATE shall have the option to relinquish
the contract providing it has met the above obligations. lf THE ASSOCIATE wishes
to go ahead into the third year, it must relinquish areas so that it remains
with an area not to exceed one hundred thousand (100,000) hectares.
5.1.2 During the third year, THE ASSOCIATE shall drill one (1) Exploratory Well
to penetrate the potential Hydrocarbon-producing formations in the Area. The
contract shall terminate at the end of this year unless an extension has been
applied for and authorized pursuant to numeral 5.2 of this Clause, or a
commercial field has been discovered, except as set out in Clause 9 (numeral
9.5).
5.2 lf THE ASSOCIATE has satisfactorily met the obligations of Clause 5, it may
request ECOPETROL to extend the Exploration Period annually up to three (3)
additional years and during each extension THE ASSOCIATE shall perform
Exploration Work in the Contract Area, consisting of drilling one (1)
Exploration Welluntil it penetrates the Hydrocarbon producing formations in the
area.
5.3 lf, during any year of the Exploration Period, THE ASSOCIATE should decide
to carry out work on the following year's obligations, it must obtain permission
therefor from ECOPETROL. lf ECOPETROL agrees, it shall decide on how such
obligations are to be transferred and the amount thereof.
5.4 Throughout the life of this contract, THE ASSOCIATE may carry out
Exploration Work on the areas retained in keeping with Clause 8, and will be
solely responsible for the risks and costs of such activities and thus have
complete and exclusive control thereon. This will not change maximum life of
this contract.
CLAUSE 6 - HANDING OVER INFORMATION DURING EXPLORATION
6.1 When THE ASSOCIATE so requests, ECOPETROL shall supply any information it
holds on the Contract Area. The costs of reproducing and supplying such
information shall be charged to THE ASSOCIATE.
6.2 During the Exploration Period, THE ASSOCIATE shall hand over the following
data to ECOPETROL as such becomes available and in keeping with the ECOPETROL
data supply manual: all geological/geophysical data, cores, edited magnetic
tapes, processed seismic sections and all supporting field data, magnetic and
gravimetric logs, all of this in reproducible originals; copies of geophysical
<PAGE>
reports, reproducible originals of all logs for wells drilled by THE ASSOCIATE,
including the final composite graph for each well and copies of the final
drilling report, including core sample analyses, results of production tests and
any other information relating to the drilling, study or interpretation of any
kind performed by THE ASSOCIATE for the Contract Area without any limitation.
ECOPETROL is entitled to witness any operations and verify the information
listed hereinabove doing so at any time and using any procedure it may consider
appropriate,
6.3 The parties agree that all geological, geophysical and engineering
information obtained from the Contract Area while this contract is in force, is
to be held onfidential for three (3) years following acquisition thereof.
Thereafter such information shall be released except for any interpretations
thereof made by the Parties. The released information mainly concerns seismic,
potential methods, remote sensors and geochemical data, with respective support
documents, surface and sub-surface mapping, wells reports, electric logs,
formation tests, biostratigraphic/petrophysical/fluid analyses and production
history. However, the parties agree that in each case they may exchange
information with ECOPETROL's associates and non-associates. It is understood
that what is agreed here shall not affect the requirement of providing the
Ministry of Mines and Energy with all the information it requests under current
legal resolutions and regulations. Nonetheless, it is understood and accepted
that the Parties can, at their own discretion, provide their affiliates,
consultants, contractors and financial entities with the information they
require and called for by authorities having jurisdiction on the parties and
their affiliates, as well as by norms established by any stock exchange quoting
the stock of the parties or related corporations.
CLAUSE 7 - BUDGET AND EXPLORATION SCHEDULES
Respecting the terms of this contract, THE ASSOCIATE must prepare the programs
and work schedule for exploring the Contract Area, together with a short-term
Budget (following calendar year) and estimated Budget giving an overview for the
next two (2) years. Such overview, programs, time schedules and Budgets shall be
submitted to ECOPETROL for the first time within sixty (60) calendar days
following contract signature, and thereafter Within the first ten (10) calendar
days of each year.
THE ASSOCIATE shall give ECOPETROL a quarterly technical and financial report,
listing exploratory work performed, prospects revealed by the information
acquired, the assigned Budget and exploration costs incurred up to date of the
report, commenting in each case on causes of the main variances. When ECOPETROL
so requess, THE ASSOCIATE shall provide explanations on the report doing so at
meetings that can be scheduled every six months. lnformation submitted by THE
ASSOCIATE in the reports and explanations mentioned in this clause shall under
no circumstances be understood as accepted by ECOPETROL. ECOPETROL may audit
financial information as set out in Clause 22 of Appendix B hereto (Operating
Agreement).
CLAUSE 8 - RESTITUTION OF AREAS
8.1 lf a Commercial Field has been discovered in the Contact Area by the end of
the initial three-year exploration period, or of the extensions obtained by THE
ASSOCIATE in keeping with Clause 5 (numeral 5.2), the Contract Area will be
reduced by 50%- two (2) years thereafter the area will be reduced to fifty
percent (50%) of the remaining Contract Area- and two years thereafter, such
area will be reduced to the Commercial Fields(s) that are producing or under
development plus a reserve belt two and a half kilometers (2.5) wide surrounding
each Field and this will be the only part of the Contract Area that continues to
be subject to the terms of this contract. In order to apply this clause, an
imaginary grid or net will be placed over the initial contract area and then
divided into ten rows and columns running north-south, limited by the maximum
and minimum north and east coordinates of the boundaries, and they will define
the cells on which relinquishment of areas referred to in this numeral will be
based. Each time areas are returned, the imaginary grid or net will be modified
in keeping with the new coordinates of the Contract Area.
<PAGE>
8.2 THE ASSOCIATE shall decide what areas are to be returned to ECOPETROL based
on the imaginary grid or net mentioned in the preceding numeral. To this end,
the relinquishment may be made in one or two lots, comprising one or more
adjoining cells and trying to conserve a single polygon, unless THE ASSOCIATE
shows that this is either impossible or unsuitable, in such case approval must
be obtained from ECOPETROL. Notwithstanding the requirement to relinquish aeas
referred to in Clause 8 (numeral 8.1). THE ASSOCIATE is not obliged to return
areas under development or production, including the 2.5 km. wide belt
surrounding said areas, unless development or production are suspended
continuously for over a year without just cause and for reasons attributable to
THE ASSOCIATE, in which case the areas will be returned to ECOPETROL, thus
terminating the contract for said areas of part of the area. These stipulations
are also applicable to development under the sole risk mode.
8.3 Retention Period- lf THE ASSOCIATE has discovered a Gas Field and applied
for commerciality thereof as set out in Clause 9 (numeral 9.1), he may
simultaneously ask ECOPETROL for a Retention Period, giving reasons to fully
justify this request.
8.3.1 THE ASSOCIATE must apply for the Retention Period, and ECOPETROL grant
same, prior to the date for final relinquishment of areas referred to in numeral
8.1 hereof.
8.3.2 The Retention Period may not exceed four (4) years. lf the initial term
were to be insufficient, ECOPETROL may extend same following a written and
justified application from THE ASSOCIATE, but the initial period plus any
extension may not exceed four (4) years.
CHAPTER III - EXPLOITATION
CLAUSE 9 - TERMS AND CONDITIONS
9.1 To initiate the Joint Operation hereunder, it is considered that
exploitation work starts on the date the Parties accept the existence of the
first Commercial Field or upon compliance with the provisions of Clause 9
(numeral 9.5). THE ASSOCIATE shall prove the existence of a Commercial Field by
drilling sufficient wells to reasonably define the hydrocarbon-producing area
and the commerciality of the Field. In this case, THE ASSOCIATE will notify
ECOPETROL in writing about such commercial discovery, furnishing the studies
that have led to this conclusion. ECOPETROL must accept or reject the existence
of such Commercial Field within ninety (90) calendar days from the date THE
ASSOCIATE hands over all support information and makes the tecnical
presentation. ECOPETROL may request any additional information it deems
necessary within thirty (30) days following submittal of the initial support
information.
9.2.1 Should ECOPETROL accept the existence of a Commercial Field, it shall so
advise THE ASSOCIATE within the ninety (90) day term referred to in Clause 9
(numeral 9.1) stipulating the area of the Commercial Field. Then it shall begin
to participate in the development of the Commercial Field discovered by THE
ASSOCIATE as set out in the terms of the Contract.
9.2.2 ECOPETROL shall reimburse fifty percent (50%) of the Direct Exploration
Costs incurred by THE ASSOCIATE for its own risk and account in the Contract
Area prior to the date when commerciality studies for the new commercial
discovery were submitted, in keeping with numeral 9. l.
hereof.
9.2.3 The amount of such Direct Costs shall be established in dollars of the
United States of America, the reference date being that vihen THE ASSOCIATE made
such disbursements; consequently, the costs incurred in Colombian pesos shall be
liquidated at the market representative rate for such date as certified by the
Banking Superintendency, or entity replacing same.
PARAGRAPH:
Once the amount of Direct Exploration Costs to be reimbursed in United States
<PAGE>
Dollars has been established, such will be inflation-adjusted for each year or
part thereof as of the disbursement date up to the date defined by the Ministry
of Mines & Energy as the initiation of the exploitation period, using the
internacional inflation rate for the respective year or, failing this, that for
the previous year. The international inflation rate to be used shall be the
annual percentage variation of the consumer price index for industrialized
countries, taken from "international Financial Statistics" published by the
International Monetary Fund (page S63 or replacement) or, failing this, the
publication agreed by the Parties.
9.2.4 As soon as Operator puts the Field on-stream, ECOPETROL shall reimburse
THE ASSOCIATE for Direct Explortion Costs according to Clause 9 (numeral 9.2.2)
with the amount of dollars equivalent to fifty percent (50%) of its direct share
in the total production of such Field, after deducting the royalty percentage.
For Commercial Gas Fields, ECOPETROL shall reimburse the ASSOCIATE with the
amount of dollars equivalent to one hundred percent (1 00%) of its direct share
in the total production of such Field, after deducting the royalty percentage,
doing so as soon as Operator puts the Field on-stream.
9.3 lf ECOPETROL rejects the existence of the Commercial Field referred to in
Clause 9 (numeral 9.1), it may notify THE ASSOCIATE of additional work it
considers necessary to demonstrate such existence. The cost of this work may not
exceed TWO MILLION DOLLARS (US$2,000,000) nor last for more than one (1) year,
in which case the Exploration Period for the Contract Area will automatically be
extended by the same period as that agreed by the Parties for the performance of
the additional work requested by ECOPETROL in this Clause but without prejudice
to the reduction of areas stipulated in Clause 8 (numeral 8. l).
9.4 lf, upon completion of the additional work requested in Clause 9 (numeral
9.3), ECOPETROL accepts the existence of a Commercial Field as stipulated in
Clause 9 (numeral 9.1), it will begin to participate in the development of said
field as stipulated herein, and will reimburse THE ASSOCIATE as set forth in
Clause 9 (numeral 9.2.3-9.2.4) for fifty percent (50%) of the cost of such
additional work referred to in Clause 9 (numeral 9.3) and the work carried out
will become Joint Account property.
9.5 lf ECOPETROL continues to reject the existence of a Commercial Field after
the additional work referred to in Clause 9 (numeral 9.3) has been carried out,
THE ASSOCIATE may go ahead with the work it deems necessary to exploit such
field and reimburse itself for two hundred percent (200%) of the total cost of
the work performed at its own risk and account in the respective Field and up to
fifty percent (50%) of the Drect Exploration Costs it incurred prior to
submitting commerciality studies for such Field. For the purposes of this
Clause, the reimbursement will be made with the value of Hydrocarbons produced,
less the royalties established in Clause 13, deducting production, collection,
transportation and sales costs. lf THE ASSOCIATE avails itself of the sole risk
modality, it is understood that the exploitation term begins on the date
ECOPETROL notifies it that commerciality is rejected. The dollar equivalence of
disbursements made in pesos will be calculated using the market representative
rate certified by the Banking Superintendency, or entity replacing same, for the
date THE ASSOCIATE made such disbursements. For the purposes of this clause, the
value of each barrel of Hydrocarbon produced in said Field during a calendar
month, shall be the average price per barrel received by THE ASSOCIATE for the
sale of its share in the Hydrocarbons produced in the Contract area during the
same month. The contents of the paragraph of Clause 9 (numeral 9.2.3.) shall
apply to reimbursement of Direct Exploration Costs.
Once THE ASSOCIATE has reimbursed itself with the percentage established herein,
all wells drilled, the facilities and all property acquired by THE ASSOCIATE to
exploit the field and paid as set forth in this Clause, shall become the
property of the Joint Account free of any charge whatsoever, and after ECOPETROL
agrees to participate in the development of such field.
9.6 At any time, ECOPETROL may start to participate in the operation of the
field discovered and developed by THE ASSOCIATE, subject to the latter's right
to reimburse itself for investments made at its own expense as stipulated in
<PAGE>
Clause 9 (numeral 9.5). Once THE ASSOCIATE has repaid itself, ECOPETROL shall
start to participate in the financial results of the wells developed at the
exclusive expense of THE ASSOCIATE.
9.7 When defining the boundaries of a Commercial Field, consideration will be
given to all geological/geophysical information on such fild plus that of all
wells drilled therein or related thereto.
9.8 lf THE ASSOCIATE has drilled one or more Exploration Wells pointing to the
possible existence of a Commercial Field by the end of the six-year (6)
Exploration Period referred to in Clause 5 (numeral 5.2), it may ask ECOPETROL
to extend the Exploration Period for the time necessary, but not to exceed one
(1) year, to demonstrate the existence of said Commercial Field, without
prejudice to the provisions of Clause 8.
9.9 lf THE ASSOCIATE continues performing the exploration obligations agreed
upon in Clause 5 after one or more fields have been declared commercial, it can
simultaneously exploit such Fields before the end of the Exploration Period
defined in Clause 4.26 but the 22-year Exploitation Period will run as of the
expiry date of the Exploration Period. When ECOPETROL has granted a Retention
Period for Gas Fields, the Exploitation Period for each Field will run from the
expiry date of the respective Retention Period.
9.10 lf THE ASSOCIATE shows that Exploration Wells drilled after the Field has
been declared commercial contain additional Hydrocarbon accumulations associated
to said field, it shall ask ECOPETROL to extend the area of the Commercial Field
and its commerciality, following the procedures of Clause 9 (numerals 9.1 and
9.2.1). lf ECOPETROL accepts the commerciality, it shall reimburse THE ASSOCIATE
for fifty percent (50%) of the Direct Exploration Costs exclusively related to
the extension of the Commercial Field, as set out in numerals 9.2.3 and 9.2.4.
lf ECOPETROL rejects the commerciality, THE ASSOCIATE may reimburse itself for
up to two hundred percent (200%) of the total costs of work performed for its
own risk and account in exploiting the Exploration Wells that have become
producers and up to fifty percent (50%) of the Direct Exploration Costs it
incurred solely with regard to the commerciality application. Such reimbursement
shall be made with production coming from the producing Exploration Wells, after
deducting the roalty, and following the procedure of Clause 21 (numeral 21.2)
until reaching the mentioned percentages.
CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS
10.1 The parties agree that THE ASSOCIATE is the 0perator and as such shall
control all operations and activities it deems necessary for an efficient,
technical and economic development of Hydrocarbons existing within the
Commercial Field, respecting the restrictions contained in this contract.
10.2 The Operator must follow standard industry practices in performing
development/production work, using the technical methods and systems best suited
to an economic and efficient Hydrocarbon production, and complying with
pertinent legal and regulatory provisions on this matter.
10.3 The Operator shall be considered an entity distinct from the Parties hereto
for all contract purposes, as well as for application of civil, labor and
administrative law, and with regard to its employees as set out in Clause 32.
10.4 The Operator may resign as such by giving the Parties six-months (6)
advance written notice of the effective date of such resignation. The Executive
Committee shall then appoint a new Operator pursuant to Clause 19 (numeral
19.3.2)
CLAUSE 11 - DEVELOPMENT PROGRAMS AND BUDGETS
11.1 Within three (3) months following acceptance of a Commercial Field in the
Contract Area, Operator shall present the Parties with a work program and a
Budget for the rest of the calendar year together with a proposed/development
plan, to be agreed by the Executive Committee. lf there are less than six and a
<PAGE>
half (6-112) months to run before the end of said year, Operator shall prepare
and submit the Budget and programs for the following calendar year within a term
of three (3) months.
11.1.1 Future Budgets and programs shall be submitted to the Parties in May each
year, and Operator shall send its proposal to the Parties in the first ten (10)
days of May. The Parties shall notify Operator in writing of any changes they
wish to propose, doing so within twenty (20) days of receivng the Budgets and
programs. When this occurs, Operator shall consider such proposals in preparing
the Budget and programs to be submitted for final approval by the Executive
Committee at its ordinary meeting held each July. Should the total Budget not be
approved before July, the Executive Committee shall approve those items on which
there is agreement, and the remainder shall be submitted to the Parties for
subsequent review and final decision as provided for in Clause 20.
11.1.2 The development program shall become a guide for the technical, efficient
and economic exploitation of each Field. it will describe work to be carried out
and estimated investments and expenses for the next five years, wih details of
the annual operating program and Budget for the next calendar year.
11.2 The parties may propose Budget additions or revisions to the Budget but not
more often than every three (3) months except in emergencies. The Executive
Committee shall decide on these proposed revisions or additions at a meeting to
be scheduled within thirty (30) days following submittal thereof.
11.3 The programs and Budget are intended to:
11.3.1 Determine the operations to be carried out during the following calendar
year, as well as expenditures and investments (Budget) the Operator is
authorized to undertake.
