PRIVATE AND CONFIDENTIAL
BY FAX
Carpatsky Petroleum Inc. Pease Oil & Gas Co.
6671 Southwest Fwy. 751 Horizon Court, Suite 203
Suite 303 P.O. Box 60219
Houston, Texas 77074-2284 Grand Junction, CO 81506-8758
Attn: Attn:
Mr. Robert Bensch Mr. Patrick J. Duncan
Vice President President
28 April 2000
Dear Mr. Bensch:
RIGHTS OF CARPATSKY PETROLEUM CORPORATION IN RESPECT OF THE RC
DEPOSIT
Further to your request I am writing to comment(1) on certain legal aspects of
the operations under the Agreement on Joint Investment and Production Activity
No. 410/95 of September 14, 1995 (with all subsequent alterations) in which
Carpatsky Petroleum Corporation is involved.
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(1) Ukraine's tax and legal system is relatively new and undergoing rapid
development. As such, there is little official interpretation available in that
there has been an insufficient period of time for the laws to be thoroughly
tested in practice either at an administrative or judicial level. Accordingly,
our comments contained herein reflect our best understanding of the laws
currently in effect based on the legislation in force, on available official
interpretation and unofficial discussions with Ukrainian authorities. Please
note that because of the lack of official interpretations available and the fact
that the relevant Ukrainian authorities have little experience in interpreting
such laws, we can provide no assurance that Ukrainian authorities will take a
position consistent with the comments contained in this review. Furthermore, we
express no comments as to changes in the laws on interpretations thereof, that
may occur subsequent to the date of this review.
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In rendering this opinion, we have examined such questions of law and such
licenses, agreements and other documents executed between Carpatsky Petroleum
Corporation and Poltavanaftogas as well as some third parties provided to us as
we have deemed necessary including copies of the following documents:
1. Agreement on Joint Activities between Poltavanaftogas and Carpatsky
Petroleum Corporation No. 410/95 of September 14, 1995;
2. Agreement of October 15, 1996 on Introducing Amendments and Addenda to the
Agreement No. 410/95 of September 14, 1995 on Joint Activities between
Poltavanaftogas and Carpatsky Petroleum Corporation (new version named as
Agreement No. 410/95 of September 14, 1995 on Joint Investment and
Production Activities as to Exploration and Development of the
Rudivsko-Chervonozavodske Deposit);
3. Addenda of December 25, 1997 to Agreement No. 410/95 of September 14, 1995;
4. Amendments and Addenda of August 26, 1998 to Agreement No. 410/95 of
September 14, 1995 on Joint Investment and Production Activities as to
Exploration and Development of the Rudivsko-Chervonozavodske Deposit as of
October 15, 1996, including amendments and addenda of December 25, 1997;
5. Amendments and Addenda of April 23, 1999 to Agreement No. 410/95 of
September 14, 1995 on Joint Investment and Production Activities as to
Exploration and Development of the Rudivsko-Chervonozavodske Deposit as of
October 15, 1996, including amendments and addenda of December 25, 1997 and
August 26, 1998;
6. Card of State registration dated April 4, 1997 of the Agreement No. 410/95
of September 14, 1995 with the Poltava Region Department of the Ministry of
Foreign Economic Relations and Trade of Ukraine ;
7. License No. 470 of July 31, 1995 granted by the State Committee for Geology
and Utilization of Subsoil to Poltavanaftogas for geological search (pilot
production) of the Rudivsko- Chervonozavodske Deposit;
8. License No. 469 of July 31, 1995 granted by the State Committee for Geology
and Utilization of Subsoil to Chernigivnaftogasgeologiya for geological
search (pilot production) of the Rudivsko-Chervonozavodske Deposit;
9. License No. 968 of March 30, 1998 granted by the State Committee for
Geology and Utilization of Subsoil to Ukrnafta for geological search
including pilot production of the Rudivsko- Chervonozavodske Deposit;
10. Agreement No. 5/27 of December 30, 1997 "On Geological Search of Subsoil
and Preparation for Industrial Development of the Rudivsko-Chervonozavodske
Hydrocarbon Deposit" between Ukrnafta and Chernigivnaftogasgeologiya;
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11. Agreement "On procedure of exploitation of wells of
Rudivsko-Chervonozavodske deposits which are jointly owned by Ukrnafta and
American company Carpatsky Petroleum Corporation, collection, preparation
of gas and condensate from these wells" dated August 31, 1998;
12. Agreement on Joint Works on Pilot Production of Wells of the
Rudivsko-Chervonozavodske Deposit by the state geological enterprise
Chernigivnaftogasgeologiya and the enterprise Poltavanaftogas of May 16,
1995;
13. Agreement (Protocol) on Holding Joint Works on Pilot Production of
Rudivsko- Chervonozavodske, Mekhedivske, Svistunkivske, Sviridovske,
Chervonolutske gas condensate deposits by the state geological enterprise
Chernigivnaftogasgeologiya and the enterprise Poltavanaftogas of May 16,
1995.
Background
Carpatsky Petroleum Corporation (CPC) is a party to the Agreement on Joint
Investment and Production Activity (the JAA). Based on the JAA, CPC has agreed
to participate with the open joint stock company Ukrnafta represented by
Poltavanaftogas, the oil and gas extraction Department of Ukrnafta for the
exploration, development and production of hydrocarbons on the Rudivsko-
Chervonozavodske deposit (the RC deposit).
According to Ukrainian legislation, exploration and production of mineral
resources in Ukraine require obtaining a special license from the State
Committee for Geology and Utilization of Subsoil(2). The license to operate on
the RC deposit was granted to Ukrnafta which is an open joint stock company --60
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(2) Code of Subsoil of Ukraine of July 27, 1994
"Article 16. Licensing activities related to the utilisation of mineral
resources
Licensing activities related to the utilisation of mineral resources is
the exclusive procedure for granting special permissions (licenses) for the use
of mineral resources fields for designated purposes.
Special permissions (licenses) for using mineral resources within
certain areas shall be granted to specialised enterprises, institutions and
organisations, as well as to citizens who have the appropriate qualifications,
and the material, technical and economic capacities for the utilisation of
mineral resources.
The granting of special permissions (licenses) for the utilisation of
mineral resources shall be carried out after the preliminary approval of the
appropriate council of people's deputies for the allocation of a parcel of land
for designated purposes, with the except of those cases when there is no need to
allocate a parcel of land.
In the event that certain types of work related to the utilisation of
mineral resources are performed by persons who are not designated by special
permission (license), the responsibility for observation of conditions
stipulated in the special permission (license) shall be carried by the subject
that received the special permission (license).
Special limitations stipulated by the current legislation of Ukraine
can be set in regard to certain types of subsurface utilisation or certain
subsurface users.
The special permissions (licenses) for the use of subsurface shall be
provided by the State Committee for Geology and the Use of Subsurface with the
consent of the Ministry of Ukraine on Environmental Protection generally on
competitive terms and according to procedures established by the Cabinet of
Ministers of Ukraine."
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percent of which are owned by Ukrainian Government on March 30, 1998. This
license No. 968 entitles Ukrnafta to carry out geological search (exploration),
including pilot production of oil, gas and condensed gas. As indicated in the
license, the purpose of the license is the exploration of oil and gas reserves,
pilot exploitation of wells and determination of reserves for the purposes of
future development of the deposit.
Under the terms of the license, operations shall be carried out in accordance
with the Agreement No. 5/27 of December 30, 1997 "On Geological Search of
Subsoil and Preparation for Industrial Development of the
Rudivsko-Chervonozavodske Hydrocarbon Deposit" between Ukrnafta and
Chernigivnaftogasgeologiya. Chernigivnaftogasgeologiya is a state owned oil and
gas exploration and prospecting company. Neither CPC nor the JAA are mentioned
in the license.
You have requested that we comment on whether CPC has the right to oil or
natural gas reserves on the RC field.
Rights of license holders
According to the Code(3), subsoil is in the exclusive ownership of the Ukrainian
people and may be granted to interested parties only for use. Any agreements
that are in an indirect or hidden form violate the right of ownership of the
Ukrainian people to subsoil shall be deemed invalid. The Ukrainian people
realize the right of ownership to subsoil through the Verkhovna Rada of Ukraine
(Ukrainian Parliament), Verkhovna Rada of the Republic of Crimea and local radas
(councils of people's deputies).
It follows from the above that the subsoil cannot be in the ownership of subsoil
users. According to the Code(4), users of subsoil have the right to:
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(3) Code
"Article 4. Ownership of Mineral Resources
Mineral resources shall be the exclusive property of the Ukrainian
people and shall be transferred only on the basis of the right to use.