11.3.2 Maintain a medium and long-term view of development at each Field.
11.4 The terms program and Budget refer to the proposed work plan and estimated
expenditures and investments that the Operator shall carry out, such as:
11.4.1 Capital investments in production-. drilling for reservoir development,
workovers or reconditioning of wells and specific production facilities.
11.4.2 General construction and equipment: industrial and camp facilities,
transport and building equipment, drilling and production equipment. Other
construction and equipment.
11.4.3 Maintenance and operating expenses: production expenses, geological
expenses and administrative overhead for the operation.
11.4.4 Working capital needs
11.45 Contingency funds
11.5 Operator shall make all expenditures and investments and handle development
and production in keeping with the programs and Budgets referred to in Clause 11
(numeral 1 1. l), without exceeding the total annual Budget by ten percent
(10%), except when so authorized by the Parties in special cases.
11.6 The Operator may no start any project on its own initiative, nor charge the
Joint Account with non-Budgeted expenditure exceeding forty thousand United
States dollars (US$40,000), or the equivalent in Colombian currency, per project
or quarter.
11.7 The Operator is authorized to effect expenses chargeable to the Joint
Account without prior authorization from the Executive Committee when it is a
matter of taking emergency steps to safeguard persons or property of the
Parties; emergency expenses originating in fire, floods, storms or other
disasters; emergency expenses essential for the operation and maintenance of
production facilities, including keeping wells at maximum production efficiency;
emergency expenses essential to protect/safeguard material/equipment needed for
<PAGE>
operations. In such cases, the Operator shall call a special meeting of the
Executive Committee as soon as possible in order to obtain approval for
continuing with the emergency measures.
CLAUSE 12 - PRODUCTION
12.1 Whenever necessary and duly approved by the Executive Committee, Operator
shall determine the Maximum Efficiency Rate (MER) for each Commercial Field.
This Maximum Efficiency Rate (MER) shall be the maximum rate for lifting
Hydrocarbons from a reservoir in order to attain maximum final recovery of
reserves. Estimated production should be diminished as necessary to compensate
for real or anticipated operating conditions, such as wells under repair and not
producing, limited capacity of gathering lines, pumps, separators, tanks,
pipeline and other facilities.
12.2 Periodically, at least once a year and with the approval of the Executive
Committee, Operator shall determine the area capable of commercial Hydocarbon
production in each Field.
12.3 Every three (3) months, the Operator shall prepare and give each Party two
schedules, one showing production share and the other production distribution
for each one over the following six (6) months. The production forecast shall be
based on the Maximum Efficiency Rate (MER), as set forth in Clause 12 (numeral
12.1) and adjusted to the rights of each Party hereunder. The production
distribution schedule shall be based on periodic requests from each Party and in
keeping with Clause 14 (numeral 14.2), with such corrections as may be necessary
to ensure that no Party having capacity to make withdrawals will receive less
than the amount to which it is entitled under Clause 14, and subject to Clauses
21 (numeral 21.2) and 22 (numeral 22.5).
12.4 lf any Party foresees that it will be unable to receive the full capacity
of Hydrocarbons set out in the forecast furnished Operator, it shall so advise
the latter as soon as possible. lf such reduction is caused by an emergency, the
Party shall notify the Operator within twelve (1'2) hours following the
occurrence of the respective event. In consequence, the Party concerned shall
provide the Operator with a new receiving schedule based on the reduction.
12.5 Operator may use the Hydrocarbons consumed in production operations in the
Contract Area, and such shall be exempt from the royalties referred to in Clause
13 (numerals 13.1 and 13.2).
CLAUSE 13 - ROYALTIES
13.1 Liquid Hydrocarbons: During exploitation of the Contract Area, and before
distributing production among the Parties, Operator shall give ECOPETROL
royalties corresponding to twenty percent (20%) of the certified production of
liquid hydrocarbons coming from said area. ECOPETROL, for its own risk and
account, shall take the royalty production in kind from the tanks belonging to
the Joint Account.
13.2 Gaseous Hydrocarbons-. Operator shall give ECOPETROL a royalty in the form
of twenty percent (20%) of the production of gaseous Hydrocarbons reported at
standard conditios. lf such Hydrocarbons need to be treated at a gas plant, the
twenty percent (20%) royalty production shall be established as the sum of dry
gas produced at the plants plus the dry gas equivalent of liquid products
produced,considering the conversion factors set out in current legislation.
Regarding fiels exploited under the sole risk mode, THE ASSOCIATE shall give
ECOPETROL the royalty percentage of Hydrocarbons.
13.3 ECOPETROL shali use the royalty production to pay the entities legally
appointed to receive the royalties due the State on the full production of the
Commercial Field, doing so in the manner and respecting the time limits set out
in law, and the ASSOCIATE shall in no case be liable for any payments to these
entities.
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF HYDROCARBONS
<PAGE>
14.1 The Hydrocarbons produced shall be transported to the jointly-owned tanks
or to other measuring facilities agreed by the Parties, except for those used
and inevitably consumed in operations hereunder. In the absence of an agreement,
the measuring point for gaseous Hydrocarbons shall be- i) The gas line of each
separator when they are not to be treated in gas plants, or ii) at the exit of
the gas plants when such treatment is required. The Hydrocarbons shall be
measured via accepted industry standards and such measurement shall be the basis
for calculating the percentages of Clause 13. Thereafter, the remaining
Hydrocarbons belong to each Party in the proportion specified in this Contract.
14.2 PRODUCTION DISTRIBUTION
14.2.1 After deducting the royalty percentage, the remaining Hydrocarbons
produced in each Commercial Field belong to the parties thus: Fifty percent
(50%) for ECOPETROL and fifty percent (50%) for THE ASSOCIATE until cumulative
production for each Commercial Field reaches 60 million barreis of liquid
Hydrocarbons or 420 giga cubic feet of gaseous Hydrocarbons at standard
conditions, whichever occurs first (1 cubic giga foot = 1 x 10 9, cubic feet)
14.2.2 Notwithstanding the fact that ECOPETROL has clssified the Field as being
commercial, when production at each Commercial Field (after deducting the
royalty percentage) exceeds the limits of 14.2. 1, distribution among the
Parties will use the R factor as set out hereunder.
14.2.2.1 lf liquid Hydrocarbons first reach the limit set out in numeral 14.2.1
hereof, the following table shall apply:
<TABLE>
<CAPTION>
R FACTOR PRODUCTION DISTRIBUTION AFTER ROYALTIES (%)
ASSOCIATE ECOPETROL
<S> <C> <C>
0.0 - 1.0 50 50
1.0 - 2.0 50/R 100-50/R
2.0 or more 25 75
</TABLE>
14.2.2.2 lf gaseous Hydrocarbons first reach the limit set out in numeral 14.2.1
hereof, the following table shall apply-
<TABLE>
<CAPTION>
R FACTOR PRODUCTION DISTRIBUTION AFTER ROYALTIES
ASSOCIATE ECOPETROL
<S> <C> <C>
0.0 - 1.0 50 50
1.0 - 2.0 50/R 100-50/R
2.0 or more 25 75
</TABLE>
14.2.3 The R factor is defined as the ratio between accrued income and accrued
disbursements made by THE ASSOCIATE for each Commercial Field, as follows:
IA
R = -------------------
ID+A-B+GO
Where:
1A (The Associates Accrued lncome)- is the valuation of income accrued by THE
ASSOCIATE for hydrocarbons produced, after royalties, at the reference price
agreed by the Parties, excluding hydrocarbons reinjected in Contract Area
Fields, and those consumed in the operation and burnt gas.
The parties shall jointly establish the average reference price for
hydrocarbons.
Accrued lncome will be based on the Monthly lncome which, in turn, will be
obtained from multiplying the average monthly reference price by the monthly
production in keeping with respective form issued by the Ministry of Mines &
Energy.
ID (Accrued Developmentlnvestment)- ls fifty percent (50%) of the accrued
development investment approved by the Association Executive Committee. Accrued
Development lnvestment made prior to the exploitation start-up date of the Field
<PAGE>
as defined by the Ministry of Mines and Energy, shall be adjusted to such date
in the same way as Direct Exploration Costs in the paragraph of Clause 9
(numeral 9.2.3).
A. Direct Exploration Costs incurred by THE ASSOCIATE according to Clause hereof
and adjusted as set out in the paragraph of 9.2.3 .
B. Accrued reimbursement of the afore-mentioned Direct Exploration Costs, in
keeping with Clause 9 hereof.
GO (Accrued Operating Expenses)-. accrued operating expenses approved by the
Association Executive Committee, in the proportion corresponding to the
ASSOCIATE plus the latter's accrued transportation costs. Transportation costs
are investment and operating expenses for transporting hydrocarbons produced in
the Commercial Fields within the Contract Area up to the exportation port or the
place agreed for taking the price to be used in the 1A calculation. Such
transportation costs will be jointly determined by the parties once the Fields
that ECOPETROL has declared to be commercial initiate the exploitation stage.
Operating expenses include special levies or similar items directly applied to
Hydrocarbon exploitation in the Contract Area.
All values included in the R factor calculation following the exploitation
start-up date established by the Ministry of Mines & Energy will be taken in
current dollars.
To this end, expenses in pesos shall be converted to dollars at the Market
Representative Rate certified by the Banking Superintendency, or entity
replacing same, in force on the date the respective disbursements were made.
14.2.4 CALCULATION OF THE R FACTOR: Production distribution based on the R
factor will be applied as of the first day of the third calendar month following
that when the accrued production in the Contract Area reached 60 million barreis
of liquid Hydrocarbons or 420 giga cubic fet of gaseous Hydrocarbons at
standard conditions, in keeping with 14.2.1
The R Factor for calculation each Commercial Field will be based on the
accounting closing for the calendar month when accrued production reached 60
million barrels of liquid Hydrocarbons or 420 giga cubic feet of gaseous
Hydrocarbons at standard conditions, in keeping with14.2.1
The resulting distribution will be applied until 30th June of the following
year. Thereafter, R factor production distribution will be made for one-year
periods (lst July to 30th June) for liquidation thereof based on accrued value
at 31st December of the previous year as shown in the respective accounting
closing.
14.3 In addition to the jointly owned tanks and other facilities, each Party may
build its own production facilities in the Contract Area for its exclusive use
and in keeping with legal regulations. When Hydrocarbons belonging to each Party
are transported and delivered to pipelines and depots that are not jointly
owned, this will be for the risk and cost of the Party receiving such
Hydrocarbons.;
14.4 When production sites are not connected to a pipeline, the Parties may
agree to install pipelines up to a point connecting to the pipeline or where the
Hydrocarbons can be sold, this work will be charged to the Joint Account. lf the
Parties agree to build such pipelines, they will enter into the contracts they
deem suitable for this purpose and appoint the Operator pursuant to current
legislation.
14.5 Each Party shall own the Hydrocarbons produced and stored as a result of
the operation hereunder and made available to it pursuant to the provisions of
this contract. Likewise, each Party must assume the expense of receiving such
Hydrocarbons in kind or selling or disposing of them separately, as provided for
in Clause 14 (numeral 14.3).
<PAGE>
14.6 Should one Party, for any reason, be unable to separately dispose all or
part of the Hydrocarbons to which it is entitled hereunder, or withdraw same
from the Joint Account tanks, the following stipulations shall pply:
14.6.1 lf ECOPETROL is the Party that is unable to fully or partially withdraw
its quota of Hydrocarbons (share plus royalty) pursuant to Clause 12 (numeral
12.3), Operator may continue producing the field and deliver to THE ASSOCIATE
not oniy the quota to which the latter is entitled based on a hundred percent
(100%) MER operation, but also all the Hydrocarbons that THE ASSOCIATE chooses
and is able to withdraw up to a limit of one hundred percent (100%) of the MER,
crediting ECOPETROL for subsequent delivery of the quota it did not withdraw.
However, regarding the volumes not taken that correspond royalties for the
month, ECOPETROL may ask THE ASSOCIATE to pay for the difference between the
Hydrocarbon volume withdrawn and the volumes corresponding to royalties as set
out in Clause 13.1 and 13.2, doing so in United States dollars. it is understood
that any Hydrocarbons withdrawn by ECOPETROL shall first be used for payment in
kind of the royalties, and thereafter, additional withdrawals will be credited
to its share as set out in Clause 14 (numeral 14.2).
14.6.2 lf THE ASSOCIATE is unable to fully or partially withdraw its quota under
Clause 12 (numeral 12.3), the Operator shall deliver ECOPETROL not only its
share based on a hundred percent (100%) MER operation, but all those
Hydrocarbons that ECOPETROL is able to receive up to a limit of one hundred
percent (100%) of the MER, crediting THE ASSOCIATE for subsequent delivery of
the quota which it was unable to withdraw.
14.7 When both Parties are able to receive the Hydrocarbons allocated under
Clause 12. (numeral 12.3), the Operator shall proceed as follows. When so
requested by the Party previously unable to receive its quota, it shall deliver
such Party its share in the operation plus at least ten percent (10%) a month of
the monthly production corresponding to the other Party and by mutual agreement
up to one hundred percent (100%) of the non-received quota, until such time when
the total amounts credited to the non-receiving party are offset.
1.8 Subject to legal provisions on this matter, each Party is free at all times
to sell or export is share of Hydrocarbons, in keeping with this contract, or to
dispose thereof in any way.
CLAUSE 15 - USE OF ASSOCIATE NATURAL GAS
When one or more fields with Associate Natural Gas are discovered, Operator
shall submit a project for using this gas for the benefit of the Joint Account,
this must be done within two (2) years following the starting date for field
exploitation as established by the Ministry of Mines and Energy. The Executive
Committee shali approve the project and establish a schedule for performance
thereof, lf Operator fails to submit a project within the two-year period, or
fails to perform same within the time limits established by the Executive
Committee, ECOPETROL may take all the Associate Natural Gas coming from the
Reservoirs being exploited and not needed for efficient field production,
without having to pay for same.
CLAUSE 16 - UNIFICATION
When an economically exploitable reservoir extends continuously into another
area or areas located outside the Contract Area, the Operator, ECOPETROL and
other interested parties should agree on a unified development program. Such
program should respect engineering techniques for Hydrocarbon production and be
approved by the Ministry of Mines and Energy.
CLAUSE 17 - INFORMATION SUPPLY AND INSPECTION DURING EXPLOITATION
17.1 The Operator shall give the Parties reproducible originals (sepias) and
copies of the electric, radioactive and sonic logs for the wells drilled,
histories, core analyses, cores, production tests, reservoir studies and other
pertinent technical data, as well as any routine reports made or received in
<PAGE>
connection with the operations and activities carried out in the Contract Area,
doing so as these become available.
17.2 Each Party shall be entitled to inspect the wells and facilities in the
Contract Area and related activities, doing so at its own cost, expense and risk
and through authorized representatives. Such representative shall have the
right to examine cores, samples, maps, drilling logs, surveys, books and any
other source of information connected with the performance of this contract.
17.3 Operator shall prepare all reports called for by the Colombian government
and hand them over to ECOPETROL so the latter may comply with the provisions of
Clause 29,
17.4 lnformation and data connected with exploitation operations shall be
treated as confidential, under the same terms as those of Clause 6 (numeral 6.3)
hereof.
CHAPTER IV - EXECUTIVE COMMITTEE
CLAUSE 18 - CONSTITUTION
18.1 Within thirty (30) days following acceptance of the first Commercial Field,
each Party should appoint a representative and his first and second alternates
to the Executive Committee, and notify the other Party in writing of the names
and addresses of such persons. The Parties may change the representative or
alternates at any time, but should so notify the other Party in writing. The
vote or decision of each Party representative is binding on said Party. lf the
main representative of either Party is unable to attend a Committee meeting, he
will be replaced by the first or second alternate, in that order, and such shall
have the same authority as the principal.
18.2 The Executive Committee will hold ordinary meetings in March, July and
November to review the development program being carried out by Operator, the
development plan and other immediate plans. In the July meeting every year, the
Operator shall submit an annual operating program and the investment and
expenditure Budget for the next calendar year.
18.3 The Parties and Operator may ask that special Executive Committee meetings
be convened to study specific operating conditions. The representative of the
interested party shall give ten (10) calendar days advance written notice of the
data and agenda for such meeting. The meeting may address any matter not
included in the agenda, provided the Party representatives agree.
18.4 For all matters discussed in the Executive ommittee, the Party
representatives shall have a vote equal to the percentage held by the respective
party in the Joint Operation. Any decision or resolution taken by the Executive
Committee will only be valid if approved by over fifty percent (50%) of the
total lnterest. In keeping with the mentioned procedure, decisions taken by the
Executive Committee shall be compulsory and final for the Parties and for
Operator.
CLAUSE 19 - FUNCTIONS
19.1 The Party representatives shall constitute the Executive Committee which
has full authority and responsibility to establish and adopt production,
development and operations schedules and Budgets for this contract. Operator
shall send a representative to Executive Committee meetings.
19.2 The Executive Committee shall appoint a Secretary to keep complete and
detailed records and minutes of all matters discussed and decisions taken by the
Committee. Party representatives should sign and approve the Minutes within the
ten (10) business days following adjournment of the meeting, otherwise they will
not be valid. Minutes should be delivered to the Parties as soon as possible.
19.3 The Executive Committee has the following duties, among others-
19.3.1 Adopt its own regulations
<PAGE>
19.3.2 Appoint the Operator in the event of resignation or removal, and issue
regulations to be met by Operator when such is a third party, setting out all
causes for removal.
19.3.3 Appoint an External Auditor for the Joint Account
19.3.4 Approve or reject the annual operations program and expenditure Budget,
any modification or revision thereof, and approve extraordinary expenses.
19.3.5 Establish expenditure policies and norms
19.3.6 Approve or reject expenditure recommended by Operator (not included in
the approved Budget) when such expenditure exceeds forty thousand dollars of the
United States of America (US$40,000) or the equivalent in Colombian currency.
19.3.7 Advise Operator and decide on matters referred to the Committee.
19.3.8 Create such sub-committees as it deems necessary, settng out their
duties which will be performed under the supervision of the Committee.
19.3.9 Define the type and frequency of drilling, operation and production
reports and any other information that Operator must furnish the Parties
chargeable to the Joint Account.
19.3.10 Supervise handling of the Joint Account
19.3.11 Authorize the Operator to enter into contracts on behalf of the Joint
Operation when the amount thereof exceeds forty thousand dollars of the United
States of America (US$40,000) or the equivalent in Colombian currency.
19.3.12 In general, assume all functions authorized hereunder and not assigned
to another entity or person through a specific clause hereof, or legal or
regulatory provision.
CLAUSE 20 - DECISION WHEN THERE IS DISAGREEMENT IN THE OPERATION
20.1 When the Party representatives cannot agree on a Joint Operation project
that requires approval from the Executive Committee, as set out hereunder, such
matter shall be referred directly to the highest ranking executive of each Party
who is resident in Colombia, in order that they may reach a joint decision. lf
the Parties reach an agreement or decision on the matter in question within
sixty (60) calendar days after such referral, they shall so notify the Executive
Committee Secretary who should call a meeting within the fifteen (15) calendar
days following receipt of the notice and committee members must ratify the
agreement or decision in said meeting.
20.2 lf the Parties fail to reach agreement within the sixty (60) calendar days
following the consultation, operations may go ahead pursuant to Clause 21.
CLAUSE 21 - SOLE RISK OPERATIONS
21.1 lf, at any time, one Party wishes to drill an Exploitation Well that has
not been approved in the operating schedule, it shall so notify the other Party
at least thirty (30) calendar days prior to the next meeting of the Executive
Committee, together with data on location, drilling recommendation, depth and
estimated costs. The Operator shall include this proposal in the Agenda for the
next cmmittee meeting. lf the Committee approves the proposal, said well shall
be drilled for the Joint Account; otherwise the Party wishing to drill the well,
hereinafter the participating Party, shall be entitled to drill, complete,
produce or abandon such well at its own risk and for its account. The Party not
wishing to participate in the afore-mentioned operation shall be referred to as
nonparticipating Party. The participating Party should spud the well within one
hundred eighty (180) days following rejection by the Executive Committee. lf
drilling does not start within this period, it must be re-submitted to the
Executive Committee. When requested by the participating Party, Operator shall
drill the afore-mentioned well for the risk and account of said Party, provided
<PAGE>
Operator considers that such operation will not interfere with normal Field
operations, and that it has received the sums it considers necessary from the
participating Party. lf Operator is unable to drill the mentioned well, the
participating Party may drill it directly or via a competent service company
and, in such case, the participating Party will be responsible for the
operation, without interfering in normal Field operations.
21.2 lf the well referred to in Clause 21 (numeral 21.1) is completed as a
producer, it shall be administered by Operator and its production, after
deducting the royalty referred to in Clause 13, will belong to the participating
Party. This Party will assume all operating costs for the well until net
production value, after deducting costs of production, gathering, storage,
transport and similar, and sales costs, reaches two hundred percent (200%) of
drilling and completion costs. Thereafter, and for all contract purposes, the
well shall belong to the Joint Account as if it had been drilled with the
approval of the Executive Committee and for the account of the Parties. For
purposes of this Clause, the value of each barrel of Hydrocarbon produced in the
well during a calendar month and prior to deducting the afore-metioned costs,
shall be the average price per barrel received by the participating Party for
sales of its share of Hydrocarbons produced in the Contract Area during the same
month.
21.3 lf one Party at any time wishes to recondition or deepen a well to
Production Targets, or plug a dry hole or a non-commercial producer drilled for
the Joint Account, and such operations have not been included in the program
approved by the Executive Committee, such Party shall notify the other Party of
its intention to recondition, deepen or plug said well. lf equipment is not
available at the location, the procedure of Clause 21 (numerals 21.1 and 21.2)
shall apply. lf suitable equipment is available at the well site, the Party
wishing to carry out such operation shall notify the other Party which must
reply in a period of forty-eight (48) hours following receipt of such notice, if
no reply is received in this lapse, it shall be understood that the operation is
performed for the risk and account of the Joint Account. lf the proposed work is
performed for the sole risk and account of the participating Party, the well
shall be administered in keeping with Clause 21 (numeral 21.2).
21.4 lf, at any time, one Party wishes to build new facilities to extract liquid
from the gaseous hydrocarbons and to transport/export Hydrocarbon production,
these will be referred to as additional facilities and such Party shall notify
the other in writing as follows:
21.4.1 General description, design, specifications and estimated costs of the
additional facilities.
21.4.2 Planned capacity
21.4.3 Approximate date of construction start-up and duration thereof. Within
ninety (90) days counted from notification, the other Party shall give written
notice of its decision to participate in such additional facilities or not. lf
it does not participate, or fails to reply to the participating Party,
hereinafter the building Party, the latter may proceed with the additional
installation and order the Operator to buiid/operate/maintain same for the sole
riskand account of the building Party, without hindering normal Joint
Operations. The building Party may negotiate with the other Party on using these
facilities for the Joint Operation. While the facilities are operated for the
risk and account of the 'building Party, the Operator shall charge the latter
with all operating/maintenance costs therefor, doing so in keeping with
generally accepted accounting principles.
CHAPTER V - JOINT ACCOUNT
CLAUSE 22 - MANAGEMENT
22.1 Subject to other provisions set out herein, Exploration expenses shall be
for the risk and account of THE ASSOCIATE.
<PAGE>
22.2 Once the Parties accept the existence of a Commercial Field, and subject to
the provisions of Clauses 5 (numerals 5.2) and 13 (numerals 13.1 and 13.2), the
rights or lnterest in Contract Area Operation shall be owned thus: ECOPETROL
fifty percent (50%) and THE ASSOCIATE fifty percent (50%). Thereafter, all
expenses, payments, investments, costs and liabilities made and contracted for
operations hereunder and Direct Exploration Costs made by the ASSOCIATE prior to
acceptance of each Commercial Field and extensions thereto, in keeping with
Clause 9 (numeral 9.10), shall be charged to the Joint Account. Except as set
out in Clauses 14 (numeral 14.3) and 21, all assets acquired or used thereafter
for operating the Commercial Field shall be owned and paid for by the Parties as
set out in this clause.
22.3 The Parties shall pay Operator their share of budget requirements, doing so
in the currency in which expenditure is to be disbursed, that is Colombian pesos
or United States dollars as called for by Operator in keeping with programs and
Budgets approved by the Executive Committee. This payment shall be made in the
first five (5) days of each month and at the bank chosen by Operator. When THE
ASSOCIATE lacks sufficient Colombian pesos to cover its pesos share, ECOPETROL
may supply these funds and have them credited to its dollar obligation, using
the market representative rate certified by the Banking Sperintendency, or the
entity acting in this capacity, on the day that ECOPETROL should make the
respective payment, provided such transaction is legally acceptable.
22.4 The Operator shall give the Parties a monthly statement showing the funds
advanced, expenses incurred, outstanding liabilities and a report on all debits
and credits made to the Joint Account, this report should follow Appendix B
hereto. The statement and report should be submitted monthly within the fifteen
(1 5) calendar days following the end of each month. lf the payments mentioned
under Clause 22 (numeral 22.3) are not made within stipulated term and Operator
chooses to pay same, the delinquent Party shall pay commercial interest in the
same currency for the time of such delay.
22.5 lf one Party fails to pay the Joint Account on the due date, it shall be
considered thereafter as the delinquent Party and the other as the Prompt party.
lf the Prompt party were to pay both its own share and that of the delinquent
Party, after sixty (60) days of delay, it shall be shall be entitled to receive
from Operator the full share of the delinquent Party in the Contract Area
(excluding royalty percentage). This will continue until production provides the
prompt Party with a net income from sales equal to the sum not paid by the
delinquent Party, plus annual interest at the Commercial rate as of the sixtieth
(60) day following the delinquency date. Net income is understood as the
difference between the sales price of the Hydrocarbons taken by the prompt
Party, less the cost of transport, storage, loading and other reasonable
expenses disbursed by such Party in selling such production. The prompt Party
may exercise this right at any time after thirty (30) calendar days of having
notified the delinquent Party in writing of its intention to take part or all
such Party's production.
22.6.1 All Direct Expenses of the Joint Operation will be charged to the Parties
in the same proportion as for production distribution after royalties.
22.6.2 lndirect Expense will be charged to the Parties in the same proportion
as for Direct Expenses set out in 22.6.1 hereof. These expenses shall be the
result of applying the equation a+m (X-b) to the total annual amount for
investment and direct expenditures (excluding technical and administrative
overhead).
Where-
x is total annual investments and expenditures (pound)(a", "m", and "b" are
constants whose values are set out in the table hereunder depending on the
amount of annual investment and expenditures
<TABLE>
<CAPTION>
INVESTMENTS AND EXPENDITURE - CONSTANT VALUES
X (US$) "A"(US$) M(FRACT) "B"$ (US$)
<S> <C> <C> <C> <C> <C>
1 0 25,000,000 0 0.10 0
2 25,000,001 50,000,000 2,500,000 0.08 25,000,000
3 50,000,001 100,000,000 4,500,000 0.07 50,000,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
4 100,000,001 200,000,000 8,000,000 0.06 100,000,000
5 200,000,001 300,000,000 14,000,000 0.04 200,000,000
6 300,000,001 400,000,000 18,000,000 0.02 300,000,000
7 400,000,001 onwards 20,000,000 0.01 400,000,000
</TABLE>
The equation will be applied once a year in each case, applying the constants
that correspond to the total sum of annual investments and expenditure.
22.7 Either Party may review or question the monthly statements of account
referred to in Clause 22 (numeral 22.4) from the time they are received up to
two years following the end of the respective calendar year, clearly indicating
the corrected or questioned items and the reasons therefor. Any account that has
not been corrected or questioned in this period, shall be considered as final
and correct.
22.8 The Operator shall keep accounting books, vouchers and reports for the
Joint Account, in Colombian pesos and according to Colombian law. Any credit or
debit to the Joint Account shall follow the accounting procedure set out in
Appendix B which is a part hereof. In the event of any discrepancy between said
accounting procedure and te terms of the contract, the latter shall prevail.
22.9 Operator may sell material or equipment during the first twenty (20) years
of the Exploitation Period, or the first twenty eight (28) years in the case of
a Gas Field, crediting the proceeds to the Joint Account when the amount does
not exceed five thousand dollars of the United States of America (US$5,000) or
the equivalent in Colombian currency. In any calendar year, operations of this
type may not exceed fifty thousand dollars of the United States of America
(US$50,000) or the equivalent in Colombian currency. The Executive Committee
must approve sales of real estate or those exceeding the afore-mentioned
amounts. These materials or equipment shall be sold at a reasonable price
considering their condition.
22.10 All machinery, equipment or other assets or chattels purchased by Operator
for contract performance and charged to the Joint Account shall belong to the
Parties in equal shares. However, if one Party decides to terminate its interest
in the contract during the first seventeen (17) years of the Exploitation
Period, except as set out in Clause 25th, said Party must sell all or part of
its share in said items to the other Party at a reasonable commercial price or
at book value, whichever is lower. lf the other Party is not interested in
purchasing them within ninety (90) days following the formal sales offer, the
Withdrawing Party shall be entitled to assign its interest in said machinery,
equipment, and items to a third party. lf THE ASSOCIATE wishes to withdraw after
seventeen (17) years of the Production Period have elapsed, its rights in the
Joint Operation shall pass to ECOPETROL free of charge, once the latter has
accepted.
CHAPTER VI - CONTRACT DURATION
CLAUSE 23 - MAXIMUM DURATION
This contract shall last for a maximum period of twenty eight (28) years running
from the Effective Date and broken down thus- up to six (6) years for the
Exploration Period in keeping with Clause 5 and subject to Clause 9 (numerals
9. and 9.8); and twenty-two years for the Exploitation Period counted from the
termination date of the Exploration Period. it is understood that when the
Exploration Period is extended as provided for in this contract, this shall
never signify an extension to the total twenty-eight (28) year term, except as
stipulated in paragraph 1 hereunder.
PARAGRAPH 1: The Exploitation Period for Gas Fields discovered in the Contract
Area shall have a maximum duration of thirty (30) years counted from the expiry
date of the Exploration Period, or of the Retention Period. In any case, the
total contract term for such Fields cannot exceed forty (40) years counted from
the Effective Date.
PARAGRAPH 2: Notwithstanding the above, at least five (5) years prior to the
expiry of the Exploitation Period for each Field, ECOPETROL and THE ASSOCIATE
<PAGE>
will study conditions for continuing exploitation beyond the term stipulated in
this Clause. lf the Parties agree to continue with such exploitation, they will
define the terms and conditions therefor.
CLAUSE 24 - TERMINATION
This contract shall terminate in the following cases-.
24.1 Upon expiry of the Exploration Period if THE ASSOCIATE has not discovered a
Commercial Field, except as set out in Clauses 9 (numerals 9.5 and 9.8) and 34.
24.2 Upon expiry of contract duration, as stipulated in Clause 23.
24.3 At any date when THE ASSOCIATE so -wishes and provided it has met its
obligations stipulated in Clause 5th, and al,l others contracted hereunder.
24.4 For the special causes set out in Clause 25th.
CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION
25.1 ECOPETROL may unilaterally declare this contract terminated at any time
prior to expiry of the period agreed to in Clause 23, in the following cases.
25.1.1 Death or dissolution of THE ASSOCIATE or its assignees.
25.1.2 lf THE ASSOCIATE or its assignees were to transfer this contract,
partially, without giving compliance to the provisions of Clause 27.
25.1.3 For financial incapacity of THE ASSOCIATE and its assignees which shall
b assumed when bankruptcy proceedings are filed.
25.1,4 When THE ASSOCIATE defaults on its obligations contracted under this
contract.
Upon expiry of each period defined for exploratory work, THE ASSOCIATE shall
submit a written report showing performance of the obligations for the
respective period. lf such have not been performed, THE ASSOCIATE shall be given
sixty (60) calendar days to diligently perform same in keeping with good
petroleum practices. lf such period is insufficient, the Parties may mutually
agree to establish a longer period for performance. lf the agreed work has still
not been performed at the end of this new extension, there will be default and
consequently ECOPETROL may proceed as set out in clause 25.3.
25.2 When unilateral termination is declared, the rights of THE ASSOCIATE set
out in this contract will lapse, both as interested Party and as Operator, if at
such time the ASSOCIATE is acting in both capacities.
25.3 ECOPETROL may oniy declare unilateral termination of this contract when it
has given the ASSOCIATE or its assignees sixty (60) calendar days advance
written notice thereof, clearing stating the reasons for such decision, and when
THE ASSOCIATE has failed to provide ECOPETROL with satisfactory explanations or
to correct the default in contract performance. This does prevent THE ASSOCIATE
from filing any appeal it considers to be in order.
CLAUSE 26 - OBLIGATIONS IN EVENT OF TERMINATION
26.1 When the contract is terminated under Clause 24th during the Exploration,
Retention or Exploitation Periods, THE ASSOCIATE shall hand over the buildings,
pipelines, transfer lines and other movable items belonging to the Joint Account
(located in the Contract Area), leaving any producing wells in production, and
all of this will pass to ECOPETROL free-of-charge together with the
rights-of-way and assets acquired for the contract, even though these may be
located outside the Contract Area.
26.2 lf this contract is terminated for any reason after the first seventeen
<PAGE>
(17) years of the Poduction Period, all interest of THE ASSOCIATE in the
machinery, equipment or other assets or movables used or purchased by THE
ASSOCIATE or the OPERATOR for contract performance, shall pass to ECOPETROL
free-of-charge.
26.3 lf this contract terminates in the first seventeen (17) years of the
Exploitation Period, the terms of Clause 22 (numeral 22. 1 0) shall apply.
26.4 lf this contract is terminated unilaterally at any time, all chattels and
real estate acquired exclusively for the Joint Account shall pass to ECOPETROL
free of charge.
26.5 Upon contract termination at any time and for any reason, the Parties
commit to give satisfactory compliance to their legal obligations both among
themselves and with third parties, as well as those contracted hereunder.
CHAPTER VII - MISCELLANEOUS PROVISIONS
CLAUSE 27 - ASSIGNMENT RIGHTS
27.1 THE ASSOCIATE is entitled to fully or partially cede or transfer its
rights, interests, and obligations in the Association Contract to another
person, company or group, with the consent of the Minister of Mines & Energy and
the President of ECOPETROL.
Consequently, THE ASSOCIATE must notify the Ministry of Mines & Energy and the
President of ECOPETROL via a certified document of any project that implies
total/partial assignment or transfer of its interest, rights and obligations
hereunder, indicating essential points of the transaction such as possible
assignee, price, interest, rights and obligations to be assigned, scope of the
operation etc. The Minister of Mines & Energy and President of the Empresa
Colombiana de Petroleos - ECOPETROL shall have thirty (30) business days to
exercise their discretionary powers and appraise the possible assignees, and
subsequently take a decision without being obliged to give reasons therefor. In
any case, the criterion of the Minister of Mines & Energy shall prevail.
27.2 lf the ASSOCIATE has not received a reply thirty (30) business after
submitting the application to the Minister of Mines & Energy, it will be
understood or all purposes that such has been approved.
27.3 Assignments made during the Exploration Period among companies legally
established in Colombia shall not be subject to the above mentioned procedure,
they shall be formalized by written authorization from ECOPETROL and signing the
respective document.
27.4 Any change in the contractual relations between THE ASSOCIATE and ECOPETROL
resulting from direct, total or partial transactions of the interest, quotas or
stock of the former must also be approved by the Minister of Mines and Energy
and President of ECOPETROL.