Agreements or acts, which directly or indirectly violate the ownership right of
the Ukrainian people to mineral resources, shall be null and void. The Ukrainian
people shall exercise their ownership rights to mineral resources through the
Parliament of Ukraine, the Parliament of the Republic of Crimea and local
councils of people's deputies.
Certain authority regarding the disposal of mineral resources may be
delegated by Ukrainian legislation to the appropriate bodies of state executive
power."
(4) Code
"Article 24. Rights and Obligations of Users of Mineral Resources
Users of mineral resources shall have the right:
1) to conduct geological surveys and to carry out the comprehensive
development of deposits of mineral resources within mineral resource fields
allocated to them, unless provided otherwise in accordance with the
conditions of a special permission (license);
2) to dispose of produced mineral resources, unless otherwise provided by
legislation or the conditions of a special permission (license);
3) to preserve a mineral resource deposit or a portion thereof allocated for
utilization pursuant to the conditions of a special permission (license);
4) the priority right to extend the term of a temporary subsoil use;
5) utilization of a mineral resource field. Users of mineral resources shall
be obliged:
1) to utilize the mineral resource field in accordance with the purposes for
which they were allocated;
2) to ensure complete geological analysis and the efficient and comprehensive
utilization and protection of mineral resources;
3) to ensure safety for persons, property and the environment;
4) to bring parcels of land that were damaged during the process of the
utilization of mineral resources into a condition acceptable for further
utilization in public production;
5) to comply with all other requirements regarding utilization of mineral
resources as established by Ukrainian legislation."
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a) carry out geological search, development of mineral deposits and other
operations in accordance with the terms of a special permit (license);
b) dispose of extracted resources unless otherwise is provided by the terms of
a special permit (license).
Summarizing the above, it is possible to conclude that unless and until mineral
resources are extracted from subsoil they remain in the ownership of the
Ukrainian people. Entities or individuals holding a relevant license, depending
on the terms of such license, have the right to use subsoil in order to search,
explore or extract mineral resources. Users of the subsoil obtain the right of
ownership to mineral resources once such resources are extracted from subsoil.
Treatment of entities that are not license holders
According to the Code(5), if entities, which are not mentioned in a license,
perform certain works in connection with the use of subsoil, the responsibility
for compliance with the terms established by the license falls on the license
holder. Thus, the Code does not prohibit entities which do not hold the license
or which are not mentioned in the license from performing certain works in
connection with the use of subsoil by the license holder. It is not clear,
however, whether this article of the Code should be interpreted as allowing
other entities to carry out operations indicated in the license (e.g.,
geological exploration, pilot production or industrial exploitation) along with
license holders or whether it may be interpreted as including only works
supporting these operations (e.g., supply and assembling of equipment,
provisions of certain technology, making available engineers and works, etc.).
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(5) Code
"Article 16. Licensing activities related to the utilization of
mineral resources Licensing activities related to the utilization of mineral
resources is the exclusive procedure for granting special permissions (licenses)
for the use of mineral resources fields for designated purposes.
Special permissions (licenses) for using mineral resources within
certain areas shall be granted to specialized enterprises, institutions and
organizations, as well as to citizens who have the appropriate qualifications,
and the material, technical and economic capacities for the utilization of
mineral resources.
The granting of special permissions (licenses) for the utilization of
mineral resources shall be carried out after the preliminary approval of the
appropriate council of people's deputies for the allocation of a parcel of land
for designated purposes, with the except of those cases when there is no need to
allocate a parcel of land.
In the event that certain types of work related to the utilization of
mineral resources are performed by persons who are not designated by special
permission (license), the responsibility for observation of conditions
stipulated in the special permission (license) shall be carried by the subject
that received the special permission (license).
Special limitations stipulated by the current legislation of Ukraine
can be set in regard to certain types of subsurface utilization or certain
subsurface users.
The special permissions (licenses) for the use of subsurface shall be
provided by the State Committee for Geology and the Use of Subsurface with the
consent of the Ministry of Ukraine on Environmental Protection generally on
competitive terms and according to procedures established by the Cabinet of
Ministers of Ukraine."
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We believe that the second interpretation seems the more likely of the two as,
in our opinion, the Code distinguishes between operations as to the use of
subsoil, which is subject to licensing, and particular works in connection with
the use of subsoil, for the performance of which a license holder may contract
with other entities. In addition the JAA for the Management Committee to decide
operations. The Management Committee consists of four (4) representatives from
each Poltavanaftogas and CPC.
Ukrainian legislation does not restrict a license holder from selecting any
forms of contracting with other entities for the performance of certain works on
services connected with the use of subsoil. We believe that the only restriction
is that a license holder cannot authorize other entities to carry out operations
that are indicated in the license and share responsibility for compliance with
the terms of the license and other required documents (e.g., project for pilot
production, etc.). For instance, a license holder may contract with another
entity for supply and assembly of certain equipment, etc. Also, a license holder
may contract with other entities, including foreign companies, on a joint
operation basis, which is allowed by Ukrainian legislation. The JAA is one of
the allowed forms of contractual relations between a license holder and other
entities. According to the JAA, Ukrnafta performs the functions of the operator.
The rights and obligations of Poltavanaftogas as a division of Ukrnafta are
defined in the Agreement "On procedure of exploitation of wells of
Rudivsko-Chervonozavodske deposits which are jointly owned by Ukrnafta and
American company Carpatsky Petroleum Corporation, collection, preparation of gas
and condensate from these wells" dated August 31, 1998. Therefore, we believe it
is very unlikely that CPC can be deemed to be carrying out operations indicated
in the license without the right to do so. Summarizing this section, there
appear to be good arguments to sustain the assertion that CPC's activities on
the RC deposit do not contradict Ukrainian legislation or the terms of the
license.
Rights of CPC under the JAA
As mentioned above, a license holder has the right to dispose of mineral
products extracted from the subsoil if it is not otherwise established in the
terms of the license. In this respect we believe that a license holder is not
restricted from selecting the legal grounds and mechanisms of such disposal. For
instance, having a service agreement with another entity a license holder may
compensate for relevant services or works by means of a portion of products
extracted from subsoil on the licensed field. Alternatively if operating on a
joint operation basis a license holder and its partner(s) may allocate extracted
products or revenues from the sale of extracted products on a pro rata basis or
in such a different way as may be agreed between them.
According to the Civil Code of Ukraine(6), parties to a joint activity agreement
have the right of joint shared ownership to the assets of such joint activities.
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(6) Civil Code of Ukraine
"Article 432. Joint estate of the parties to an agreement
To attain the goal determined in Article 430 of this Code the parties
to an agreement on joint operations shall make contributions in terms of money
or other property or labour participation.
The money or other property contributions of the parties to the
agreement, and the property created or obtained as a result of the joint
operations thereof, shall constitute their condominium.
Neither party to an agreement on joint operations shall be entitled to
dispose of its interest in the joint estate without consent of the other parties
to the agreement."
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Thus, assets that are shown in the accounts of the JAA, including equipment,
extracted products, cash received as compensation for the sold products, etc.
belong to the parties to the JAA under joint shared ownership. According to the
JAA, hydrocarbons produced under the JAA are sold by the joint activity and
reflected in its accounts. CPC and Ukrnafta do not distribute products. Rather,
they distribute income from the sale of such products. Thus, according to the
mechanism stipulated by the JAA, neither Ukrnafta nor CPC can dispose of any
products extracted under the JAA. This means that CPC and Ukrnafta cannot
dispose of these assets independently (i.e., without mutual consent). The
management and disposal of the assets of the joint activities must be agreed
between CPC and Ukrnafta in the JAA. Summarizing the above we conclude that CPC
and Ukrnafta have the right of joint shared ownership to the assets of the JAA.
Neither party to the JAA has the right to dispose of its share independently.
This assertion is supported by the provisions of law and the JAA applicable to
termination. In case of termination of the JAA each party has the right to
obtain its share in the joint assets. According to the JAA, in case of
termination of the JAA before the established date, Ukrnafta assumes an
obligation to buy the share due to CPC at prices to be estimated by an
independent licensed expert. This provision confirms the right of CPC to obtain
fair compensation for its interest in the JAA and of joint activity created
assets.
Rights of CPC with regard to the existing license
The current license entitles Ukrnafta to carry out the geological search and
pilot production of hydrocarbons on the RC deposit. According to the Code(7),
pilot production shall be carried out in accordance with a special project. Such
a project should be approved in accordance with the established procedure. We do
not comment in this letter on the procedure for the preparation and approval of
these projects. In this respect, it is sufficient to mention that products
extracted under a pilot production project may be sold normally. In other words
the holder of a license for pilot production has the right to sell hydrocarbons
extracted within the limits established by the respective project.
For purposes of this letter we presume that Ukrnafta has a duly approved project
for the pilot production on the RC deposit. Thus based on the above, Ukrnafta
and CPC may mutually sell hydrocarbons produced within the duly approved project
for the pilot production on the RC deposit through the JAA and CPC has the right
to obtain its share in the revenue from such sales.