27.5 However, such changes shall not require authorization from the Minister of
Mines and Energy and Ecopetrol in the following cases:
27.5.1 When the transactions are made in an open stock exchange.
27.5.2 When the transfer/cession is the result of matters beyond the control of
the ASSOCIATE or the companies that control or direct same, such as governmental
decisions, judicial sentences, division and award of assets and auctions.
When the negotiations take place between companies that control or direct THE
ASSOCIATE, or their subsidiaries or affiliates, or between companies making up a
single economic group, it suffices to notify the Minister of Mines & Energy and
ECOPETROL of such assignment or cession in a timely way.
27.6 Except for the above cases, any cession, transfer, negotiation, transaction
or operation referred to in this Clause that is made without approval or consent
<PAGE>
of the Minister of Mines & Energy and the President of ECOPETROL, when calied
for, shali give rise to the application of Clause 25th of the Association
Contract.
27.7 lf the operations carried out under this Clause give rise to taxes under
Colombian law, such shall be paid.
CLAUSE 28 - DISAGREEMENT
28.1 Whenever there is a discrepancy or contradiction in interpreting the
clauses hereunder as compared to those of Appendix B known as the Operating
Agreement, the former shall prevail.
28.2 Disagreements of a legal nature arising among the Parties with regard to
contrct interpretation and performance and that cannot be resolved in a
friendly way, shall be referred to the decision of the jurisdictional branch of
Colombian public power.
28.3 Any difference of a technical nature arising among the parties with regard
to contract interpretation and performance and that cannot be resolved in a
friendly way shall be referred to the final decision of experts appointed thus-
one by each Party and a third chosen by the first two. lf the latter are unable
to reach agreement on such third expert, either Party may ask the Board of
Directors of the Colombian Society of Engineers - SCI - having its head office
in Santafe de Bogota to appoint same.
28.4 Any difference of an accounting nature arising among the parties with
regard to contract interpretation and performance and that cannot be resolved in
a friendiy way shali be referred to the final decision of experts who shouid be
public accountants appointed thus: one by each Party and a third chosen by the
first two. lf the latter are unable to reach agreement on such third expert,
either Party may ask the Central Board of Accountants of Bogota to appoint same.
28.5 Both Parties declare that the decision of the experts shall have the force
of a settlement among themselves, and consequently shall be final.
28.6 lf the Parties fail to agree on whether the controversy is of a legal,
technical or accounting nature, such shall be considered legal and subject to
Clause 28th (numeral 28.2).
CLAUSE 29 - LEGAL REPRESENTATION
Without impairing the legal rights of the ASSOCIATE as set out in law or in this
Contract, ECOPETROL shall represent the Parties Wth Colombian authorities in
matters regarding the development of the Contract Area, whenever such is called
for, furnishing government offices and entities with all information and reports
they may legally require. Operator must prepare the respective reports and hand
them over to ECOPETROL. Any expenses incurred by ECOPETROL to attend matters
referred to in this Clause shall be charged to the oint Account. When such
expenses exceed five thousand dollars of the United States of America (US$5,000)
or the equivalent in Colombian currency, the Operator must first approve same.
Regarding any relations with third parties, the Parties represent that neither
the provisions of this or any other Clause in the contract, implies granting a
general power-of-attorney, nor that the Parties have set up a civil or
commercial association or any other relationship whereby either Party may be
held jointly liable for the acts or failure to act of the other Party, or have
authority or mandate to commit the other Party with regard to any obligation.
This contract refers to operations within the Republic of Colombia and while
ECOPETROL is an industrial and commercial company belonging to the Colombian
State, the Parties agree that THE ASSOCIATE, if such were the case, may choose
to be excluded from the provisions of sub-chapter K entitled Partners and
Partnerships of the Internal lncome Code of the United States of America. The
ASSOCIATE may make such choice in a suitable way.
CLAUSE 30 - RESPONSIBILITIES
30.1 The Operator shall perform operations hereunder in a manner that is
<PAGE>
difigent, responsible, efficient, economically and technically sound and in
keeping with internationally accepted industry practices for this type of
operation, it being understood that at no time shall it be liable for errors of
judgment, or loss or damage that is not directly attributable to it.
30.2 Liabilities contracted by ECOPETROL and THE ASSOCIATE hereunder with third
parties shall not be joint, therefore each Party is individually liable for its
share in the expenses, investments and obligations resulting therefrom.
30.3 Operator alone shall be liable with third parties for expenses incurred and
contracts entered into for amounts exceeding forty thousand United States
dollars (US$40,000) or the equivalent in Colombian currency when such have not
been duiy authorized by the Executive Committee, except as ruled in Clause 1 1
(numeral 11.7) nd therefore it shall assume the full cost thereof. When the
Executive Committee accepts such expenditure, it will pay Operator for the work,
study or purchase in keeping with the guidelines it has set out in this respect.
lf the Executive Committee rejects the expense or asset, Operator if possible
should withdraw same and reimburse the partners for any expense incurred in such
withdrawal. When Operator is unable or refuses to withdraw the assets, the
resulting equity increase or profit from such expenditure or contract shall
belong to the Parties in proportion to their share in the Operation.
30.4 ECOLOGICAL CONTROL. In performing work hereunder, THE ASSOCIATE should
comply with the provisions of the National Code for Renewable Natural Resources
and Environmental Protection and other legal provisions on this matter. THE
ASSOCIATE undertakes to carry out a permanent prevention plan to guarantee
conservation and restoration of natural resources within the zones where it
carries out Exploration, development and transport hereunder.
THE ASSOCIATE should make these plans and programs known to the communities and
to national and regional entities involved in this matter. Likewise, specific
contingency plans should be established to deal with emergencies and take
pertinent remedial action. To this end, THE ASSOCIATE should coordinate plans
and action with the authorized entities.
THE ASSOCIATE must prepare the respective Budgets and programs as set out in the
pertinent clauses of this contract.
All costs incurred shall be assumed by THE ASSOCIATE in the Exploration Period
and in sole risk operations during the Exploitation Period. During the
Exploitation Period these costs will be charged to the Joint Account and shared
by both Parties.
CLAUSE 31 - TAXES, LEVIES AND OTHERS
Taxes and levies related to Hydrocarbon production, caused after the Joint
Account has been set up but before the Parties receive their production share,
shall be charged to the Joint Account. Each Party shall be exclusively liable
for its ow taxes on income, capital and similar.
CLAUSE 32 - PERSONAL
32.1 When THE ASSOCIATE is Operator, it should consult ECOPETROL before
appointing the Manager for Operator.
32.2 According to the terms hereof, and subject to norms to be established,
Operator shall be free to appoint the personnel needed for operations hereunder,
and may fix salary, duties, categories and conditions thereof. Operator shall be
diligent in training Colombian personnel needed to replace the foreign personnel
that it considers necessary for operations hereunder. In any case, Operator
shall comply with legal provisions on the proportion of local and foreign
personnel.
32.3 TRANSFER OF TECHNOLOGY- THE ASSOCIATE commits to assume the cost of a
program to train ECOPETROL professionals in areas related to contract
performance.
<PAGE>
In the Exploration Period, this obligation could be met by training in: geology,
geophysics and related areas, reserve appraisal, reservoir characterization,
drilling and production, among others. Supervised training should take place
throughout the initial exploration period and its extension by integrating the
ECOPETROL professionals to the work group THE ASSOCIATE sets up for either the
Contract Area or other similar activities.
lf THE ASSOCIATE wishes to resign as set out in Clause 5, it must have first
given compliance to these training programs.
The Association Executive Committee shall establish the scope, duration, place,
participants, conditions and other aspects of training during the Exploitation
Period.
THE ASSOCIATE shall assume all costs of supervised training during the
Exploration Period, except for labor costs of the professionals attending same.
During the Exploitation Period both parties shall assume these costs via the
Joint Account.
To comply With Technology Transfer called for hereunder, THE ASSOCIATE
commits to run annual supervised training programs for Ecopetrol professionals
for each of the first three years of the Exploration Period, in an amount of
fifty thousand (US$50,000 United States dollars per year. ECOPETROL and THE
ASSOCIATE shall first agree on the subject and type of training. lf the
Exploration Period is extended, the supervised training will be similar to that
set out here.
32.4 During the Exploitation Period, Operator may perform any work through
contractors, subject to the Executive Committee approval when the amount of the
contract exceeds forty thousand dollars of the United States of America
(US$40,000) or the equivalent in Colombian currency.
CLAUSE 33 - INSURANCE
The Operator shall take all insurance called for under Colombia law. Likewise,
it shall require any contractor engaged in work hereunder to obtain such
insurance as the Operator considers necessary and keep same in force. Likewise,
Operator shall take such additional insurance as the Executive Committee deems
suitable.
CLAUSE 34 - FORCE MAJEURE OR FORTUITOUS CIRCUMSTANCES
The obligations referred to hereunder shall be suspended for such time as either
Party is unable to fully or partially perform same because of unforeseen events
that constitute force majeure or fortuitous circumstances, such as strikes,
shutouts, wars, earthquakes, floods or other catastrophes, laws, decrees or
government regulations that prevent procurement of essential materials and, in
general, any non-financial reason that effectively impedes work, even when not
listed above, but that affects the Parties and is outside their control. lf
force majeure or fortuitous circumstances prevent one Party from performing its
duties hereunder, it should immediately notify the other Party, setting out the
causes of such impediment. Under no circumstances shall force majeure or
fortuitous circumstances extend or prolong the total period of exploration,
retention or exploitation beyond maximum contract term set out in Clause 23rd.
However, any force majeure event during the six (6) year exploration period set
out in Clause 5 and which lasts for over thirty consecutive days, shall extend
this six-year (6) period for the same time as that of he impediment.
CLAUSE 35 - APPLICATION OF COLOMBIAN LAW
The Parties establish Santa Fe de Bogota, Republic of Colombia, as the domicile
for all contract purposes. This contract is fully ruled by Colombian law and THE
ASSOCIATE accepts the jurisdiction of Colombian courts and waives diplomatic
claim regarding its rights and duties hereunder, except in the case of denial of
justice. it is understood there shall not be denial of justice when THE
ASSOCIATE as Party or Operator has had access to all remedies and means of
action that may be exercised with the jurisdictional branch of public power
<PAGE>
under Colombian law.
CLAUSE 36 - NOTICES
Notices or communications among the Parties regarding this contract must be sent
to the following addresses and mention the pertinent clauses in order to be
considered valid-.
ECOPETROL - Carrera 13 No. 36-24, Santafe de Bogota, Colombia
THE ASSOCIATE - Calle 114 No. 9-01 Torre A, of.707,Santafe de Bogota,
Colombia
Any change of address shall be notified to the other Party in advance.
CLAUSE 37 - VALUATION OF HYDROCARBONS
Payments or reimbursements referred to in Clauses 9 (numerals 9.2 and 9.4) and
22 (numeral 22.5) shall be made in dollars of the United States of America or in
Hydrocarbons, based on the price in force and the restrictions existing or to be
applied under Colombian law for sale of the dollar portion of hydrocarbons
coming from the contract area and destined for domestic refining.
CLAUSE 38 - HYDROCARBON PRICES
38.1 Hydrocarbons belonging to the ASSOCIATE hereunder and destined for domestic
refining or supply shall be paid for at the refinery where they are to be
processed or at the receiving station agreed to by the Parties, in keeping with
current governmental measures or those replacing same.
38.2 Differences arising in the application of this Clause shall be settled via
the means set out in this Contract.
CLAUSE 40 - DELEGATION AND ADMINISTRATION
In keeping with ECOPETROL regulations, its President delegates the
administration of this contract tothe Vice President for Exploration and
Production, with power to take all action pertinent to contract performance. The
Vice-President of Exploration and Production may exercise this delegation via
the Assistant Vice President for Joint Operations.
CLAUSE 41 - VALIDITY
This contract must be approved by the Ministry of Mines & Energy in order to be
valid (and the incorporation and approval of the Colombian branch, if pertinent.
In witness whereof, the parties sin in the presence of witnesses in Santa Fe de
Bogota, on the 30th day of the month of December,nineteen hundred and ninety
seven (1997)
EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL
ENRIQUE AMOROCHO CORTEZ
President
SEVEN SEAS PETROLUEM COLOMBIA INC.
Gustavo Vasco Munoz
Legal Representative
Witnesses
EMPRESA COLOMBIANA DE PETROLEOS
Calculation of area, director and distances using Gauss coordinates, origin
Santafe de Bogota.
Data and results of MONTECRISTO sector
<PAGE>
<TABLE>
<CAPTION>
POINT NORTH EAST DISTANCE DIF. N. DIF. E DIRECTION
<S> <C> <C> <C> <C> <C> <C>
A 1,402900.00 1,020,000.00 6,410.00 0.0 6,410.00 East
B 1,402,900.00 1,026,410.00 2,790.00 0.0 2,790.00 East
C 1,402,900.00 1,029,200.00 27,200.00 -27,200.00 0.00 South
D 1,375,700.00 1,029,200.00 23,120.00 0.00 23,120.00 East
E 1,375,700.00 1,052,320.00 4,088.76 - 4,012.22 787.44 S 1 1.6'1 3' 0.551 E
F 1,371,687.78 1,053,107.44 14,183.60 114,132.11 - 1,207.44 S 4 53, 0" 0.460 W
G 1,357,555.67 1,051,900.00 5,867.32 0.00 - 5,867.32 West
H 1,357,555.67 1,046,032.68 8,027.36 - 6,555.67 - 4,632.68 S35 14, 51- 0.407w
I 1,351,000.00 1,041,400.00 4,900.00 -4,900.00 0.00 South
J 1,346,100.00 1,041,400.00 8,094.01 -12.00 8,094.00 S 89,54'54' 0.196E
K 1,346,088.00 1,049,494.00 19,274.23 14,640.00 -12,536.60 S40 34'27" 0.390 W
L 1,331,448.00 1,036,957.40 2,096.62 - 1,878.98 - 930.20 S26 20'16'.0.725E
M 1,329,569.02 1,037,887.60 20,887.60 0.04 -20,887.60 N89 59'59" 0.605 W
N 1,329,569.06 1,017,000.00 15,030.94 15,030.94 0.00 North
O 1,344,600.00 1,017,000.00 3,000.00 0.00 3,00 0.00 East
P 1,344,600.00 1,020,000.00 - W,300.00 58,300.00 0.00 North
A 1,402,900.00 1,020,000.00
</TABLE>
POLYGONAL AREA: 151,933 HECTARES, 5,950 M2
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
Page
PART I - TECHNICAL ASPECTS
<S> <C>
Section One - Exploration 1
CLAUSE 1 INFORMATION TO BE SUPPLIED DURING EXPLORATION 1
CLAUSE 2 AREAS DEVOLUTION 4
Section Two - Production 1
CLAUSE 3 EXTENSIVE PRODUCTION TESTS 5
CLAUSE 4 COMMERCIAL FIELD 6
CLAUSE 5 OWN RISK MODALITY 6
CLAUSE 6 OPERATIONS INSPECTION 7
CLAUSE 7 PRODUCTION 7
CLAUSE 8 HYDROCARBON DISTRIBUTION AND AVAILABILITY 7
CLAUSE 9 EXPORT HYDROCARBON SUPPLY 8
PART II - ACCOUNTING AND FINANCIAL ASPECTS
Section One - Programs and Budgets 8
CLAUSE 10 EXPLORATION PROGRAMS AND BUDGETS 8
CLAUSE 11 PRODUCTION PROGRAMS AND BUDGETS 8
CLAUSE 12 BUDGET MANUAL 8
CLAUSE 13 INCOME BUDGET 9
CLAUSE 14 EXPENSES BUDGET 10
CLAUSE 15 OTHER PROVISIONS 17
Section Two . Accounting procedures 17
CLAUSE 16 ACCOUNTING PROCEDURE 20
<PAGE>
CLAUSE 17 CASH CALLS, BILLS AND ADJUSTMENTS 21
CLAUSE 18 CHARGES 23
CLAUSE 19 CREDITS 27
CLAUSE 20 DISPOSAL OF EXCESS MATERIAL AND EQUIPMENT 28
CLAUSE 21 INVENTORY 28
CLAUSE 22 AUDIT 30
CLAUSE 23 FEES TABLE 30
CLAUSE 24 CONTRIBUTIONS IN KIND 32
PART III - ADMINISTRATIVE ASPECTS AND SUNDRY PROVISIONS
Section One - The Executive Committee 32
CLAUSE 25 OPERATING CONDITIONS 32
Section Two - Subcommittees
CLAUSE 26 SUBCOMMITTEES ORGANIZATION 33
Section Three - Operator
CLAUSE 27 RIGHTS AND OBLIGATIONS 34
Section Four - Contracting Procedures 35
CLAUSE 28 SUPPLIERS REGISTER AND LIST OF PROPONENTS 35
CLAUSE 29 TENDER PROCEDURES 35
CLAUSE 30 CONTRACT AWARD AND PURCHASE ORDERS 37
CLAUSE 31 CONTRACTS AND PURCHASE ORDERS MANAGEMENT 39
CLAUSE 32 INSURANCE 40
CLAUSE 33 FORCE MAJEURE OR ACTS OF GOD 40
CLAUSE 34 OPERATION AGREEMENT REVISION 41
</TABLE>
<PAGE>
EXHIBIT B TO THE OPERATION AGREEMENT
SSOCIATION CONTRACT "MONECRISTO" SECTOR
EXHIBIT B - OPERATION AGREEMENT
EXHIBIT TO "MONTECRISTO" ASSOCIATION CONTRACT
Entered into between EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL and SEVEN SEAS
PETROLEUM COLOMBIA INC., with Effective Date on the 28th day of the month of
February, nineteen hundred ninety-eight (1998), hereinafter the Contract.
PART I- TECHNICAL FACTORS.
CLAUSE 1 - INFORMATION SUPPLY DURING EXPLORATION
Geological and geophysical information to be supplied by the ASSOCIATE to
ECOPETROL shall be provided according to international standards accepted by the
industry, compatible with standards applied by ECOPETROL (included in ECOPETROL
Information Supply Manual) to enable regional sedimentary basins evaluation. To
complement Contract Clause 6 (section 6.2) the ASSOCIATE or the Operator shall
deliver to ECOPETROL, as obtained, the following information associated to
exploration activities conducted by the ASSOCIATE:
1.1 Geological, geophysical, magnetometric, gravimetric, remote sensors,
electric meters information and in general any Exploration Work conducted by the
<PAGE>
ASSOCIATE in development of the Contract, shall be submitted in magnetic media,
original and reproducible copy with the respective support information,
including acquisition and interpretation maps, acquired data processing and
interpretation.
1.2 Processed seismic section for each line, obtained in two scales, together
with an interpretation report containing: information used, background, seismic
programs, geological information and geophysical, geological and economic
considerations supporting technical conclusions and recommendations.
1.3 Two (2) sets of seismic lines magnetic tapes, one of them containing
demultiplexed information and the other containing stack information and the
respective support information and processing report. In the event of vibration
a copy of the field tape instead of demultiplexed tape shall be delivered.
1.4 Seismic programsshooting points map in reproducible sepia and copy,
containing coordinates and elevations identification. This information shall
also be supplied in magnetic tape.
1.5 Magnetic and gravimetric profiles and residual maps in reproducible
originals, copies and magnetic tapes including all information generated.
1.6 Seismic, gravimetric and magnetometric interpretation report, together with
all interpreted sections profiles and maps submitted in accordance with
ECOPETROL standards for this type of information.
1.7 Geological, structural, isopachous, isolitic, facies, seismic, etc. maps of
the Contract Area in reproducible sepia and copies in scales determined by
ECOPETROL for each basin.
1.8 Before well drilling: Intention to drill (Ministry of Mines and Energy Form
4-CR), drilling program, well location map, prospect area isochrone or
structural map and drilling geological prognosis, duly approved by the Ministry
of Mines and Energy. Exploration wells location shall be referred to the seismic
maps on which basis the prospect was defined. At each Exploration Well to be
drilled in the Contract Area, a geodesic precision point accepted by "Instituto
Geografico Agustin Codazzi - IGAC", obtained by satellite shall be materialized
with its respective azimuth line.
1.9 Daily drilling and geology reports. These reports shall be directly
delivered to ECOPETROL, preferably via fax and shall contain basic well
information, drilling conditions, drilling fluid properties, Hydrocarbon
expressions as obtained, penetrated geological formations description and daily
and accumulated costs together with the program to be developed.
The ASSOCIATE or the Operator shall report sufficiently in advance to ECOPETROL
on electric logging, cores sampling and test to be performed for ECOPETROL to
send a representative to witness all operations.
1.10 Copy of bi-weekly reports forwarded to the Ministry of Mines and Energy
(Form 5CR).
1.11 Final geology report: This report is mandatory for any well drilled in the
country, whether exploraton, stratigraphic or development and shall be
submitted in Spanish by a registered geologist no later than ninety (90) days
after well completion or abandonment; the report shall include the following
information by chapters;
1.11.1 A summary of all activities developed during drilling
1.11.2 Well location and 1:250,000 scale maps
1.11.3 Stratigrapy: Shall include the stratigraphic column, environments
determination and each drilled formation age.
1.11.4 Biosratigraphy: shall include dispersion charts, analysis conducted and
potential correlation.
<PAGE>
1.11.5 Geochemistry: shall include all analysis performed both on ditch samples
and each of the recovered cores.
1.11.6 Electric logging: shall include all RW, SW determination calculations.
Speed logging analysis shall be included in this chapter.
1.11.7 Formation tests: shall include all results obtained from each of the
tests taken and water and Hydrocarbon laboratory analysis.
1.11.8 The Final Geological Report shall be accompanied of the following
exhibits:
Exhibit A: Description of ditch samples taken every ten (10) feet.
Exhibit B: Detailed description of cores and wall samples recovered.
Exhibit C: All cores and wall samples lab analysis.
Exhibit D: Composed graphic log in reproducible sepia and copy in 1:500 scale.
For the different lithologies included in the composed graph log symbols used
for such cases by the American Association of Petroleum Geologists (AAPG) shall
be used.
Exhibit E: Final report issued by the well logging company, including the
"Grapholog".
1.12 Reproducible sepias and copies of each well logs including speed logging in
1:200 and 1:500 scales. Additionally deliver magnetic tapes in LIS format
containing all logs, accompanied of computer tabulates using forms provided by
ECOPETROL for such cases.
1.13 Formation and/or production tests report including bottom pressure analysis
(open and closed well).
1.14 Shall deliver to ECOPETROL two sets of ditch samples, one of them unwashed
taken every thirty (30) feet and the other dy taken every ten (10) feet
including a detailed lithological samples description.
1.15 Coring report, when performed, including a detailed description thereof and
all analysis performed. Together with this report the ASSOCIATE shall deliver to
ECOPETROL photographs and fifty percent (50%) core.
1.16 Report all materials used for drilling.
1.17 Biostratigraphic reports including the respective dispersion chart. These
analyses shall be performed for Exploration wells considering this information
defines sedimentation environments and each drilled formation age. This type of
analyses may also be performed on the different cores recovered.
1.18 Geochemical ditch, wall and core samples analysis.
1.19 Official well completion, plugging or abandonment report (form 6CR or 10A
CR) and in general, any other report referring to well completion (subsequent
work, multiple completion).
1.20 Final well report. Shall include all engineering information and a final
geologic report summary. Shall be submitted in Spanish no later than ninety (90)
days after well completion or abandonment, and approved by a duly registered
Petroleum engineer.
1.21 Copy of the Annual Technical report (Geology and Geophysics and Engineering
Report) including the respective supports, submitted to the Ministry of Mines
and Energy according to applicable legal regulations.
1.22 Any other engineering or geology study conducted.
CLAUSE 2 - AREAS DEVOLUTION
<PAGE>
Areas to be returned to ECOPETROL by the ASSOCIATE, according to Contract Clause
8, shall be, as far as possible, regular polygonal lots to facilitate boundaries
determination without prejudice of commercial areas.
Section Two - Production
CLAUSE 3 - EXTENSIVE PRODUCTION TESTS
The following will be the procedures applied to extensive Hydrocarbon production
tests management previous Commercial Field acceptance.
3.1 For obtained volumes management and handling, tests permit shall have been
obtained from the Ministry of Mines and Energy and accepted by ECOPETROL.
3.2 Production obtained from tests will be distributed according to proportions
provided under the Contract Clause 14 (section 14.2), after discounting twenty
percent (20%) royalties, according to Contract Clause 13; ECOPETROL will be
responsible of direct payment thereof.
3.3 Test volumes produced will be recovered from the well during the maximum
test period approved by the Ministry of Mines and Energy under the respective
permit, discounting any Hydrocarbon volume consumed for operations.
3.4 The ASSOCIATE will be responsible of one hundred percent (100%) expenses
incurred during the production test period, which shall be charged as higher
well value and taken as direct cost for reimbursement purposes, according to
disbursement origin.
3.5 The ASSOCIATE shall enter into the necessary agreements with the transport
to provide Hydrocarbon transportation. Hydrocarbon ECOPETROL is entitled to plus
royalties transportation will be paid by ECOPETROL after receiving the
respective bills and supports.
3.6 ECOPETROL shall have advanced knowledge of the Hydrocarbon transportation
contract and shall approve it before extensive production tests start.
3.7 The ASSOCIATE shall maintain ECOPETROL duly informed about the production
test program and shall deliver any permits required from government authorities,
as well as any other information as obtained.
3.8 In the event Hydrocarbon is used for reimbursement, bills shall be submitted
each month from well production start.
CLAUSE 4 - COMMERCIAL FIELD
4.1 After the ASSOCIATE has obtained sufficient information related to Field
development, the ASSOCIATE shall conduct a study to define petrophysical
parameters, better productive area boundaries and reserves calculation. The
study shall be conducted by the ASSOCIATE, at its expense, applying available
technical methods in the country or abroad; and when the circumstances so
require the pertinent revisions shall be made.
4.2 For new facilities or expansions/modifications, basic production and
detailed engineering designshall be submitted to the Technical Subcommittee for
consideration.
4.3 Production facilities engineering shall be contracted with domestic
companies except if in the opinion of the Technical Subcommittee technological
complexity requires assistance from a foreign company, preferably in consortium
with a domestic company.
4.4 Final mechanical completion of wells to become Joint Account property shall
be agreed by the Technical Subcommittee. Such Exploration Wells Reimbursement
will be subject to Contract Clause 9 (sections 9.2.2, 9.2.3 and 9.2.4).
4.5 Regarding dry Exploration Wells, the ASSOCIATE shall abandon subject to
applicable legal and environmental regulations.
<PAGE>
CLAUSE 5 - OWN RISK MODALITY
5.1 Reimbursement refers to two hundred percent (200%) total work developed at
the ASSOCIATE's own expense and risk to produce the respective Field and up to
fifty percent (50%) Direct Exploration Costs incurred by the ASSOCIATE at its
own expense and risk within the Contract Area before the respective Field
commercial feasibility studies submittal date. ECOPETROL shall audit to
determine reimbursable investments.
5.2 During the Own Risk Field production, the ASSOCIATE shall deliver to
ECOPETROL a quarterly report including all technical, economic, legal and
administrative information such as contracts entered into, wells completion,
flow lines, production facilities, metering systems, storage capacity,
production wells, restriction orifices, production reports, economic studies,
etc. Different Contract Clause and clarifications herein are understood fully
applicable in the event of Contract Clause 21 "One of the Parties Own Risk
Operations" for timely information, technical reserves control and all other
administrative activities purposes.
CLAUSE 6 - OPERATIONS INSPECTION
Regarding activities developed in the Contract Area inspection and audit,
ECOPETROL will have the right to send its representatives to the field. The
ASSOCIATE or the Operator shall provide the officer designated by ECOPETROL stay
conditions imilar to those provided it engineers.
CLAUSE 7 - PRODUCTION
7.1 The Operator shall also deliver to the Parties any information on technical
production improvements developed during the Production Period.
7.2 For Hydrocarbon losses and environmental damage control and prevention, the
Operator and the Parties shall take the necessary measures applying methods
generally accepted by the Oil industry to prevent Hydrocarbon losses or spilling
in any way during drilling, production, transportation and storage activities.
7.3 The Operator shall keep daily Hydrocarbon consume, if any, operation records
and shall submit a monthly Hydrocarbon consume report accompanied of forms
provided by the Ministry of Mines and Energy for such purpose.
CLAUSE 8 - HYDROCARBON DISTRIBUTION AND AVAILABILITY
Pursuant to Contract Clause 14 (section 14.4), the Operator shall be responsible
of metering, sampling and controlling Hydrocarbon quality in accordance with
standards and methods accepted by the oil industry (ASTM, AGA, and API) and
applicable legal regulations referring to net Hydrocarbon received and delivered
at standard conditions volumes calculation.
Hydrocarbon volumes accepted by the Operator for transportation will be
determined using meters installed by the Operator for such purpose in receiving
stations and points of delivery.
CLAUSE 9 - EXPORT HYDROCARBON SUPPLY
For Contract Clause 14 purposes, the ASSOCIATE's Hydrocarbon exports shall take
into consideration primarily country needs before exporting Hydrocarbon subject
to legal regulations on the matter.
PART II - ACCOUNTING AND FINANCIAL MATTERS
Section One - Programs and Budgets
CLAUSE 10 - PRODUCTION PROGRAMS AND BUDGET
10.1 Pursuant to Contract Clause 7, the ASSOCIATE shall deliver to ECOPETROL
within sixty (60) days following Contract signature date, the programs, schedule
of activities and the budget to be executed in the short term (the following
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year) and the following two (2) years estimated budget projection roken down by
type of Exploration Work to be developed and indicating the disbursement
currency. After the first year, the ASSOCIATE shall submit the aforementioned
information within the first ten (10) calendar days each year.
10.2 The ASSOCIATE shall submit on a quarterly basis, within fifteen (15)
calendar days following the respective quarter end, the technical and financial
report provided in Contract Clause 7.
CLAUSE 11 - PRODUCTION PROGRAMS AND BUDGETS
11.1 For Contract Clause 11 effects, the Operator shall submit a Field
development plan proposal envisaging in detail the short and mid term. The short
term budget shall be submitted by year and by quarter to facilitate execution
and to prepare the respective treasury flows.
11.2 The Operator shall submit to ECOPETROL the Commercial Field organization
chart which shall be agreed at Technical Subcommittee level and approved by the
Executive Committee.
CLAUSE 12 - BUDGET MANUAL
Standards and procedures listed below constitute the budget manual applicable to
Budgets preparation, submittal and control during production of Commercial Field
or Fields discovered in development of the Contract. This manual has three (3)
parts, as follows:
12.1 Income budget
12.2 Expense budget
12.3 Other provisions
CLAUSE 13 - INCOME BUDGET
This budget is in turn divided into two (2) sections: current income budget and
capital contributions.
13.1 Current Income
Covers all contributions regularly obtained to the favor of the Joint Account
and foreseeable by the Operator. Includes the following items as the case may
be:
13.1.1 Sale of products:
Income from Operator Hydrocarbon sales to one of the Parties or to third parties
on behalf of the Association (such sales are understood other than each of the
Parties participation in the Association).
13.1.2 Services Provided:
Covers all services provided by the Operator to one of the Parties or to third
parties, according to fees agreed by Subcommittees and approved by the Executive
Committee.
13.1.3 Disposal of asses or materials:
Covers equipment or materials sold by the Operator to the Parties or to third
parties subject to this Agreement Clause 20 (section 20.2) provisions.
13.1.4 Other income
Includes all funds received by the Operator and destined to the Joint Account,
on the account of transitory financial investments and all other income
projected by the Operator.
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13.2 Capital contributions:
Refers to all contributions received by the Operator on the account of cash
calls delivered by the each of the Parties according to Contract participation.
Such income is designated cash calls and is managed on the basis of procedures
provided under this Agreement Clause 15 (section 15.5).
CLAUSE 14 - EXPENSE BUDGET
As previous step to budget preparation, the Executive Committee will have the
respective Subcommittees determine general policies and parameters to be taken
into account to prepare the budget plan for the respective Commercial Field. The
expense or appropriations budget includes the operation expenses budget and the
investment budget. Each of these Budgets will be prepared according to monetary
origin, whether pesos or dollars.
14.1 Operation Expenses Budget
The operation budget will be prepared by the Operator on the basis of standards
and policies on the matter issued by the Association Executive Committee
pursuant to Contract Clause 19 (section 19.3.5) and on the basis of economic
parameters and indexes defined by the Joint Operation as the most representative
for the budget term.
14.1 Preparation Procedure
The Operator shall submit the operation expense budget identifying Joint
Operation needs and broken down by expense item according to classification
provided in this Agreement Clause 14 (section 14.1.2).
Cost factors used to evaluate the different activities programmed to be
developed during the Budget year will refer to actual figures known upon budget
preparation or the best information available. In all cases the operation
expenses budget will be calculated taking into consideration costs require by
units which directly provide their services to the Joint Operation and shall be,
therefore, one hundred percent (100%) assumed by the Joint Account and charged
to the Parties in the proportion provided under Contract Clause 22 (section
22.6.1). Indirect Expenses to be assumed by the Joint Account will be charged to
the Parties and determined as provided under Contract Clause 22 (section
22.6.2).
14.1.2 Expenses Budget Classification
For all expenses budget submittal purposes, the budget will be divided into
programs, groups and expense items. Budget expense programs represent
homogeneous activities required to develop the Joint Operation, including
programs associated to investment. Each of the programs numerical and sequential
expense groups reflect the expense objective, shall be duly supported and
explained and separated by expense item. The following are major expense items
to be used
14.1.2.1 Organization chart expenses
Salaries
Fringe Benefits and parafiscal contributions
14.1.2.2 Operation materials and supplies
Repair and maintenance materials
14.1.2.3 Contracted services
Technical field operation and maintenance services
Services provided by the Operator
Other services
14.1.2.4 Overhead
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Equipment and Office leases
Shared expenses
Insurance
Utilities
Assistance to the community
Other overhead
14.1.2.5 Environmental management
Materials
Contracted services
Other expenses
14.1.2.6 Aggregated value tax - IVA
14.1.2.7 Indirect expenses
14.1.3 Calculation base
Operation expenses budget calculation basis will be the following:
The salaries and fringe benefits budget will be calculated on the basis of
organization charts approved for the Association and estimates will be subject
to this Agreement Clause 18 (section 18.1.1). Salaries, fringe benefits and all
other voluntary bonus to domestic and foreign personnel will be separately
listed by disbursement origin for Association Subcommittees and Executive
Committee information purposes.
Materials and supplies costs estimates will be based onactual prices or updated
quotations and, in general on the basis of the best information available.
Import expenses will be based on subsequently imported materials and/or
equipment FOB prices taking into account the following factors: freight,
insurance, Colombian ports use taxes, import taxes and all other import
expenses.
Contracted operation and maintenance services value will be estimated on the
basis of contracts entered into or to be entered into by the Joint Operation
upon Budget preparation.
Indirect expenses to be assumed by the Joint Account for services provided or to
be provided by the Operator will be calculated according to procedures provided
in Contract Clause 22 (section 22.6.2).
The environmental expenses budget objective is to appropriate the necessary
annual funds to comply with environmental regulations.