In summary, we may conclude that although under the existing license CPC does
not possess the right to carry out the geological search and pilot production on
the RC field independently from Ukrnafta, the JAA allows CPC to obtain its due
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(7) Code
"Article 20. Allocation of Mineral Resources for Geological Surveys
Mineral resources shall be allocated without allocation of mining
offsets after special permission (license) for geological surveys of mineral
resources is obtained for geological surveys, including research and industrial
development of state mineral resources.
Research and industrial development of state mineral resources shall
be carried out for the purpose of identifying their specific mining, geological
and other parameters and selecting efficient methods of extraction of mineral
substances on the basis of designs for such works approved by the State
Committee on Supervision over Safety of Labour of Ukraine. Mineral resources
extracted in the course of research and study development shall be subject to
sale in accordance with general procedures."
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share of income obtained from the sale of hydrocarbons produced with the limits
established by the duly approved pilot production project.
Rights to obtain production license.
Based on the Code(8) the subsoil user has a priority right to prolong the term
of temporary use of subsoil.
This is uniformly understood, that the license holder for the specified area has
the right to prolong the term of the existing license or prolong the use of
subsoil by means of obtaining new license for the next stage of subsoil
development (pilot production after exploration, and production license after
pilot production).
Please note, that pilot production (as a specified activity in the license) is
limited in time and volume of produced minerals. The Order of the Ukrainian
Committee on the Issues of Geology and Subsoil Use No. 40 dated March 15, 2000
"On approval of the Provisions on procedure of organization and performance of
pilot production development (PPD) of the deposits of minerals of state
importance", Section 2.1(9) limits the term of PPD to five years, and section
2.2(10) of the same Provisions limits the volume of minerals produced during PPD
to ten percent of the preliminary estimates of the minerals deposits. Taking
into account very recent issue of the Order No. 40, there is no information or
interpretation wether and how its provisions may be applied retroactively (i.e.
to companies license holders which for example exceeded volume of ten percent of
the preliminary estimated reserves).
Conclusions and recommendations
In our opinion, using a JAA carries certain material disadvantages and potential
risks. First, the Code does not provide entities that are not license holders
with the right to use subsoil and to dispose of extracted products. Thus, the
rights that CPC has under the JAA are not established by the Code. However, our
opinion we believe CPC could enforce its rights under the JAA through injunctive
relief in the Courts.
Second, the existing license was granted under a special condition that
operations on the RC deposit would be based on the agreement between Ukrnafta
and Chernigivnaftogasgeologiya. In our opinion, this means that if this
agreement is terminated or if the JAA is deemed contradictory to the terms of
this agreement, the existing license may be at risk. We are not aware of any
provision of the JAA which is contradictory to the agreement.
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(8)
(9) Section 2.1 of the Provisions: "The time period for PPD of a
deposit, the amount of and conditions for extraction, in so doing, of mineral
resources shall be substantiated in PPD project. The time period for conducting
PPD of a deposit cannot be beyond the limits of validity of a special permit
(license) for geological exploration thereof and shall not have to exceed 5
years."
(10) Section 2.2 of the Provisions: "The volume of mineral resources
stipulated to be extracted during PPD shall not have to exceed 10 percent of the
pre-assessed mineral reserves in the deposit."
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Third, in order to have the right to commercial exploitation of the RC deposit
after the exploration and pilot production license expires because of the term
or the volume of minerals extracted, it will be necessary to obtain a new
production license. According to the JAA, CPC's position under the agreement on
this issue would therefore appear to be secure, unless Ukrnafta took the
unlikely steps of deliberately acting against the terms of the agreement or
seeking to terminate it. In those cases CPC's interests would be in the hands of
the Courts.
Fourth, the JAA is not mentioned in the license as a condition for carrying out
operations under the license. In our opinion, this means that operation of
Ukrnafta on the RC is not bound by the necessity to maintain activities under
the JAA. However we are aware of no instance where Ukrnafta or other similar
entity has failed to honour an agreement with a foreign entity. We would also
anticipate that a Ukraine court would entertain a proper proceeding to enjoin
clearly wrongful activity by a party to an agreement similar to the JAA.
In summary, we conclude that under the JAA, CPC has certain rights in respect of
the mineral resources on the RC deposit the main of which is to obtain the share
of profits from the sale of hydrocarbons extracted within the project of the
pilot production.
To avoid some of the risks described in this letter, CPC may consider the option
of concluding a production sharing agreement under the recently adopted
Ukrainian legislation.
This opinion is subject to the following qualifications:
1. We are attorneys who practice in Ukraine, and we express no opinion as
to any laws of any jurisdiction other than the laws of Ukraine
currently in force in Ukraine which are applicable to Ukrnafta, CPC and
the JAA. We express no opinion with respect to the applicability or the
effect in connection with the matters referred to herein of the laws of
any other jurisdiction or as to any matters of municipal law or the
laws of any subdivision of Ukraine or of any local agencies.
2. We have relied exclusively on the documents in arriving at the opinions
expressed herein and the documents constitute the material documents
relating to the rights and obligations of Ukrnafta and CPC.
3. With respect to all the documents that we reviewed, we have assumed,
but have not independently verified, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the
conformity with the authentic originals of all documents submitted to
us as copies.
4. Our opinions in this letter with respect to validity of contractual
relations between Ukrnafta and CPC are based on the assumption that the
parties to the JAA and other agreement mentioned above did not and do
not violate any provisions of such agreements and that the terms and
conditions of license are fully met by respective license holders.
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5. The rights of Ukrnafta and CPC contained in the JAA may be limited by
applicable bankruptcy, reorganization, insolvency or other similar laws
of general application relating to or affecting the enforcement of the
parties' rights.
6. The opinions expressed in this letter are specific to the transactions
and the documents referred to herein and are based upon the facts known
to use, the documents examined by us and the law as of the date hereof,
and should not be assumed to state general principals of law applicable
to transactions other then those which we have specifically referred.
Therefore, this opinion may not be relied upon by persons other than
the addressees, their stockholders and counsel, and the Securities and
Exchange Commission in the United States.
Yours sincerely,
VASIL KISIL & PARTNERS
/s/ Alexey N. Volkov
------------------------
Alexey N. Volkov
Attorney at Law
cc: Mr. G. Sullivan
<PAGE>
ATTACHMENT 1
TO OPINION LETTER
APPROVED
Chairman of the Board of "Ukrneft" JSC
.....................................B.V. Zaritsky
September 22, 1995
AGREEMENT No. 410/95
on joint operations
Poltava September 14, 1995
"Poltavaneftegas" enterprise and "Carpatsky Petroleum Corporation"
company, hereinafter referred to as "Partners" have made and entered into this
agreement as follows:
DEFINITIONS OF THE PRINCIPAL TERMINOLOGY
Partners shall be understood as "Poltavaneftegas" enterprise and "Carpatsky
Petroleum Corporation" company that have initially entered into this Agreement
and hereafter as any legal entities and individuals that join the Agreement.
Enterprise - "PNG" shall be understood as "Poltavaneftegas" enterprise, a party
hereto.
Company - "CPC" shall be understood as "Carpatsky Petroleum Corporation"
company, a party hereto.
Managing Committee shall be understood as the supreme managing body consisting
of the managers and authorized representatives of the Partners, and authorized
to make decisions on the principal issues of the joint operations such as
preparation of amendments and addenda hereto, approval of the Joint Operations
Program and Agreed Budgets, termination of the joint operations.
Joint Production shall be understood as production capacities and fixed assets
to be created in the course of joint operations hereunder.
Joint Operations Program shall be understood as a program of operations for a
fiscal year based on the projects for exploration and operation of hydrocarbon
deposits, including production and geophysical exploration of wells and strata,
a set of works related to boring production wells, overhaul of wells,
construction and operation of objects, collection, transportation and
preparation of produce.
Agreed Budget of Joint Operations shall be understood as a document determining
the costs for performance of the Joint Operations Program. The Agreed Budget of
Joint Operations shall account of all funding sources.
1
<PAGE>
Licensee, Licensees shall be understood as "Chernigovneftegasgeologiya"
state-run geological enterprise and "Poltavaneftegas" enterprise.
Fiscal Year shall be understood as a calendar year, and, for the first year of
the joint operations, a time period as from approval of the Joint Operations
Program and Budget till the end of the calendar year.
Operating Costs shall be understood as costs for production of gas and gas
condensate to be referred to the produce self-cost under the legislation in
force, less payments and deductions to the budget and non-budget funds.
Effective Date shall be understood as the date of signing this Agreement.