Overhead will be calculated on the basis of concrete needs required by the Joint
Operation in development of its normal activities. Shared expenses are
disbursements to be assumed by the Joint Account as a result of facilities
and/or services shared by Fields or Associations. The budget and these Joint
Account charges shall be recommended by the Association Subcommittee and
approved by the Executive Committee. Assistance to the community will be
budgeted on the basis of petitions from interested parties and policies dictated
by the Executive Committee. Under special conditions so deserving the Operator
will have the right to accept petitions according to procedures, previous notice
to each of the Parties.
14.1.4 Budget execution.
Operation expenses budget execution will be based on the following
considerations:
14.1.4.1 All services, purchases or contracts charged to the Joint Account as
operation expenses shall be budgeted and fully justified.
14.1.4.2 If the service or activity to be contracted does not imply
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disbursements exceeding the limits provided for the Joint Operation, the
Operator will be fully autonomous to contract subject to internal responsibility
and authorityprocedures.
14.1.4.3 Purchases, contracts or any other act implying a higher partial or
global cost exceeding limits provided shall be previously submitted to the
Association Technical Subcommittee for study and recommendation.
14.1.5 Budget Execution Control.
Expenses budget execution control will be the responsibility of the Operator
which shall monitor correct expenses appropriation.
During the first fifteen (15) calendar days following the respective quarter
end, the Operator shall prepare a budget report explaining budget execution
results, which report shall contain:
14.1.5.1 Accumulated expenses to date broken down by expense item provided under
this Agreement Clause 14 (section 14.1.2).
14.1.5.2 Special comments on items which execution has significantly deviated
with respect to the average budget or quarterly estimate.
14.1.5.3 Projected expenses to be disbursed on a quarterly basis or the
remaining year.
14.1.5.4 Justification of potential budget additions, adjustments or transfers
the Operator deems convenient or if proposed by one of the Parties.
14.2 Investment budget
Will be each of the programs and investment projects to be developed by the
Joint Operation basic planning, execution and control tool and will be the means
to estimate funds required to develop the different programs approved by the
Executive Committee.
14.2.1 The investment budget will include the respective entries for the
following items:
14.2.1.1 Acquisition of lasting goods, materials and services required to
develop the different projects determined by the Association.
14.2.1.2 Acquisition of major equipment and tools destined to Association
workshops with the purpose of guaranteeing normal operations development.
14.2.1.3 Constructions and/or buildings expansion as required by operations,
including facilities destined to Joint Account staff.
14.2.2 Investment budget classification For investment budget submittal
purposes, the budget will be grouped by programs and projects. Each Budget
programs in numerical orderwill reflect groups of common objective projects to
be developed by the Operator for the Joint Operation. Each Program project in
numerical sequential order will be duly supported and explained. The following
are major activities and project types to be used:
14.2.2.1 Development wells Pumping or surface equipment, recompletion and
services to wells potentially capitalized.
Production wells
Locations
14.2.2.2 Production facilities Hydrocarbon collection system Storage system
Hydrocarbon treatment system Improved recovery system Pumping Stations Transfer
lines Other
14.2.2.3 Civil works
Roads
Bridges
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Construction (camps, workshops, warehouses, offices)
14.2.2.4 Other assets
Automotive equipment
Fire fighting equipment
Communications equipment
Office equipment
Electromechanical maintenance equipment
Major tools
Cleaning or workover equipment
14.2.2.5 Special Projects
Environmental management
Deposits studies
Simulation studies
Interference tests
14.2.2.6 Warehouses
For projects
For maintenance materials
14.2.2.7 Each of these project may be divided into as may subprojects as
necessary, always maintaining uniform identification to be finally submitted by
project, according to the above classification and using for such purpose forms
provided by ECOPETROL, which may be adapted by mutual agreement of the Parties
by the Financial Subcommittee. With the purpose of further clarifying investment
budget preparation, the following shall be taken into consideration:
14.2.2.7.1 Maintenance projects Refers to all investments in equipment,
materials and constructions destined to maintain the facilities in efficient
operation conditions subject to original capacity and yield limits.
14.2.2.7.2 Expansion projects Areinvestments with the purpose of increasing
facilities capacity, increasing authorized automotive equipment number, office
equipment, etc.
14.2.2.7.3 Special Projects Will include all projects which value, importance
for industrial activities or impact at the social or ecological level deserves a
special clssification.
14.2.3 Each and all investment budget projects shall be fully justified and
analyzed before including in the general budget. In this sense, the Operator
shall prepare an initial investment project containing the following general
information: Needs analysis Project justification General project description
Estimated investment value Schedule of activities Project critical route
Economic assessment Theinitial investment project containing the above
information in addition to any other information deemed necessary for
evaluation, will be jointly studied by Association Subcommittees which will
recommend or object project feasibility on the basis of policies dictated by the
Executive Committee.
After the Subcommittees have recommended a given project, such project will be
included in the general budget to the approved by the Association Executive
Committee.
All general information included in each project justification will be recorded
in a technical-financial Exhibit to serve as support to budget submittal and
approval by the Executive Committee.
14.2.4 Budget consolidation
After determining Joint Operation needs, the Operator will consolidate each of
the Commercial Fields expenses and investment budget according to classification
provided in this Agreement Clause 14 (sections 14.1.2 and 14.2.2, respectively)
and will submit to the Executive Committee for final approval. Both the expense
budget and the investment budget will be listed in four (4) columns showing
dollars origin accrual and pesos origin accrual, a dollar consolidated and a
<PAGE>
pesos consolidated, on the basis of the respective year exchange rate
projection.
Additionally, the Operator shall prepare, for information purposes, a schedule
of disbursements indicating short term funds requirements broken down by quarter
and currency origin, at group expense and investment program level.
14.2.5 Budget execution
In all cases the Operator is empowered to make all operation expenses and
investments required by the Joint Operation according to aproved Budget not to
exceed ten percent (10%) appropriations assigned to each expense group and to
each project during the respective budget term (Contract Clause 11, section
11.5). Budget execution will be the responsibility of the different Operator
units subject to previously determined execution schedule.
Appropriations assigned each project will be identified using a previously
defined code to be used in all documents associated to Budget Execution
procedures.
14.2.6 Budget Control.
The Operator will be responsible of developing each of the programs and
investment projects and shall account for execution thereof subject to approval
conditions.
Additionally, the Operator will be responsible of monitoring timely and correct
projects development. In the event any trouble preventing normal projects
development arises, the Operator shall forthwith report such trouble in writing
to the Parties for trouble encountered to be solved. The Operator, as the person
responsible of the development plan, programs and projects, shall prepare
quarterly reports on budget and technical progress thereof to be delivered to
each of the Parties for study and subsequent approval by the Association
Executive Committee.
The quarterly report shall be prepared and submitted by the Operator within
fifteen (15) calendar days following each quarter end and shall contain the
following information:
Period covered by the report.
Project code and description
Total project budget
Financial progress from start to closing date. Investments by current year
project accumulated to date.
Technical work progress
Quarterly projection of work to be developed for the remaining year, for
information purposes.
14.2.7 Investments during the Retention Period
Investments during the Retention Period will be assumed by the Association Joint
Account or by the ASSOCIATE, depending on whether ECOPETROL has accepted Field
commercial feasibility.
CLAUSE 15 - OTHER PROVISIONS
15.1 Budget additions.
In the event during Budget execution appropriations aproved by the Executive
Committee would require additions, the Parties may be required extraordinary
amendments to be ratified by the Executive Committee at its next meeting.
Expenses and investment Budgets additions or transfer requests may be
periodically submitted when the Executive Committee holds its regular meetings.
<PAGE>
However, the Executive Committee will have the right to meet on an extraordinary
basis to discuss budget issues any time a special situation so deserves.
Therefore, every time a budget revision is requested, the Operator shall start
the respective procedures duly in advance submitting the requests to the
respective Subcommittee for study and subsequent recommendation to the Executive
Committee.
In any case, budget addition requests shall be fully justified explaining the
reasons originating appropriated entries variation and including the respective
technical and financial exhibits provided un this Agreement Clause 14 (section
14.2.3).
15.2 Budget transfers.
Appropriations carried from one year to the next due to projects not concluded
during the budgeted term (for reasons such as lack of equipment, import
procedures, bad weather, etc.) will be deemed budget transfers.
Nondeveloped project full value will be carried to the following year budget and
will be subject to Executive Committee approval. These projects will be
expressly included in the budget taking into account the disbursement schedule
provided in this Agreement Clause 15 (section 15.4). Additionally, budget
transfers will originate an exhibit explaining budget transfer causes and how
will the budget be executed within the next term.
15.3 Approvals.
The Executive Committee will be the body in charge of approving the programs and
the budget recommended by Association Subcommittees and to authorize the
Operator to purchase or contract on behalf of he Association all goods and
services required by the Joint Operation.
15.4 Disbursement schedule.
Together with the budget recommended by the Association Subcommittees, the
Execuive Committee will approve the quarterly budget submitted by the Operator
for the immediately following year which will serve as the basis to calculate
monthly cash calls.
15.5 Cash calls.
Cash calls or funds advances will be placed by the Operator to each of the
Parties on the basis of obligations assumed by the Joint Operation for the month
immediately following the cash call, consulting the Budget approved by the last
Executive Committee and the projected cash flow. Cash calls under this Clause
will be deposited in a bank account opened by the Operator for such purpose to
be exclusively used by the Joint Operation. Cash calls preparation and submittal
shall be subject to the following requirements:
15.5.1 Preparation
On the basis of the approved budget and obligations assumed by the Association
in the subsequent month, the Operator will prepare cash calls taking into
account the following conditions:
15.5.1.1 The Operator will place a separate cash call for each of the producing
Commercial Fields in the Contract Area, identifying pesos and dollars expenses
and investments according to projected disbursement origin.
15.5.1.2 The cash call shall be open by programs and project in the event of
investments and by group and expense item in the event of expenses, as shown in
the budget approved by the Executive Committee.
15.5.1.3 For each of the projects and expense group listed in the cash call to
be considered, it must be included in the budget; otherwise, total cash call
value will be discounted.
<PAGE>
15.5.1.4 Projects and expense groups budgeted value shall be sufficient.
Nonetheless, in special cases, the value appropriated for the term may be
exceeded by ten percent (10%) according to Contract Clause 11 (section 11.5).
15.5.2 Submittal
Every cash call will be submitted for processing using the form previously
agreed by the Parties in the Financial Subcommittee and shall show actual and
estimated expense charges and will include the following documents:
15.5.2.1 Cash call letter
15.5.2.2 Cash call formshowing each of the programs, projects or expense item
financial status on cash call date, and
15.5.2.3 General comments of the technical nature identifying cash call
destination for major projects or expense items.
Section Two - Accounting Procedures
CLAUSES 16 - ACCOUNTING PROCEDURE
From Exploration Period start the ASSOCIATE shall deliver to ECOPETROL on a
quarterly basis within fifteen (15) calendar days following each quarter end,
the exploration costs report provided in Contract Clause 7, expressly
identifying Direct Exploration Costs subject to reimbursement pursuant to
Contract Clause 9.2.2, as detailed in the budget indicating the disbursement
currency and a US dollars consolidated. Additionally, and in the same report the
ASSOCIATE shall include the preliminary accumulated value to be included as R
Factor denominator provided in Contract Clause 14 (section 14.2.3), clearly
showing Direct Exploration Costs detail and calculation parameters applied. It
is hereby understood that Direct Exploration Costs reported by the ASSOCIATE
will only be firm after ECOPETROL has audited and accepted such costs.
During the Production period. credits and charges incurred by the interested
Parties and covering operations defined in the Contract, will be subject to the
following conditions: All charges will go to the Joint Account to be opened as
provided under Contract Clause 22. The Joint Account defined in Contract Clause
4 (section 4.7) will be divided into three major records as follows:
16.1 General Joint Account (clarification, charges and entries). This account
will record all movement as detailed below and will be fully distributed to the
Parties on a monthly basis, in the proportion of fifty percent (50%) to
ECOPETROL and fifty percent (50%) to the ASSOCIATE with respect to investments,
and in the proportion provided in Contract Clause 22 (sections 22.6.1 and
22.6.2) for Direct Expenses and Indirect Expenses, that is, will serve as the
basis for monthly billing as therein provided, laving a zero (0) balance each
month. All accounting transactions associated to this account will be recorded
by the Operator in Colombian pesos subject to the laws of the Republic of
Colombia, but the operator will have the right to, in turn, keep ancillary
records showing disbursements incurred in any currency other than Colombian
pesos.
16.2 Operation Joint Account. This account will record cash calls received from
the Parties and credit charges associated to their billing and shall show all
times a balance to the favor or against each of the Parties, as the case may be.
This account will be divided into sub-accounts according to transaction currency
origin, whether pesos of dollars.
16.3 Joint property records. The Operator shall keep under the Joint Account
records of all goods acquired and subject to inventory indicating each asset in
detail, acquisition date and original cost. Accounts mentioned in this Agreement
Clause 16 (sections 16.1, 16.2 and 16.3) will form part of the Operator's
official accounting records but shall not mix with accounting records other than
the Joint Account. The three accounts will be subject to this Agreement Clause
22.
<PAGE>
16.4 The Operator shall deliver to ECOPETROL on a monthly basis, together with
information provided in this Agreement Clause 17 (section 17.2.2) in the form of
a separate exhibit, R Factor parameters and calculation pursuant to Contract
Clause 13 (section 14.2.3).
CLAUSE 17 - CASH CALLS, BILLING AND ADJUSTMENTS
17.1 Cash calls. Although the Operator will pay and discharge in the first place
all costs and expenses incurred according to the Contract, charging each Party's
participation percentage, it is hereby agreed, with the purpose of funding such
participation, that each of the Parties, upon request from the Operator and as
provided further below, shall deliver cash calls to the Operator, from
Commercial Field acceptance by the Parties and no later than within the first
five (5) calendar days each month, the respective month's estimated operations
expenses ortion. The cash call shall be accompanied to detailed information as
provided under clause 15 (section 15.5.1.2) hereof. Such cash calls will be made
in US dollars or Colombian pesos, according to needs contemplated in the budget
and cash calls prepared by the Operator. The Operator shall place the cask call
within the first twenty (20) calendar days the month immediately prior to the
month when the cash call is to be delivered. If the Operator would have to incur
in extraordinary expenses not contemplated under the monthly cash call, the
Operator shall make special cash calls to the Parties covering such
disbursements participation. Each participant shall advance its proportional
funds within fifteen (15) calendar days following the Operator cash call.
17.2 Billing
17.2.1 The Operator shall prepare an initial bill to ECOPETROL after each
Commercial Field acceptance covering fifty percent (50%) Direct Exploration
Costs incurred before submitting each discovered Commercial Field commercial
feasibility studies, which costs have been audited and accepted by ECOPETROL
according to Clause 22 hereof. Exploration wells costs will include all costs
incurred to drill, terminate and test in the event of producing wells and dry
Exploration Wells abandonment costs. Said bill shall also include fifty percent
(50%) additional work costs provided in Contract Clause 9 (section 9.3) which
will be paid according to said Clause. Said bill shall include a costs summary
separately stating the investment and expenses currency, that is, Colombian
pesos or US dollars.
17.2.2 From the initial bill date on, the Operator will bill the Parties, within
fifteen (15) calendar days following the last day each month, its proportional
participation in costs and expenses for the month. Bills shall list Operator
accounting procedures details, including a detailed accounts summary, separately
listing costs and expenses originated in dollars or in pesos.
17.3 Adjustments. Bills will be adjusted by he Operator and the Parties after
subtractingcash calls in dollars and pesos.
If any of the Parties' cash calls differ from their participation in actual
costs determined for each period, the difference will be adjusted in the
following month's bills.
17.4 Bills acceptance. Bills payment will not affect the Parties right to oppose
or inquire about bills accuracy subject to Contract Clause 22 (section 22.7)
provisions.
CLAUSE 18 - CHARGES
Subject to limitations described below, the Operator will charge the Joint
Account and bill each of the Parties according to percentages provided under
this Agreement Clause 16 (section 16.1), the following expenses:
18.1 Labor
18.1.1 Domestic and foreign employees
18.1.1.1 Operator's employees salaries if directly working for the Joint
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Operation, including overtime, night overcharge, Sundays and holidays and the
respective compensation rest payment and in general any salary payment.
18.1.1.2 Fringe benefits, indemnification, insurance, subsidies and bonus and in
general any benefit other than salary granted workers and/or their families or
dependents, whether individually or collectively or granted in virtue of the
work contract, the law agreements and/or arbitration awards, with the exception
of housing plans in which respect a special agreement will be required. Some of
the above could be the following, among other: severance, vacation, retirement
and disability pensions, benefits granted retired personnel and their families,
benefits and assistance in the event of illness and professional or non
professional, accidents, service bonuses, life insurance, contract termination
indemnification, union assignments, all type of bonuses, assignments and
savings, health and/or education assistance and social security in general.
Additionally, contributions to Instituto Colombiano de Bienestar Familiar -ICBF
(Family Welfare), Servicio Nacional de Aprendizaje - SENA (National
Apprenticeship Service), Instituto de Seguros Sociales - ISS (Social Security)
and other similar required.
18.1.1.3 All expenses incurred on behalf f the Joint Operation for camp
maintenance and operation, field offices or services facilities. These expenses
also include - not taxatively but for information purposes - expenses listed
below regardless of whether services are provided gratuitously or for
remuneration, or whether to workers, their dependents or relatives or whether
voluntary or mandatory. Some of such services are:
18.1.1.3.1 Medical, pharmaceutical, surgical or hospital services.
18.1.1.3.2 Camp and complete services therein, including repair and hygiene.
18.1.1.3.3 Training and qualification costs
18.1.1.3.4 Workers entertainment
18.1.1.3.5 Schools for workers, their children and dependent relatives.
18.1.1.3.6 Security or social assistance plants and camp surveillance.
18.1.1.4 Expenses and services listed in the above Clause 18 (sections 18.1.1.1,
18.1.1.2 and 18.1.1.3) are understood with charge to the Joint Account in the
event applicable regulations, collective labor agreements and/or arbitration
awards directly or jointly applicable to contractors subcontractors,
intermediaries and/or their employees at the service of the operation.
18.1.1.5 Regarding retirement pensions and disability assistance, the Executive
Committee will have the right to proceed according to the Social Security and
Pensions system provided by Law 100 of 1993 and all other regulating provisions.
18.2 Materials and supplies
Materials and supplies required to develop operations will be charged to the
Joint Account. Materials and supplies shall be acquired and stored in the
project warehouse or the maintenance material warehouse as convenient for the
operation and credited the operation at book cost as they leave the warehouse to
be used. Capital equipment units will be directly charged to the Joint Account.
The book value is determined as follows:
18.2.1 Book value
Book value is understood as the last average price for warehouse stock on the
basis of costs taken from imports calculation worksheets or local cost, as
follows:
18.2.1.1 For imported materias, equipment and supplies the book value shall
include net manufacturer or supplier bill cost, purchase cost, freight and
delivery charges at supply site and port of embarkment, freight to
destination port, insurance, import duties or any other tax, cargo handing
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from the ship to customs warehouse and transportation to operations site.
18.2.1.2 For locally acquired materials, equipment and supplies the book value
shall include net seller bill plus sales tax, purchase cost, transportation and
insurance and similar costs paid to third parties from the purchase place to
operations site.
18.2.1.3 Materials will be charged to the Joint Account according to acquisition
currency origin to be subsequently charged to each of the Parties.
18.2.2 Materials devolution to the Joint Account warehouse, as the case may be.
Materials, equipment and supplies returned to the Joint Operation warehouses
value will be estimated following the same procedures.
18.2.2.1 New materials will be recorded at book value.
18.2.2.2 The Operator will have the right to reincorporate used materials, in
good operating conditions and equipment fit to be subsequently used with no need
for repairs to the respective warehouse at seventy five percent (75%) book
value, crediting the respective Joint Account project.
18.2.2.3 The Operator will have the right to reincorporate repaired used
materials, in good operating conditions to the respective warehouse at fifty
percent (50%) book value. When such materials are used again will be charged at
the new book value.
18.2.3 Sales by the Parties. Materials, equipment and supplies value sold by the
Parties to the Joint Operation will be estimated on the basis of replacement
cost agreed by the Parties. The respective transportation costs will be assumed
by the Joint Operation. In the event of Joint Operation sales to one of the
Parties, goods value will be estimated on the basis of replacement cost agreed
by the Parties and transportation costs will be assumed by the buying Party.
18.2.4 Local Mterials transportation
18.2.4.1 Materials shipped by an external carrier at cost according to the
carrier company bill.
18.2.4.2 Materials shipped in carrier units property of the Parties, at the
rates calculated to cover actual expenses, according to this Agreement Clause 18
(section 18.2 and 23 (section 23.1.1).
18.2.5 Canceled, postponed or changed projects. In the event stock accumulated
in the warehouse due to projects approved by the Parties change, postponing or
cancellation, such materials cost will be charged to the warehouse account. Such
materials may be sold to third parties according to this Agreement Clause 20
(section 20.2.1) and the produce credited to the Joint Account.
Excess material from projects, if such material purchase has been directly
charged, shall be returned to the warehouse upon such projects completion and
credited to the respective project. The Operator shall report such transaction
to the Parties at regular Financial Subcommittee meetings when held.
18.3 Travel expenses
All travel expenses incurred on behalf of the Joint Operation by domestic or
foreign personnel, such as transportation, hotels, feeding, etc.
18.4 Service units and facilities
Services provided using equipment and facilities property of either of the
Parties will be charged to the Joint Account at reasonable rates as provided in
this Agreement Clause 23. Rates determined shall apply until amended by mutual
agreement.
18.5 Services
<PAGE>
Services provided the Joint Operation by third parties, including contractors,
at actual cost. Likewise, technical services such as lab analyses and special
studies requiring Technical Subcommittee recommendation and Executive Committee
approval.
18.6 Repairs
Repairs to equipment or goods property of any of the Parties destined for Joint
Operation use, except if such costs have been previously charged under leases or
otherwise.
18.7 Litigation
Joint Operation expenses associated to actual or threatened litigation
(including investigation and proof taking), attachments relase, awards or court
decisions, legal claims and claim filings, accidents compensation, arrangements
in the event of death and funeral, provided such charges have not been
acknowledged by an insurance company or covered by the respective charges
provided in this Agreement Clause 18 (section 18.1.1). In the event legal
counseling is provided on such matters by permanent or external attorneys whose
full or partial remuneration has been included in indirect expenses, no
additional service charges will be recorded but will be charged to Direct Costs
incurred for such proceedings.
18.8 Joint Operation propertied and equipment loss or damage. All costs and
expenses required to replace or repair losses or damages caused by fire, floods,
storm, robbery or any similar act. The Operator shall notify the Parties in
writing any losses or damages suffered, as soon as practical.
18.9 Taxes and leases
Alltaxes paid or accrued in development of the Joint Operation will be charged
to the Joint Account, subject to applicable legal provisions.
TheJoint Account will also be charged leases, rights of way and indemnification
paid on improvements, soil occupation, etc.
18.10 Insurance
18.10.1 Insurance premiums on insurance taken for the benefit of operations
subject to the Contract together will all expenses and indemnification accrued
and paid, and all losses, claims and other expenses not covered by insurance
companies, including legal counseling mentioned in this Agreement Clause 18
(section 18.7) well be charged to the Joint Account.
18.10.2 In the event no insurance has been taken aforementioned actual expenses
incurred and paid by the Operator will also be charged to the Joint Account.
CLAUSE 19- CREDITS
19.1 The Operator shall credit the Joint Account the following income items:
19.1.1 Insurance returns associated to the Joint Operation which premiums have
been charged to said operations.
19.1.2 Geological information sales previously authorized by the Parties
provided associated recoveries have not been charged to he Joint Account.
19.1.3 The sale of properties, plants, equipment and materials property of the
Joint Operation.
19.1.4 Lease rents received, customs taxes or transportation claims refunds,
etc. shall be credited to the Joint Operation if rents or refunds associate to
such operation.
19.1.5 Any other operational income or contracts authorized by the Executive
Committee for the Joint Account service.
<PAGE>
19.2 Warranty
In the event of defective equipment when the Operator has received the
respective adjustment from the manufacturer or its agents, such amount will be
credited to the Joint Operation.
CLAUSE 20 - DISPOSING OF MATERIAL AND EXCESS EQUIPMENT
20.1 Excess materials and equipment
The Operator shall inform the Parties in writing about any Joint Operation
excess materials or equipment, thirty (30) days after completing the inventory
provided in Clause 21 hereof. Each of the Parties shall designate a
representative to review the condition thereof and to determine which materials
or equipment may be sold. In the event of usable materials or equipment
ECOPETROL will have the first option and the ASSOCIATE will have the second
option; such options shall be exercised within sixty (60) days following notice
date. In the event the aforementioned parties do not buy the Operator shall
notify them in writing and will proceed to auction.
20.2 Disposing of Capital equipment and materials: pursuant to Contract Clause
22 (section 22.9) the Operator will have the right to sell materials and
equipment property of the Joint Account subject to the following conditions:
20.2.1 Major material and capital equipment sold by the Operator and previously
charged to the Joint Account will be subject to previous Executive Committee
approval. The produce thereof will be credited to the Joint Account. For such
purpose only, major materials are defined as any assets which estimated sale
value exceeds forty thousand US dollars (US$40,000) or the equivalent Colombian
currency.
20.2.2 Minor materials charged to the Joint Account andnot required for
operations or reincorporated to the respective warehouse may be sold by the
Operator and the produce thereof credited to the Joint Account.
20.2.3 Any assets which cost or estimated value exceeds forty thousand US
dollars (US$40,000) or the equivalent Colombia currency abandonment or
dismantling requires previous Executive Committee authorization.
20.2.4 None of the Parties will have the obligation to purchase the other
Party's interest in excess materials, whether new or used. Disposal of major
excess materials, such as towers, tanks, engines, pumping units and piping will
be subject to Executive Committee approval. The Operator will, however, have the
right to reject damaged or unusable materials in any way.
20.2.5 All taxes accrued by reason of Joint Account materials or assets sale or
disposal shall be the responsibility of the Operator with charge to the Joint
Account.
CLAUSE 21 - INVENTORY
Upon request from ECOPETROL the Operator shall submit the necessary information
to analyze warehouse stock and the Parties shall agree upon joint participation
to control inventories. The Operator shall provide any facilities required by
ECOPETROL to take a fixed assets physical inventory at the Association
facilities, previous Financial Subcommittee agreement on the date, time and
number of persons designated to take said inventory.
21.1 Inventory and Audit
Subject to applicable regulations and no less than once every three (3) years
the Operator shall take all Joint Operation assets inventory.
21.2 The notice of intention to take an inventory shall be given by the Operator
in writing to the Parties one (1) month in advance to said inventory taking date
for the Parties to be represented. But if one of the Parties is not present the
inventory so taken by the Operator shall be no less valid.
<PAGE>
21.3 The Operator shall provide the Parties copy of each inventory including
copy of the reconciliation and will submit results to the Association
Subcommittees which shall study the report and propose acton to be taken on
the matter.
21.4 Excess and shortage inventory adjustments will be reported to the Executive
Committee for consideration and approval.
21.5 At midnight on the last day of the Exploration Period provided, the Parties
shall take an inventory of both material in the warehouse property of the Joint
Account and extracted products in the collection batteries and piping from
collection batteries to storage tanks or in storage tanks all within production
fields, and such inventories will be distributed to the Parties, after deducting
royalties, in the proportion provided under Contract Clause 13.
CLAUSE 22 - AUDIT
Subject to Clause 17 (section 17.4) hereof the Parties will have the right to
have their own Auditors or representatives examine and control Operator's
accounting books and records associated to properties and operation activities
thereof. However, with the purpose of facilitating Direct Exploration Costs
revision under this Agreement Clause 17 (section 17.2.1) as soon as the Operator
notifies the Parties any reimbursable Exploration Work initiation, the ASSOCIATE
or the Operator shall permit, previous due notice, ECOPETROL auditors to
periodically examine such Exploration Work accounts, for the mentioned revision
to have been performed under the best conditions and time when the Commercial
Field is declared. During audits herein provided representatives from the
General Accountant of the Republic will have the right to participate if such
body deems convenient. Such audit costs and expenses will be paid by the
interested Party.
22.1 After the audit report has been delivered, the ASSOCIATE or the Operator
will have a maximum six (6) months term to answer or sustain objections
submitted; upon said term expiration if the Operator has not answered,
objections will be deemed accepted and consequently the audit will proceed
accordingly. Audit notes or comments not resolved within the three (3) following
months will be resolved according to Contract clause 20.
CLAUSE 23 - FEES TABLE
23.1 ubject to limitations provided above, services provided the Joint
Operation by facilities exclusively owned by ECOPETROL or the ASSOCIATE will be
charged the respective fees with the purpose of recovering actual costs. Such
costs shall include normal work, salaries, fringe benefits, depreciation costs
and other operation expenses taking the following into account:
23.1.1 The transportation units fee usually calculated on the basis of operation
time shall include loading and unloading time, the time spent waiting for
loading and the time spent waiting to be unloaded. Transportation unit charges
assigned the operation shall include Sundays and holidays, except if out of
service for repairs.
23.1.2 In the event material required for the mentioned operations is
transported together with other material by fluvial or land carrier exclusively
owned by ECOPETROL or the ASSOCIATE the charge shall be based on transported
tons at rates which shall not exceed commercial rates.
23.2 Equipment and tools lease fees
The procedure to calculate equipment and tools property of the Parties leases,
excluding drilling equipment and major equipment which fees must be separately
calculated and approved by the Executive Committee, shall cover a depreciation
value in addition to a maintenance value and the procedure will be the
following:
23.2.1 Equipment description, model, number, purchase date and original cost.
<PAGE>
23.2.2 Site where the equipment will be used, reasons for leasing and estimated
use period.
23.2.3 Annual equipment depreciation value, calculated on the basis of
depreciated book value and remaining useful life (minimum book value to be
considered will be ten percent (10%) original cost or the salvage value).
23.2.4 The annual maintenance value will be a percentage of the original cost
which will range from five percent (5%) for new equipment to fifteen percent
(15%) for depreciated equipment, depending on depreciation period, for instance:
Equipment A: (Five [5] years useful life)
Period (years) 1, 2, 3, 4, 5: one hundred percent (100%) depreciated equipment.
Maintenance: 5, 6, 7, 8, 9: 15%
Equipment B: (Ten [10] years useful life)
Period (years) 1, 2, 3, 4, 5, 6, 7, 8, 9, 10: one hundred percent (100%)
depreciated equipment.
Maintenance: 5, 6, 7, 8, 9, 10, 1,, 12, 13, 14, 15: 15%
Note: Useful life period and depreciation will be determined on the basis of
accounting practices applicable to oil operations.
23.2.5 Annual lease fee equals the value provided under Clause 23 (section
23.2.3) hereof plus the value specified in section 23.2.4 hereof.
23.2.6 Monthly or daily equipment lease fee will be as provided under Clause 23
(section 23.2.5) hereof divided into twelve (12) or three hundred and sixty five
365, as the case may be.
23.2.7 No "standby" fee will be charged but this fee will be charged in the
event of third parties.
23.2.8 The above lease fees do not include transportation, installation,
operation, lubricants and fuel costs which will be charged the operation
equipment is destined to.
23.2.9 The above lease fees will apply to eventual equipment and tools one
hundred percent (100%) property of the ASSOCIATE or the Operator and vice versa.
23.2.10 In each case, the Technical Subcommittee will recommend the Executive
Committee the need to use leased equipment and the Financial Subcommittee will
have the right to apply the fee system recommended herein.
23.2.11 Equipment lease fee will be calculated in US dollars but the respective
bill will be in pesos at the rate agreed by the Parties.
23.2.12 Warehouses and fixed assets lease fee.
For full or partial use of warehouses property of one of the Parties or the
Joint Operation lease fee calculation the procedure agreed by the Financial
Subcommittee will apply.
CLAUSE 24 - CONTRIBUTIONS IN KIND
ECOPETROL or the ASSOCIATE shall contribute in kind any materials deemed
convenient as agreed between the Parties.
PART III - ADMINISTRATIVE ISSUES AND SUNDRY PROVISIONS
Section One - The Executive Committee
CLAUSE 25 - OPERATING CONDITIONS
<PAGE>
In development of its functions the Executive Committee shall comply with
conditions provided in Contract Clause 19, as follows:
25.1 The Executive Committee will be alternatively chaired by the Parties
starting with ECOPETROL.
25.2 The Executive Committee shall designate its Secretary alternating people
designated by ECOPETROL and the ASSOCIATE. The Chairman and the Secretary will
be members of the same Party.
25.3 The Executive Committee shall hold regular meetings during the months of
March, July and November, and shall hold extraordinary meetings any time the
Parties and/or the Operator deem necessary. At said meetings the production
program developed by the Operator, the development plan and immediate plans will
be discussed. This Executive Committee may be attended by each of the Parties
counselors as deemed convenient, being understood each of the companies shall
designate the less possible number of people.
25.4 In the event of Executive Committee regular meetings, the representative
chairing the coming meeting shall notify all other representatives (principal
and alternates) from the other Party and the Operator ten (10) calendar days in
advance indicating the meeting time and place and matters to be discussed
(agenda).
25.5 In development of Contract Clause 18 (section 18.3), during both regular
and extraordinary Executive Committee meetings, matters to be discussed and not
included in the agenda may be discussed during the meeting previous agreement of
the Parties representatives attending the Committee.
Section Two - Subcommittees
CLAUSE 26 - SUBCOMMITTEES ORGANIZATION
In development of the function provided under Contract Clause 19 (section
19.3.8), the Executive Committee will have the right to designate any advisory
subcommittees deemed necessary. In any case the Executive Committee shall
designate a Technical Subcommittee and a Financial Subcommittee.
The above subcommittees will be the organizations in charge of controlling and
defining Contract tchnical, financial and legal recommendations to the
Executive Committee and shall be governed by the Contract and this Agreement.
Each subcommittee shall issue its own internal regulations to be approved by the
Executive Committee.
Section Three - Operator
CLAUSE 27 - RIGHTS AND OBLIGATIONS
27.1 Pursuant to Contract Clause 30, the Operator has the right to conduct Joint
Operations by itself or retaining subcontractors subject to general Executive
Committee direction. In any case, the Operator will be responsible of the Joint
Operation according to Contract provisions.
27.2 Some of the Operator's obligations are the following, among other:
27.2.1 To prepare, submit and implement the development plan, expenses budgets
and exploration/ production programs as well as expenses approval.
27.2.2 To direct and control all operation expenses statistical and accounting
services.
27.2.3 To plan and obtain all services and materials required for good Joint
Operation development.
27.2.4 To provide all techniques and assistance required for good Joint
Operation development.
<PAGE>
27.2.5 To plan tax effects and to comply with all tax obligations derived from
operations developed and to provide a timely report to the Parties in their
respective proportion.
27.3 The Operator shall not have the right to constitute any lien on Joint
Operation properties.
27.4 Operator resignation will be without prejudice of any right, obligation or
responsibility acquired during the time the Operator acted in such condition; if
the Operator resigns or is removed before obligations provided under the
Contract have been satisfied, the Joint Account shall not be charged any
expenses incurred by such change. But if the Executive Committee approves, these
costs and expenses may be charged to the Joint Account.