Engineer Centre shall be a working body of the Managing Committee. Upon an
assignment of the latter and together with the services of "Poltavaneftegas"
enterprise and "Carpatsky Petroleum Corporation" company it shall develop the
Programs and Agreed Budgets of the joint operations, and shall exercise control
over implementation thereof.
ARTICLE I
GENERAL PROVISIONS
1.1 This Agreement has been entered into for the purpose of:
- obtaining a license for production development of the deposit;
- providing for organizational and economic conditions, application of
domestic and foreign technology for intensification of exploration and
operation of Rudovsko- Krasnozavodsk deposit, increasing the volumes of
gas and gas condensate production, achieving high economic indicators
when developing the deposit with complying with requirements of labour
safety, subsoil and environment protection under the legislation of
Ukraine.
- developing technical solutions with accounting of the advanced
foreign expertise implementation of which would provide for efficient
development of the deposit and safe operation of the wells up to 6000 m
deep (including abnormally high seam pressures);
- earning profits by the partners hereof.
1.2 The subject-matter of this Agreement shall be:
- exercising joint business initially related to pilot production
operation of Rudovsko-Krasnozavodsk gas condensate deposit;
2
<PAGE>
- creation of the required production capacities for the subsequent
production operation of the deposit (production wells) with application
of the advanced foreign engineering and technologies in the field of
production and geophysical exploration of wells and seams, overhaul of
wells, intensification of hydrocarbons inflow, boring wells and in
other fields where advisable.
1.3 The partners shall combine their pecuniary, material, labour resources,
productive, technical and economic potentials for the purpose of
implementation of the joint operations goals listed in Sections 1.1,
1.2.
1.4 The Partners shall maintain their legal and property independence.
1.5 The Partners shall incur losses from the joint operations hereunder
independently (separately).
1.6 This Agreement cannot preclude performance by the Partners of their
obligations as to third persons.
1.7 In the process of their joint operations the Partners shall be governed
by the Legislation of Ukraine and this Agreement.
1.8 This Agreement shall be entered into for twenty (20) years. The Program
and the Agreed Budget of Joint Operations for the first Fiscal Year
shall have to be prepared within three months as from the date this
Agreement is signed. If the practical joint business operations on
exploration and operation of Rudovsko-Krasnozavodsk deposit is not
launched within six (6) months as from the date this Agreement is
signed, the partners shall consider the issue of repudiation of the
Agreement.
ARTICLE II
LICENSE FOR EXPLORATION AND OPERATION OF
THE HYDROCARBONS DEPOSIT
2.1 The license for exploration of Rudovsko-Krasnozavodsk deposit for the
time period of 2 years was obtained on July 31, 1995, by
"Chernigovneftegasgeologiya" state-run geological enterprise.
2.2 License No. 470 for the pilot production operation of
Rudovsko-Krasnozavodskoi deposit for the time period of 2 years was
obtained on July 31, 1995, by "Poltavaneftegas" enterprise.
2.3 The relationship between "Poltavaneftegas" enterprise and
"Chernigovneftegasgeologiya" state-run geological enterprise shall be
determined by the following documents
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(Appendices 1 and 2):
- "Agreement (protocol) on conducting joint operations for exploratory
and production operation of Rudivsko-Krasnozavodsk, Mekhedivsk,
Svystunovsk, Svyrydivsk, Chervonolutsk gas condensate deposits by
"Chernihivnaftogasgeologiya" state-run geological enterprise and
"Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director
General of "Poltavaneftegas" enterprise V.P. Kozak, by the Director
General of "Chernigovneftegasgeologiya" state-run geological enterprise
S.M. Guinda, approved by the Chairman of the Board of "Ukrneft" JSC
B.V. Zaritsky and the Deputy Chairman of the State Committee of Ukraine
for Geology B.O. Byalyuk;
- "Agreement on conducting joint operations for exploratory and
production operation of the wells of Rudivsko-Krasnozavodsk deposit by
"Chernigovneftegasgeologiya" state- run geological enterprise and
"Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director
General of "Poltavaneftegas" enterprise V.P. Kozak, by the Director
General of "Chernigovneftegasgeologiya" state-run geological enterprise
S.M. Guinda, approved by the Chairman of the Board of "Ukrneft" JSC
B.V. Zaritsky and the Deputy Chairman of the State Committee of Ukraine
for Geology B.O. Byalyuk.
"Carpatsky Petroleum Corporation" company shall bind itself with
promoting performance of agreements available between "Poltavaneftegas"
enterprise and "Chernigovneftegasgeologiya" SGE.
2.4 Prior to expiration of the validity term of the License for pilot
production operation "Poltavaneftegas" enterprise shall apply for a
License for production operation of Rudovsko-Krasnozavodsk deposit. The
Company and "Chernigovneftegasgeologiya" SGE shall not compete with
"Poltavaneftegas" enterprise with respect to obtaining the above
License and shall not facilitate other contenders in obtaining it.
ARTICLE III
ORGANIZATION OF WORKS FOR EXPLORATION AND
OPERATION OF RUDOVSKO-KRASNOZAVODSKOI DEPOSIT
3.1 "PNG" enterprise and "CPC" company shall apply all efforts for
putting the laying-up prospecting holes and the ones with drilling
completion into pilot production operation as early as possible, for
qualitative and complete exploration of wells and seams, for timely
transfer of the obtained data to the services of
"Chernigovneftegasgeologiya" state-run geological enterprise (SGE),
and by participating in summarizing assessment of the geophysical,
geological and production data, shall facilitate the services of
"Chernigovneftegasgeologiya" SGE to complete calculations of
hydrocarbons reserves in the deposit and to have them approved by the
State Commission on Reserves by June of 1997.
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3.2 In compliance with the provisions of Article 2 hereof "PNG" enterprise
has determined that the contractor for drilling operating wells shall
be "Chernigovneftegasgeologiya" SGE.
The Company shall take steps for technical re-equipment of the drilling
teams with the advanced foreign machinery, materials and technology,
geophysical support of the drilling that would provide for decreasing
well drilling duration and would facilitate for maintaining filtration
properties of the opened seams.
3.3 The Company shall secure deliveries to Ukraine, repair and service of
the progressive technological equipment for production and drilling,
organize and fund performance of the highly technological operations in
compliance with the subject-matter of the Agreement and the Joint
Operations Program.
ARTICLE IV
RIGHTS OF THE PARTNERS TO THE AGREEMENT
4 The Partners shall be entitled to the following:
4.1 To participate in solution of the issues related to co-ordination of
the joint operations and in managing the Joint Production under this
Agreement;
4.2 To obtain free of charge all the information related to the joint
operations, to have access to the accounting documents, reporting, to
the initial financial and all geological production, technological and
technical documents;
4.3 To receive into its ownership a portion of the produce made under this
Agreement or a share of the incomes from the joint operations.
ARTICLE V
DUTIES OF THE PARTNERS TO THE AGREEMENT
5 The Partners to the Agreement shall have:
5.1 To perform decisions of the Managing Committee;
5.2 To perform their obligations hereunder including those related to the
property participation in the Joint Operations in the amount, under the
procedure and by the means stipulated hereby and approved by the Joint
Operations Programs;
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5.3 Not to disclose commercial secrets and confidential information on the
joint operations;
5.4 To bear other obligations when stipulated by amendments hereto and by
the Joint Operations Programs approved by the Managing Committee.
5.5 In addition to the general obligations "PNG" enterprise shall undertake:
5.5.1 To use the license for operation of Rudovsko-Krasnozavodsk deposit for
the best interest of the joint operations.
5.5.2 To use for the best interest of the joint operations the existing
improvement objects and those under construction in the deposit, and
the wells launched but not yet put into operation prior to the
Effective Date.
5.5.3 To incur the Operating Costs related to production of hydrocarbons of
Rudovsko- Krasnozavodsk deposit.
5.5.4 To use efficiently for the best interest of the joint operations the
equipment transferred thereto for operation and to keep it in due
technical condition. To provide "CPC" company with the conditions for
control over application of the equipment transferred thereby for use.
5.5.5 To act as a customer for construction of wells and improvement objects
on the basis of a decision of the Managing Committee.
5.6 In addition to the general obligations "Carpatsky Petroleum
Corporation" company shall undertake:
5.6.1 In compliance with the Joint Operations Programs for its own account:
- to provide for deliveries to Ukraine, repair and maintenance of the
progressive mobile, mountable technological equipment for production
and repair-restoration works, and to transfer it to the Enterprise for
use;
- to provide for deliveries to Ukraine and to transfer to the
Enterprise materials, chemical reagents and stationary equipment as a
contractual foreign investment;
- to organize and fund performance of the highly technological
operations - hydraulic fracture of a seam, deep penetrating perforation
under repressure with providing for maximum preservation of the
trapping properties of a seam, etc.;
- to indemnify 50% of the operating costs to "PNG" enterprise.