27.5 If the Operator has been removed or if its resignation has been accepted,
for obligations transfer purposes ECOPETROL will audit the Joint Account and
take an inventory of all Joint Operation properties. Sad inventory will be used
for devolution and accounting purposes as regards said obligations transfer
procedures. All costs and expenses incurred with respect to inventory taking and
audit shall be charged to the Joint Account.
27.6 The Operator shall not be responsible for any loss or damage caused by
Joint Operation except if such losses or damage are imputable to:
27.6.1 The Operator's fault
27.6.2 The Operator's default to take and maintain any of the insurance required
under Contract Clause 33, except if the Operator has made every possible effort
to obtain and maintain such insurance with fruitless results, which case shall
be timely notified to the Parties.
Section Four - Contracting Procedures
CLAUSE 28 - SUPPLIERS REGISTER AND LIST OF PROPONENTS
28.1 The Operator will be responsible of keeping an updated suppliers register,
classified according to the different activities required by the operation and
shall determine qualification criteria applicable to companies to be included in
the list of proponents. The Technical Subcommittee will have the right to review
criteria before approving the list of proponents.
28.2 ECOPETROL will have the right to review the Operator suppliers register on
an annual basis and will have the right to have the Technical Subcommittee
suggest including or excluding suppliers from the record. The above
notwithstanding, ECOPETROL will have the right, any time, by duly motivated
petition, to require individuals or entities to be removed from the record.
28.3 In any cases implying invitations to bid for contracting purposes the
suppliers register shall be consulted placing the act on record in the
respective document.
28.4 Individuals or entities listed in the suppliers register shall evidence
technical, moral and economic solvency in addition to experience not only
regarding the company but also its partners and technicians working for such
companies on a steady basis.
28.5 On the basis of the above parameters, the Operator shall keep a qualified
supliers register, which shall be periodically updated according to their
performance.
CLAUSE 29 - TENDER PROCEDURE
29.1 Responsibility. The Operator will be responsible of preparing duly in
advance the invitation to bid and will submit it to the Technical Subcommittee
for consideration.
29.2 The list of entities invited to bid will be prepared on the basis of
<PAGE>
Suppliers Register information.
29.3 If the estimated contract value subject to bidding exceeds US$40,000, the
Operator shall invite no less than three (3) companies. If this would not be
possible, justification will be placed on record in the recommendation report to
the Technical Subcommittee.
29.4 The Operator shall endeavor to invite no more than 6 companies to bid with
the purpose of preventing excessive tender evaluation costs and also to give
participant companies a better opportunity to be awarded the respective
contract.
29.5 Being all other factors equivalent, the priority order to have the right to
be included in the list of proponents will be: Companies organized and domiciled
in the Department or Departments where the Commercial Field or Fields is or are
located - Colombian companies domiciled outside the Department or Departments
where the Commercial Field or Fields is or are located, but having a branch in
the Department - Colombian companies with their main domicile outside the
Department or Departments where the Commercial Field or Fields is or are located
not having a branch in said Department - Foreign companies with a branch
organized in Colombia - Foreign companies without a branch in Colombia.
29.6 Companies invited to bid list will also take into account companies
technically and commercially qualified which have not been provided the
opportunity to participate in similar tenders in the past.
29.7 The Operator shall prepare the tender Reference Terms and will submit them
to the Technical Subcommittee for consideration, duly in advance.
29.8 Tender Reference Terms shall clearly specify that:
29.8.1 Costs will be one of the crieria to be taken into account for contract
award and management:
29.8.2 All tenders exceeding such activity actual cost will be disqualified.
29.8.3 Tender evaluation will take into consideration factors other than costs,
which factors will be included in the Reference Terms
29.8.4 Offers shall be submitted according to invitation to bid Reference Terms
and if this requirement is not complied with the offer may be considered
invalid.
29.8.5 The invitation to bid will include a detailed price table to be filled
out by proponents to facilitate proposals evaluation.
29.9 The list of proponents will be reviewed and approved by the Technical
Subcommittee before delivering to parties invited.
29.10 As soon as the Reference Terms have been distributed, the following rules
will apply:
29.10.1 Any original Reference Terms information, amendment or clarification
will be delivered all proponents. The Operator Purchases and Supplies Unit will
be responsible of such changes. Changes must be duly justified by written
document.
29.10.2 No proponents shall be added or removed from the proponent list
originally approved by the Technical Subcommittee.
29.10.3 Every proponent who does not comply with tender procedures and rules, or
who violates the Operator business ethics code will be forthwith disqualified.
29.11 All invitation to bid contents and form shall meet "Documentation
Submitted to the Technical Subcommittee Form" procedure requirements and shall
be submitted to the Technical Subcommittee for consideration.
<PAGE>
29.12 Internal approvals required by the Operator and ECOPETROL will depend on
contract estimated value on the basis of their respective internal procedures.
CLAUSE 30 - CONTRACT AWARDING AND PURCHASE ORDERS
30.1 The Operator will be responsible of awarding contracts and purchase orders.
For this purpose the Operator shall submit its recommendation to the Technical
Subcommittee which is the body in charge of approving and will be ratified by
the Executive Committee if awarded value equals or exceeds US$4,000.
30.2 Value: Awarding will be based on the best global value. The lowest price is
not always the best, because value will also take into consideration proponents
programming and quality, experience, reputation, and Colombian contents. In the
event the contract is not awarded to the lower value offer, such decision shall
be justified.
30.3 Written justification. The Operator shall submit a written recommendation
to the Technical Subcommittee justifying each contract and purchase order
awarded if the value equals or exceeds US$40,000. Such justification shall
include a summary of proposals submitted commercial and technical evaluation and
the basis for Operator recommendation.
30.4 Direct contracting: Direct contracting shall be supported and submitted in
writing to the respective Subcommittees clearly stating justification. The
Operator will have the right to contract directly with no need for tender in any
of the following events:
30.4.1 In the event only one supplier is available within the term required to
meet project schedule;
30.4.2 In the event there is no equivalent or satisfactory substitute for the
item or service previously directly contracted.
30.4.3 In the event the service or work derives from previous service or work or
in the event of and addition to a contract or purchase order opened within the
past ninety (90) days and if commercial conditions have not been modified or
when a recent tender evidences justify awarding with no need for tender.
30.4.4 In the event the Operator has standardized a specific item or service for
all applications within its operations area and there is only one known supplier
for such item or service.
30.4.5 In the event only one item or service is deemed meeting Operator's
requirements within the specified delivery term.
30.4.6 In the event an item or service is obtained for testing or evaluation.
30.4.7 In the event of an emergency. The Operator shall notify ECOPETROL at the
Technical Subcommittee immediately following such emergency.
30.5 Partial awards: A tender may be partially awarded two or more bidders,
provided the following conditions are fully satisfied:
30.5.1 The possibility to partially award is clearly specified in the Invitation
to Bid
30.5.2 Favored bidders have met Invitation to Bid requirements
30.5.3 Partial award reflects the best items or services to be obtained value
30.5.4 Any work scope change or awarding criteria shall be clearly communicated
all proponents before partial award.
30.6 Rejected offers: The Operator will have the right to declare the tender
void when the Technical Subcommittee finds motives justifying such decision
and/or if offers are distant from actual costs.
<PAGE>
30.7 Notice to non favored bidders: Awarding results will be notified all
participants in writing.
30.8 Clarification: During the evaluation period, the Operator will have the
right to require clarifications from proponents. The Technical Subcommittee
shall approve significant commercial clarifications. No new approval from the
Technical Subcommittee will be required in the event of technical
clarifications. Clarifications capable of affecting the tender shall be notified
all proponents in writing.
CLAUSE 31 - CONTRACT MANAGEMENT AND PURCHASE ORDERS
31.1 The Operator will be responsible of managing contracts and purchase orders
and of execution thereof.
31.2 Contracts or purchase orders management basis will consist in execution
thereof, which shall include agreed costs, schedules and quality requirements.
31.3 The operator shall keep written record of all original contract amendments,
Each contract costs change impact will be evaluated by the Operator and
negotiated with the supplier or contractor before changing contract price.
31.4 If the proposed change exceeds US$40,000 or 10% originally approved value
not to exceed the US$40,000 limit the change will have to be submitted to the
Technical Subcommittee for consideration.
31.5 The Operator shall be responsible of Costs Control.
31.6 Any additional work or item within contract terms shall be authoried by
the Operator Project or Operations Manager, who shall consult with the Purchase
and Logistics Department or substituting units before amending the contract in
any way. This double responsibility ensures change process integrity. In the
event changes imply amending the contract text, such changes will be subject to
the Operator Legal Department approval.
31.7 Quality control will be managed subject to the QA/QC ("Quality Assurance
and Quality Control) process which shall include independent work inspection and
monitoring at the right time during work development.
31.8 Procedures applied by the Operator to control costs are described in a
Costs Control procedure.
31.9 The Parties will be delivered a monthly report on work progress accompanied
of costs documentation and schedules including major contracts and purchase
orders originally agreed budget variations analysis.
31.10 After major contracts and purchase orders have been completed a detailed
analysis will be conducted to evaluate experiences learned and applicable to
similar contracts or purchase orders to improve their control.
CLAUSE 32 - INSURANCE
For the purposes of Contract Clause 33, as regards insurance, the Operator shall
deliver to ECOPETROL the following information for ECOPETROL to insure fifty
percent (50%) Commercial Field assets:
32.1 Assets description, separated as far as possible in the following way:
31.1.1 Offices, camps and other non industrial assets.
31.1.2 Collection stations specifying tanks (quantity and capacity) and other
equipment
31.1.3 Sundry warehouses and other facilities
NOTE: External pipelines and wells are not covered by the fire policy because in
such case ECOPETROL directly assumes the risk.
<PAGE>
32.2 Assets value indicating only the portion property of ECOPETROL value and
indicating the full value percentage it represents.
32.3 Geographical location
32.4 Reception date from the time the risk is transferred to the Joint
Operation.
CLAUSE 33 - FORCE MAJEURE OR ACTS OF GOD
Contract Clause 34 only suspends cmpliance with specific obligation of the
Parties if development thereof is impossible due to events of force majeure or
acts of God. Additionally, obligations associated to goods, properties,
production facilities etc. are only suspended if affected by such circumstances.
The affected Party shall notify force majeure termination detailing damages
magnitude and corrective actions affecting the system.
CLAUSE 34 - OPERATION AGREEMENT REVISION
This Operation Agreement may be revised when the Parties deem convenient, upon
request from either of them; the Executive Committee is fully empowered to
review and amend this Agreement. This Operation Agreement will be in force until
one of the following events occurs:
34.1 Contractor termination
34.2 Written agreement of the Parties
34.3 Entering into a new Agreement
<PAGE>
In witness the Parties sign this Operation Agreement in ECOPETROL contract paper
on the 30th (30) day of the month of December; 1997.
EMPRESA COLOMBIANA DE PETROLEOS "ECOPETROL"
Enrique Amorocho Cortes
President
SEVEN SEAS PETROLEUM COLOMBIA INC.
Gustavo Vasco Munoz
Legal Representative
Witnesses
<PAGE>
POTOMAC ENERGY CORPORATION
1400 FOUNDERS TOWER
5900 MOSTELLER DRIVE
OKLAHOMA CITY, OKLAHOMA 73112-4605
TELEPHONE 405/840-1427 FAX 405/840-4697
April 24, 1997
The GHK Company, L.L.C.
6305 Waterford Boulevard, Suite 470
Oklahoma City, Oklahoma 73118
Attention: Larry A. Ray
Re: Letter of Intent dated February 27, 1997, by and between the GHK Company,
L.L.C. and Potomac Energy Corporation (the "Letter of Intent")
Dear Larry:
Please be advised that Potomac Energy Corporation has assigned all of its
right, title and interest under the Letter of Intent to Potomac Energy
(Bermuda), Ltd. Potomac Energy (Bermuda), Ltd. by its signature below agrees to
be bound by all of the terms and conditions of the Letter of Intent the same as
if it were a signature party thereto.
Please indicate the GHK Company L.L.C.'s agreement to the aforesaid assignment
by signing and returning one copy of this letter to us.
Sincerely yours,
/s/ Frank Mahan,
--------------------------
Frank Mahan, President
AGREED TO AND ACCEPTED BY: AGREED TO AND ACCEPTED BY:
THE GHK COMPANY, L.L.C. POTOMAC ENERGY (BERMUDA), LTD.
/s/ Larry A. Ray 4/24/97 /s/ Frank Mahan, President
- -------------------------- --------------------------
Larry A. Ray Frank Mahan, President
<PAGE>
LETTER OF INTENT
The GHK Company L.L.C. (GHK), 6305 Waterford Boulevard, Suite 470, Oklahoma
City, OK 73118 and Potomac Energy Corporation (PEC), 1400 Founders Tower, 5900
Mosteller Drive, Oklahoma City, OK 73112 have had various communications
regarding properties in Colombia, South America referred to as the Rosa Blanca
Block and the Montecristo Block. The Montecristo Block has sometimes been
referred to as Rosa Blanca Block II. These lands are more fully set out on the
plat attached as Exhibit "A" hereto and are hereinafter referred to as the
"Blocks."
PEC has for some time been in communication with Empresa Colombiana De Petroleos
(Ecopetrol) concerning the issuance of Association Contracts covering the
Blocks. At PEC's invitation, GHK has visited the Ecopetrol data room in Bogota,
Colombia and reviewed various seismic and other information pertaining to the
Blocks. GHK is now interested in pursuing, along with PEC, the issuance of
these Association Contracts from Ecopetrol. GHK and PEC now believe that they
should go forward together in negotiating said Association Contracts from
Ecopetrol with joint GHK and PEC commitments as hereinafter set out:
(1) Successful negotiation of the Association Contracts shall result in 75%
ownership to GHK's Columbian branch company and 25% ownership to PEC's
Colombian branch company. Both GHK and PEC are aware that in order to hold
title under an Association Contract a branch company must be formed and
approved in Colombia, S.A.
(2) The maximum work commitments to be negotiated with Ecopetrol for each
Association Contract will be as follows:
(a) Rosa Blanca Block: (i) First Year reprocess two hundred miles of
seismic, landsat acquisition and interpretation, aerial photo
work and also conduct additional surface geology work which may
or may not include some geochemical surveys. Anticipated costs
for this program, excluding overhead, are approximately U.S.
$120,000.00 (this is confidential to GHK and PEC). (ii) Years
two through six (Exploration) drill one well per year or release.
Ecopetrol has advised us the Buturama Block has been shown on
maps as being reserved by Ecopetrol, but that this is in error
and we could probably get this acreage included in our Rosa
Blanca contract.
(b) Montecristo Block: (i) First Year reprocess three hundred and
fifty miles of seismic and in addition perform similar landsat
acquisition and interpretation, aerial photo work and surface
geology work as proposed for the Rosa Blanca Block. Anticipated
costs, excluding overhead, are approximately U.S. $180,000.00
(again confidential to GHK and PEC). (ii) Years two through six
(Exploration) drill one well per year or release.
<PAGE>
(c) There will be an annual Transfer of Technology obligation of
approximately $50,000.00 in each of the Association Contracts
during the initial six (6) year Exploration Period.
(3) GHK will perform the negotiations with Ecopetrol, but will work with PEC
and keep them advised of the status at all times. If GHK does not agree to
Ecopetrol's terms, it will stand aside and let PEC pursue the Association
Contracts for its own account at PEC's sole cost and expense.
(4) Upon successful issuance of the Association Contracts, GHK agrees to pay
PEC the sum of $150,000.00.
(5) GHK will be responsible for and put up any initial guarantee for the
performance of exploratory works under the Association Contracts if
required by Ecopetrol.
(6) The usual Association Contract requires the Colombian branch of the
Associate to be qualified within sixty (60) days after issuance. If PEC is
not qualified for 25% of the Contracts to issue in its Colombian branch at
that time, GHK will hold in trust such interest for an additional period of
three (3) months. Within said three (3) month period PEC shall: (a) become
qualified to do business in Colombia, (b) reimburse GHK 25% of any initial
guarantees required for the signing of the Association Contracts, and (c)
be financially capable and agree to pay 25% of the costs to perform the
First Year obligations of the Association Contracts from issuance. If PEC
is unable, within said three (3) month additional period, to pay for its
share of any guaranty to Ecopetrol or First Year obligations under the
Association Contracts, PEC shall forfeit all rights to its interest in the
Association Contracts.
(7) GHK and PEC agree that their Colombian branch subsidiaries will enter into
an International Operating Agreement with accounting procedure for each
Contract area naming the GHK Colombian branch company as Operator. The
International Operating Agreement with attached accounting procedure shall
be in the form attached hereto as Exhibit "B".
The Parties hereto confirm their understanding of the above set out terms and
conditions by signing in the spaces provided herein below this 27th day of
February, 1997.
THE GHK COMPANY, L.L.C.
By: /s/ Larry A. Ray
-------------------
POTOMAC ENERGY COMPANY
By: /s/ [ILLEGIBLE]
-------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
<TABLE>
State or Country Name Under
of Incorporation or Which does
Name Organization Business
---- ------------------- ----------
<S> <C> <C>
Potomac Exploration
Acquisition Corporation Oklahoma Same
Potomac Energy
(BVI) Ltd. British Virgin Islands Same
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF POTOMAC ENERGY (BERMUDA) LTD. FOR
THE PERIOD APRIL 7 THROUGH DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-07-1997
<PERIOD-END> DEC-31-1997
<CASH> 102,782
<SECURITIES> 37,777
<RECEIVABLES> 150,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 290,559
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 312,902
<CURRENT-LIABILITIES> 121,701
<BONDS> 0
0
0
<COMMON> 47,000
<OTHER-SE> 144,201
<TOTAL-LIABILITY-AND-EQUITY> 312,902
<SALES> 0
<TOTAL-REVENUES> 1,443
<CGS> 0
<TOTAL-COSTS> 697,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (695,799)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (695,799)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