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5.6.2 For the purpose of securing performance of the Joint Operations
Programs to provide for deliveries to Ukraine, repair and maintenance
of the progressive technological equipment and tools for drilling and
to transfer it to "Chernigovneftegasgeologiya" state-run geological
enterprise directly or through the Enterprise.
ARTICLE VI
JOINT OPERATIONS PROGRAM AND ITS FUNDING
6.1 The volumes of works related to drilling, repair and improvement
of the wells with distribution among the customers and implicit
contractors shall be annually approved in the form of the Joint
Operations Program. The Joint Operations Program shall have to contain
volumes of supplies of material and technical resources to be made by
the Company and shall indicate the form of transfer thereof to the
Enterprise or Ukrainian contractors, and the volumes of specific types
of services rendered by foreign firms for the account of the Company.
6.2 The Joint Operations Program shall be prepared by the respective
services of the Enterprise with participation of the Engineer Centre.
6.3 The Joint Operations Program shall have to be approved by the Managing
Committee not later than thirty days prior to the beginning of a fiscal
year except the first year and shall contain scientifically
substantiated volumes and types of works related to exploration and
operation of the deposit.
6.4 Repeated approval of the Joint Operations Program shall be performed
when necessary with occurrance of new circumstances related to
conditions of operation of the deposit, and when the incomes from sale
of hydrocarbons and the assets allocated by the Partners are not
sufficient for performance of volumes of the works earlier planned by
the Program.
6.5 The Partners are intending to fund the works planned by the Joint
Operations Programs in the ratio:
- "Poltavaneftegas" enterprise - 50%
- "Carpatsky Petroleum Corporation" company - 50%
"CPC" company shall indemnify to "PNG" enterprise 50% of the operating
costs under the requisites of "PNG" enterprise.
When necessary a Partner shall obtain credits and settle with them on
its own.
6.6 During the first year of the joint operations "CPC" company shall
indemnify at the
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contractual price the costs incurred by "PNG" enterprise prior to
commencement of the joint operations for the objects of the further
Joint Production.
6.7 For the purpose of co-ordination of the efforts of the Partners, the
Joint Operations Agreed Budget shall be developed.
6.8 The Agreed Budget shall be approved by the Managing Committee for the
next fiscal year, except the first year, 30 days prior to commencement
thereof and shall be subject to revision and re-approval in case the
Joint Operations Program is amended.
6.9 Implementation of the Joint Operations Program and the Agreed Budget
shall be subject to control on the part of the Managing Committee.
ARTICLE VII
BASIC AND ADDITIONAL HYDROCARBONS
7.1 Gas and gas condensate produced in the deposit shall be divided into
Basic and Additional Hydrocarbons.
7.2 The Basic Hydrocarbons shall be the volumes of gas and gas condensate
produced from the wells (Krasnozavodsk wells Nos. 2, 3, 4, 5, 6, 7, 8,
9 and Rudovsk wells Nos. 2, 4, 10, 100, 101, 105, 371) to be put into
operation by "PNG" enterprise. The Basic Hydrocarbons shall be the
property of the Enterprise and shall not be the product of the joint
operations hereunder.
7.3 The Additional Hydrocarbons shall be the volumes of gas and gas
condensate produced with application of the production capacities
created in the deposit after the Effective Date. The Additional
Hydrocarbons shall be the difference between the total volumes of gas
and gas condensate production and the volumes referred to the Basic
Hydrocarbons. The Additional Hydrocarbons which are the produce of the
joint operations shall be distributed between "PNG" enterprise and
"CPC" company at the ratio of 60 and 40% under Section 9.4.2.
ARTICLE VIII
ACCOUNTING OF THE PRODUCE, COSTS AND RESULTS OF PRODUCTION
8.1 The Partners shall independently keep accounting of the produce
obtained in the process of the joint operations, costs and financial
results related to the joint operations hereunder.
In compliance with Article 47 of the Decree of the Cabinet of Ministers
"On Conditions for Foreign Investing" the Partners shall organize a
separate accounting and reporting related to the operations connected
with this Agreement.
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8.2 The Partners of the joint operations shall have the right of control
over and audit of all accounting documents related to the joint
operations through performance of audits by independent auditing
entities. The auditing shall be carried out in compliance with the
legislation of Ukraine and shall be paid for by the Partners in
proportion to the shares thereof. The audits which are not stipulated
by the plan, shall be paid for by the initiators thereof.
8.3 The Enterprise shall keep the consolidated accounting of the produce,
costs and results of the joint operations. All Partners shall promptly
supply the required information for keeping such accounting. The
consolidated accounting shall be kept in terms of the currency of the
actual payments, and in terms of US dollars and the national currency
of Ukraine. The data of the consolidated accounting shall be
transferred to all partners to the Agreement on the systematic basis.
8.4 The accrued Capital Costs, the accrued operating costs and the Actual
Shares of either Partner in the accrued Aggregate Costs shall be
determined quaterly on the basis of the consolidated accounting data.
8.4.1 The accrued Capital Costs of the Enterprise shall have to include:
- the costs for construction and overhaul of the wells and improvement
objects incurred prior to the Effective Date and not related to
production of the Basic Hydrocarbons;
- the costs under the Joint Operations Programs for contractual
drilling, industrial construction and overhaul at the actual
contractual prices with accounting of the cost of the material
resources given to the contractors;
- the costs under the Joint Operations Programs for industrial
construction and overhaul performed through its own efforts at the
actual cost.
8.4.2 The accrued Capital Costs of the Company shall have to include:
- the costs under the Joint Operations Programs for contractual
drilling, industrial construction and overhaul at the actual
contractual prices with accounting of the cost of the material
resources given to the contractors;
- the cost of the material resources transferred to the contractors or
the Enterprise for the purpose of securing accomplishment of the joint
Operations Programs;
- depreciation deductions as to the equipment transferred to the
Enterprise and Ukrainian contractors for use;
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- cost of the services rendered by foreign firms at the expense of the
Company under the approved Joint Operations Programs.
8.4.3 The Actual Share of either Partner shall be quarterly determined on the
basis of the information about the Accrued Capital Costs.
8.5 The Accrued Capital Costs and the Actual Shares of the Partners shall
be subject to approval by the Managing Committee.
8.6 The costs related to the wells from which the Basic Hydrocarbons are
extracted, shall not be included into the Accrued Capital Costs. The
Company can operate such wells under a separate agreement with the
Enterprise.
ARTICLE IX
PROPERTY RELATIONS OF THE PARTNERS
9.1 The property created or acquired by any of the Partners in connection
with implementation hereof shall be the property of the respective
Partner. To perform the Joint Operations Program the property of one
Partner can be transferred to the other Partner or a contractor for
use.
9.2 The property owned by any of the Partners can be sold or transferred
into ownership of the other Partner including as a foreign investment
in compliance with the legislation of Ukraine.
9.3 The property owned by any of the Partners and used for the joint
operations hereunder, can be sold or transferred into ownership of a
legal entity or an individual which is not a Partner as agreed upon
with the managing Committee.
9.4 Hydrocarbons produced in Rudovsko-Krasnozavodsk deposit shall become
the property of the partners under the following terms and conditions:
9.4.1 the Basic Hydrocarbons are the property of the Enterprise.
9.4.2 the Additional Hydrocarbons are distributed between the Partners hereto
depending on the Shares of the Partners in the Consolidated Accrued
Costs. "CPC" company with 50% share in the Consolidated Accrued Costs
shall be given 40% of the Additional Hydrocarbons.
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ARTICLE X
SALE OF THE PRODUCE FROM THE JOINT OPERATIONS
10.1 The produce from the joint operations can be sold by the Enterprise
under an agreement with the Company or by either Partner independently.
In the first case the payment for the sold produce shall be exercised
under the requisites indicated by "CPC" company.
ARTICLE XI
PROCEDURE FOR CONDUCTING THE JOINT OPERATIONS
11.1 Management of the general business related to performance of the
Agreement terms and conditions, to organization and management of the
works, representation to third persons shall be assigned to the
Enterprise which is vested with the respective authority on behalf of
the Partners. The operative management of the operations shall be
exercised by the charter managerial bodies of the Enterprise.
11.2 The procedure for selling the produce and for settlements shall be
determined hereby and specific agreements with produce buyers.
11.3 The control over the financial and business operations of the partners
shall be exercised by the auditing bodies of the Partners to be
determined by the Partners. In so doing the Partners shall have the
right to get familiarized with any documents within the scope of their
joint operations.
11.4 Solution of the issues related to exercising the joint operations which
require mutually agreed upon solutions, shall be carried out when
necessary through convening meetings of the Managing Committee by the
Chairman under the plans for the Committee operation, upon the own
motion of the Chairman or upon a request of any of the Partners.
Decisions may also be made through exchange of letters, cables, fax
messages, etc., notices in writing.
ARTICLE XII
CO-ORDINATION OF THE JOINT OPERATIONS AND
MANAGEMENT OF THE JOINT PRODUCTION
12.1 Co-ordination of the joint operations and management of the Joint
Production shall be exercised on the basis of decisions of the Managing
Committee. Initially the Managing Committee shall consist of 3
representatives from either Partner. The Chairman of the Managing
Committee is the Director General of "Poltavaneftegas" enterprise. Upon
expiration of i year of the joint operations hereunder the composition
of the Managing Committee shall revised in such a way in order to
account of the Actual Share of the Partners in the joint operations.
Further on the composition of the Managing Committee shall be revised
in compliance with the actual shares every two years.
12.2 The decisions of the Managing Committee shall be made through
individual unanimous vote.
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12.3 The operative control over the Joint Production shall be exercised by
the services of the Enterprise.
12.4 The Enterprise in line with the Company and the Engineer Centre shall
prepare the documents required to the Managing Committee for making
decisions on co-ordination of the joint operations. The Engineer Centre
shall be formed upon a decision of the Managing Committee.
ARTICLE XIII
CONFIDENTIALITY OF INFORMATION
13.1 Any information transferred by one Partner to the other one within the
effective time period hereof and containing the information on the
works performed, produce, prices, negotiations and proposals including
the terms and conditions hereof disclosure of which may inflict losses
to any of the Partners, shall be confidential and shall not be subject
to disclosure to third persons except the cases stipulated by the
legislation in force.
13.2 Any other information proposed by any of the Partners or proposals or
ideas, shall not have to be considered as secret or confidential
information except the cases when it is specially stipulated in an
additional agreement signed by representatives of the Partners.
ARTICLE XIV
MUTUAL LIABILITY OF THE PARTNERS AND
SETTLEMENT OF DISPUTES
14.1 Either Partner shall be materially liable for default or undue
performance of the terms and conditions hereof and appendices hereto,
and in case of violation thereof shall have to indemnify to other
Partners direct losses occurred due to its fault.
14.2 The Partners to the Agreement shall be exempted from liability if the
due performance thereby of their obligations have been interfered with
circumstances of insuperable force, particularly acts of God, war
operations or mass riots, changes in the legislation in force,
substantial reduction in state prices on gas or other circumstances
beyond the control of the Partners and affecting performance thereby of
the obligations hereunder, etc. The affected Partner shall have to
notify with no delay the other Partner on occurrence of such
circumstances, anticipated time period of their effect and their
termination.
14.3 Any disputes and discrepancies, differences arising from or in
connection with this Agreement shall be settled through amicable
negotiations. When the amicable settlement fails to be achieved within
ninety (90) days as from the date of the notice of one of the
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Partners about existence of a dispute, discrepancy, claim, the case
shall be submitted to the Arbitration.
14.4 In case of failure to reach the agreed upon settlement the parties
hereto shall aplly to the International Commercial Arbitration Court
with the Chamber of Commerce and Industry of Ukraine in Kiev (3,
Zhitomirskaya St.) for final settlement of the dispute.
ARTICLE XV
PROCEDURE FOR REPUDIATION OF THE AGREEMENT
15.1 If upon the opinion of one of the Partners it is unable to perform its
obligations due to failure of the other Partner to comply with the
contractual obligations or due to occurrence of the circumstances
interfering with the proper performance of the Agreement, such Partner
shall have to notify the other Partners in writing as to the reasons
causing repudiation of the Agreement.
15.2 The Agreement can be terminated prematurely, prior to expiration of the
established 20 year time period, when the Partners arrive to the
conclusion that the goals of the Agreement cannot be achieved or
continuation hereof is not advisable due to unprofitability of the
joint operations. In such case a Liquidation Commission shall be formed
which assumes all authority for completion of the joint operations
including sale of the property, repayment of debts, settlements with
the Partners.
15.3 In case one of the Partners intends to withdraw from the composition of
the Partners hereto, it shall have to notify thereabout the other
Partner not later than 3 months prior to the date of withdrawal.
Upon expiration of the above time period the Partner shall be deemed
departed from the composition of the Partners of the joint operations,
and within the next three months mutual settlements therewith shall be
carried out with reference to distribution of the produce and the
profit.
15.4 In case of repudiation of the Agreement due to withdrawal of the
Licensee from the composition of the Partners, it (the Licensee) shall
within three (3) months indemnify to the other Partner its costs
related to acquiring or creating the property on its balance sheet.
15.5 A Partner (except the Licensee) can be excluded from the number of the
Partners to the Agreement in case it fails to perform its obligations
under the Agreement.
15.6 In case of repudiation hereof or withdrawal herefrom, the property
transferred by the Partners each other for use, shall be returned to
the owner.
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15.7 Article XV shall be subject to making it more precise in the process of
development of the Working Program for the first fiscal year.
ARTICLE XVI
MISCELLANEOUS
16.1 As mutually agreed upon by the Partners this Agreement can be amended
and supplemented including involvement of other Partners into the joint
operations.
16.2 The Partners to the Agreement have agreed that within the time period
of development of the Program and the Agreed Budget of the Joint
Operations, an Accounting Agreement shall be prepared and signed.
16.3 The Partners represent:
- that they have all powers required to sign this Agreement;
- that they will not take actions that can be detrimental to goals and
tasks hereof.
16.4 This Agreement has been made on 14 pages and signed in 2 duplicates of
equal legal force, one for each of the Partners.
THE AGREEMENT HAS BEEN SIGNED
For "Poltavaneftegas" Enterprise
V.P. Kozak
(Director General)
For "Carpatsky Petroleum Corporation"
Company
L. Texas
(Company President)
AGREED
Article 2 and Sections 3.1, 3.2
Director General of
"Chernigovneftegasgeologiya" state-run
geological enterprise
S.M. Guinda
, 1995
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ATTACHMENT 2
TO OPINION LETTER
AGREEMENT
on introducing amendments and addenda to agreement No. 410/95
dated September 14, 1995, on joint activity between
"Poltavanaftogas" enterprise and "Carpatsky Petroleum Corporation" company, USA
Poltava
London October 15, 1996
"Poltavanaftogas" enterprise and "Carpatsky Petroleum Corporation"
company, USA, on the basis of the provisions of the Law of Ukraine "On Treatment
of Foreign Investments" passed by the Verkhovna Rada of Ukraine ans put into
effect as from April 16, 1996, and on the basis of by-laws adopted for the
purpose of creating the mechanism for implementation of the provisions of the
above law, have agreed as follows:
1 Amendments and addenda shall have to be introduced into agreement No.
410/95 entered into between them on September 14, 1995, with setting it
forth in the following (new) wording making the title of the agreement
more precise:
AGREEMENT No. 410/95
as of September 14, 1995, on joint investment and production activity
for development and exploitation of Rudivsk-Chervonozavodsk deposit
"Poltavanaftogas" enterprise and "Carpatsky Petroleum Corporation"
company, USA, hereinafter referred to as the "Partners" have made and entered
into this agreement as follows:
DEFINITIONS OF THE PRINCIPAL TERMS
Partners shall have to be understood as legal entities that have initially
entered into this Agreement, and further on any legal entities and individuals
that can join the Agreement.
Enterprise shall have to be understood as "Poltavanaftogas" enterprise, a
partner to this Agreement.
Company shall have to be understood as "Carpatsky Petroleum Corporation" company
registered in the State of Texas, USA, a partner to this Agreement.
Joint Activity shall have to be understood as activity based on cooperation
between the Partners to this Agreement and stipulating division of risks and
results of such activity.
Investments shall have to be understood as property and intellectual valuables
contributed into development and exploitation of Rudivsk-Chervonozavodsk gas
condensate deposit in compliance with this Agreement.
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Initial Contribution shall have to be understood as property and intellectual
valuables that initially (within 1996) are contributed by the Partners onto the
Individual Balance Sheet for the purpose of exercising the Joint Activity for
development and exploitation of Rudivsk- Chervonozavodsk gas condensate deposit.
Development of Rudivsk-Chervonozavodsk deposit shall have to be understood as a
package of works carried out under the projects for the pilot production
operation of the deposit and performed during exploratory works in the deposit
prior to approval of the reserves under the procedure prescribed by the State
Commission for Reserves.
Exploitation of Rudivsk-Chervonozavodsk deposit shall have to be understood as
a package of works carried out within the time period of production exploitation
of the deposit within the volumes determined by the exploitation project.
Managing Committee shall have to be understood as the supreme leading body
composed of executives and authorized representatives of the Partners and
authorized to make decisions on the principal issues of the Joint Activity -
preparation of amendments and addenda to this Agreement, approval of the Joint
Activity Programs and Agreed Budgets, exercising control over performance
thereof, selection of contractors for performance of works related to drilling
boreholes, to comprehensive geophysical exploration, to hydrofracture of seams
and/or other works of high value, to coordination of contracts for performance
of works to the amount of over two million US dollars and contracts for purchase
of the property to be transferred onto the Balance Sheet of the Joint Activity
to the amount over five hundred thousand US dollars, to coordination of the
terms and conditions for termination of the Joint Activity.
Joint Venture shall have to be understood as the object of the Joint Activity
under this Agreement namely the production capacities and capital funds of
Rudivsk-Chervonozavodsk deposit initially allotted for the Individual Balance
Sheet, and created in the process of the Joint Activity.
Individual Balance Sheet, Balance Sheet of the Joint Activity shall have to be
understood as the individual balance sheet of "Poltavanaftogas" enterprise
designated for keeping records of the property combined by the Partners to this
Agreement for the purpose of implementing the Joint Activity and created in the
process of such activity, and for keeping records of business operations under
the Joint Activity and of financial results.
Individual Settlement Account shall have to be understood as an individual
settlement account to be opened with one of the banks of Ukraine for ensuring
the Joint Activity.
Agreed Budget of the Joint Activity shall have to be understood as a document
that determines the expenses for performance of the Joint Activity Program. The
Agreed Budget of the Joint Activity shall account of all funding sources
including the own assets of the Partners designated for acquiring material
resources for the Joint Activity.
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Licensee, Licensees shall have to be understood as "Chernihivnaftogasgeologiya"
state-run geological enterprise and "Poltavanaftogas" enterprise.
Fiscal Year shall have to be understood as a calendar year and for the first
year of the Joint Activity the time period from the date of transfer of the
Initial Contribution of "Poltavanaftogas" enterprise onto the Individual Balance
Sheet through to the end of the calendar year.
Capital Costs shall have to be understood as one time expenses for creation of
the capital funds on Rudivsk-Chervonozavodsk deposit which expenses are incurred
in compliance with the terms and conditions of this Agreement. Current Costs
shall have to be understood as the expenses for production of gas and gas
condensate which expenses under the legislation of Ukraine are calculated on the
basis of the incomes from sale of the produce when determining the taxable
profit (referred to self-cost of the produce).
Effective Date shall have to be understood as the date Agreement No. 410/95 is
agreed upon by the leading bodies of "Ukrnafta" OJSC, that is September 22,
1995.
Engineering Centre shall have to be understood as a working body with the
Managing Committee.
ARTICLE I
General Provisions
1.1 This Agreement is made and entered into for the purpose of:
- earning incomes by the Partners hereof;
- providing for organizational and economic conditions for joint
investment of development and exploitation of Rudivsk-Chervonozavodsk
gas and gas condensate deposit, application of the advanced technical
facilities of domestic and foreign origin for intensifying exploration
and operation thereof, increasing volumes of production of gas and gas
condensate, achieving high economic indices when exploiting the deposit
with compliance with requirements of labour safety, protection of the
subsoil and the environment;
- development of engineering solutions with accounting of the advanced
foreign experience implementation of which would provide for efficient
exploitation of the deposit and safe performance of works in the wells
over 5000 m deep (under abnormally high seam pressures including).
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1.2 The subject-matter of this Agreement shall be:
- exercising the joint investment activity with creation of the
required production capacities for operation of Rudivsk-Chervonozavodsk
gas and gas condensate deposit, implementation of the advanced
engineering and technologies in the field of productive and geophysical
exploration of the wells and seams, overhaul of the wells and
improvement thereof;
- exercising the joint production and business activity related to
production of gas and gas condensate in the process of the development
and exploitation of Rudivsk- Chervonozavodsk gas and gas condensate
deposit with application of production capacities and capital funds
created in the process of the investment activity;
- division of the incomes from the Joint Activity in the form of the
balance profit or produce.
1.3 The Partners shall combine their pecuniary, material, labour resources,
production, technical and economic potentials for the purpose of
realization of the targets of the Joint Activity.
1.4 The Partners shall keep their legal independence. The property
independence of the Partners shall be restricted in part of disposal of
the property on records of the Individual Balance Sheet.
1.5 The Partners shall bear liability under the obligations kept on the
records of the Individual Balance Sheet in proportion to their shares
in investment of the Joint Activity. In case of bankruptcy of one of
the Partners, the liability under the obligations kept on the records
of the Individual Balance Sheet shall be re-distributed between other
Partners in proportion to their shares in investment of the Joint
Activity.
1.6 In case the obligations are not kept on the records of the Individual
Balance Sheet but rather assumed by one of the partners on the basis of
the powers of attorney of all other Partners, the liability under such
obligations shall be borne by all Partners in proportion and under the
procedure set forth in Section 1.5. The provisions of this Section
shall in no way expand to the obligations related to the acquiring by
the Foreign Partner of the equipment or other property subject to
supplies to Ukraine as the foreign investment (a contribution into the
Joint Activity).
1.7 The risk of accidental loss or damage of the property kept on the
records of the Individual Balance Sheet and being the general share
property, shall be borne by the Partners according to their shares.
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1.8 The risk of accidental loss of the property used by the Partners in the
operations related to performance of this Agreement but not transferred
onto the Individual Balance Sheet, shall be borne by the respective
Partner.
1.9 This Agreement cannot interfere with performance by the Partners of
their obligations related to third persons.
1.10 In the process of their Joint Activity the Partners shall be governed
by the legislation of Ukraine and this Agreement.
1.11 Amendments to this Agreement including amendments caused by joining it
by new Partners, shall be introduced upon the mutual consent.
1.12 Termination of any section hereof in connection with such section
becoming contradictory to changes in the legislation of Ukraine, shall
not involve termination of the Agreement as a whole. In case of such
contradictions available the Partners shall introduce amendments and
addenda to the text of the Agreement.
1.13 This Agreement shall be entered into for twenty (20) years.
ARTICLE II
Terms and Conditions for Investment of Development and Exploitation
of Rudivsk-Chervonozavodsk Deposit
2.1 The Partners intend to invest the Joint Activity on exploitation of
Rudivsk- Chervonozavodsk gas and gas condensate deposit at the
following ratio:
- "Poltavanaftogas" enterprise - 50%
- "Carpatsky Petroleum Corporation" company - 50%
2.2 "Carpatsky Petroleum Corporation" company shall in 1996 transfer onto
the Individual Balance Sheet the Investments in the form of pecuniary
assets and property to be its Initial Contribution into the Joint
Activity to the total amount of 4 800 thousand US dollars including:
- pecuniary assets in terms of free convertible foreign currency -
2 500 thousand US dollars;
- property (equipment, tools, transport facilities and materials) to
the amount of 2 300 thousand US dollars.
2.3 The list of the property contributed in 1996 as the Investment of
"Carpatsky Petroleum Corporation" company is given in Appendix 1
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hereto. Under an additional agreement of the Partners Appendix 1 can
be re-approved without changing the total amount of the Initial
Contribution and revision of other provisions hereof.
2.4 In 1996 "Poltavanaftogas" enterprise shall provide for transfer from
the balance sheet of the principal activity onto the Individual Balance
Sheet of the property including the objects of uncompleted construction
assessed under the prescribed procedure by specialized entities having
relevant licenses.
2.5 Commencing with 1997 investment of the Joint Activity shall be carried
out in compliance with the Joint Activity Programs and the Agreed
Budget. The Partners shall agree that the approved Joint Activity
Program and the Agreed Budget of any year are the Appendices hereto.
2.6 Subsequently investment of the Joint Activity shall be carried out by
the Partners in compliance with the Joint Activity Programs with
observance of the relations set forth in Section 2.1. At the same time,
if any of the Partners declares that it is not able to provide for 50%
of the investment required for performance of the optimal Joint
Activity Program and the other Partner can cover the deficit of the
financial assets, the Managing Committee can make a decision on
altering for a specific time period the proportional shares of the
Partners in the investment through amending the Agreed Budget.
ARTICLE III
Licenses for Exploration and Operation of Hydrocarbon Deposits
3.1 The license for exploration of Rudivsk-Chervonozavodsk deposit for a
time period of 2 years was obtained by "Chernihivnaftogasgeologiya"
state-run geological enterprise (SGE) on July 31, 1995.
3.2 The license for pilot production operation of Rudivsk-Chervonozavodsk
deposit for a time period of 2 years was obtained by "Poltavanaftogas"
enterprise on July 31, 1995.
3.3 The following documents shall be considered as mutual between
"Poltavanaftogas" enterprise and "Chernihivnaftogasgeologiya" SGE:
- "Agreement (protocol) on conducting the joint works of pilot
production operation of Rudivsk-Chernovozavodsk, Mekhedivsk,
Svystunkiv, Svyrydivsk, Chervonolutsk gas and gas condensate deposits
by "Chernihivnaftogasgeologiya" state-run geological enterprise and
"Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director
General of "Poltavanaftogas" enterprise V.P. Kozak, by the Director
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General of "Chernihivnaftogasgeologiya" state-run geological
enterprise S.M. Guinda, approved by the Chairman of the Board of
"Ukrnafta" JSC B.V. Zaritsky and the Deputy Chairman of the State
Committee of Ukraine for Geology B.O. Byalyuk;
- "Agreement on conducting joint works of pilot production operation of
the wells of Rudivsk-Chernovozavodsk deposit by
"Chernihivnaftogasgeologiya" state-run geological enterprise and
"Poltavanaftogas" enterprise" signed on May 16, 1995, by the Director
General of "Poltavanaftogas" enterprise V.P. Kozak, by the Director
General of "Chernihivnaftogasgeologiya" state-run geological enterprise
S.M. Guinda, and approved by the Chairman of the Board of "Ukrnafta"
JSC B.V. Zaritsky and the Deputy Chairman of the State Committee of
Ukraine for Geology B.O. Byalyuk.
"Carpatsky Petroleum Corporation" company shall bind itself with
promoting performance of agreements available between "Poltavanaftogas"
enterprise and "Chernihivnaftogasgeologiya" SGE.
3.4 Prior to expiration of the validity term of the License for pilot
production operation "Poltavanaftogas" enterprise shall apply for a
License for production operation of Rudivsk-Chervonozavodsk deposit
under the procedure established in "Ukrnafts" JSC. The application for
obtaining the license shall have to set forth that "Poltavanaftogas"
enterprise acts for the best interests of the Partners hereto. For the
purpose of formulation of the contractual terms and conditions for use
of the subsoil of Rudivsk- Chervonozavodsk deposit "Poltavanaftogas"
enterprise with participation of specialists of the Company shall
develop the draft License Agreement and shall organize its signing by
the relevant governmental authorities. The Partners hereto shall not
compete with "Poltavanaftogas" enterprise on issues of obtaining the
above License, and shall not facilitate directly or indirectly other
contenders in obtaining it.
ARTICLE IV
Organization of Works on Exploration and Operation of
Rudivsk-Chervonozavodsk Deposit
4.1 "Poltavanaftogas" enterprise shall be recognized as the Operator as it
is traditionally understood in the international oil and gas business
and shall carry out the whole organizational and practical activity
related to operation of Rudivsk-Chernovozavodsk deposit. Specific
operations related to development of the deposit, drilling and overhaul
of the wells under decisions of the Managing Committee can be
performed/organized by the Company on its own or with involvement of
foreign contractors.
4.2 In compliance with the provision of Article 2 hereof the Enterprise has
determined that "Chernihivnaftogasgeologiya" SGE and the drilling
entities of "Ukrnafta" JSC shall act as contractors for drilling
production wells.
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The Company shall implement measures for technical re-equipment of the
drilling teams with foreign machinery, materials and technology,
geophysical support of the drilling that would provide for reducing
duration of wells drilling and would facilitate preservation of the
filtering properties of seams to be opened. The specific measures for
technical re- equipment of drilling teams shall have to be stipulated
by the Joint Activity Programs.
In November, 1996, the Company will receive a working group of
Ukrainian specialists in Houston, USA, and will give them chance to
study the experience of operation of the drilling entities of USA. The
specialists of the Company and the Ukrainian specialists shall jointly
prepare proposals on stage-by-stage technical re-equipment of the
Ukrainian drilling entities involved in Rudivsk-Chernovozavodsk
deposit.
4.3 The Enterprise and the Company shall implement measures for accelerated
putting into pilot production operation of prospecting boreholes those
which are in laying-up condition or being drilled, for qualitative and
complete exploration of the wells and seams, for timely submission of
the obtained data to services of "Chernihivnaftogasgeologiya" state-run
geological enterprise (SGE), and, by participating in the summarizing
evaluation of geophysical, geological and production data, shall
facilitate the services of "Chernihivnaftogasgeologiya" SGE in
completing calculations of hydrocarbon reserves in the deposit and
approval thereof by the State Commission for Reserves by June of 1997.
4.4 The Company shall provide for supplies into Ukraine of the progressive
equipment and tools for operation of the wells, their overhaul and
exploration, shall organize performance of highly technological
operations by foreign contractors in compliance with the subject-matter
of the Agreement and the Joint Activity Program.
ARTICLE V
Rights of the Partners to the Agreement
5.1 The Partners shall have the following rights:
5.1.1 To participate in solution of the issues related to co-ordination of
the Joint Activity and in managing the Joint Venture under this
Agreement;
5.1.2 To obtain free of charge all the information related to the Joint
Activity, to have access to the accounting documents, reporting, to the
initial financial and all geological production, technological and
technical documents;
5.1.3 To receive a portion of the incomes from the Joint Activity or a
portion of the produce extracted under this Agreement.
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ARTICLE VI
Obligations of the Partners to the Agreement
6.1 The Partners to the Agreement shall have:
6.1.1 To comply with this Agreement and perform decisions of the Managing
Committee;
6.1.2 To perform their obligations hereunder including those related to the
property participation in the Joint Activity in the amount, under the
procedure and by the assets stipulated hereby and approved by the Joint
Activity Programs;
6.1.3 Not to disclose commercial secrets and confidential information on the
Joint Activity;
6.1.4 To bear other obligations when stipulated by amendments hereto and by
the Joint Activity Programs approved by the Managing Committee.
6.2 In addition to the general obligations the Enterprise shall undertake:
6.2.1 To perform the functions of the Operator on operation of
Rudivsk-Chernovozavodsk deposit including keeping the accounting of the
property of the Partners to be transferred for the Joint Activity, and
the operations under the Joint Activity on the Individual Balance
Sheet;
6.2.2 To use the license for operation of Rudovsko-Chernovozavodsk deposit
for the best interest of the Joint Activity;
6.2.3 To use for the best interest of the Joint Activity the existing
improvement objects and those under construction in the deposit, and
the wells launched but not yet put into operation prior to the
Effective Date;
6.2.4 To serve the objects of the Joint Activity (the Joint Venture) by the
Enterprise personnel, to exercise day-today management of the Joint
Venture, to perform specific technological operations on the conditions
of cooperation;
6.2.5 To use efficiently for the best interest of the Joint Activity the
equipment transferred thereto for use under the terms and conditions of
individual agreements and designated for application when rendering
services to the Joint Venture. To provide the Partners with the
conditions for control over application of the equipment given thereby
for use;
6.2.6 To act as a customer for construction of wells and improvement objects.
6.3 In addition to the general obligations "Carpatsky Petroleum Corporation"
company shall undertake:
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6.3.1 To supply the Enterprise with scientific and technical information on
the advanced achievements in the field of exploration, development of
hydrocarbon deposits, production of oil, gas and gas condensate, to
organize the training of specialists abroad.
6.3.2 To ensure participation of foreign specialists in development of the
Working programs and the agreed Budgets of the Joint Activity.
ARTICLE VII
Joint Activity Program and its Funding
7.1 The volumes of works related to drilling, repair and improvement of the
wells with distribution among the customers and implicit contractors
shall be annually approved in the form of the Joint Activity Program.
The Joint Activity Program shall have to contain volumes of supplies of
material and technical resources to be made by the Company with
indicating the form of transfer thereof to the Enterprise or Ukrainian
contractors, and the volumes of specific types of services rendered by
foreign firms.
7.2 The Joint Activity Program shall be prepared by the respective services
of the Enterprise with participation of the Engineer Centre.
7.3 The Joint Activity Program shall be approved by the Managing Committee
not later than thirty days prior to the beginning of a Fiscal Year and
contain scientifically substantiated volumes and types of works related
to efficient exploitation of the deposit under the projects.
7.4 Repeated approval of the Joint Activity Program shall be performed when
necessary with occurrence of new circumstances related to conditions of
operation of the deposit, and when the incomes from sale of
hydrocarbons and the assets allocated by the Partners are not
sufficient for performance of volumes of the works earlier planned by
the Program.
7.5 The Joint Activity programs shall be approved on the basis of the
mutual consent of the Partners. In case contradictions arise with the
Partners in connection with the principal positions of the Joint
Activity Program, they can be separated as the Great Risk Operations as
stipulated in Article IX.
7.6 The Partners shall have no right to carry out on
Rudovsko-Chernovozavodsk deposit the works that are not stipulated by
the Joint Activity Program or are not separated as the Great Risk
Operations.
7.7 The demand in financial resources for conducting exploration works
stipulated by the Joint Activity Program and the works related to
creation of the capital funds, shall be covered at the expense of:
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- pecuniary contributions (investments) of the Partners that are
transferred onto the Individual Balance Sheet;
- pecuniary assets of the Partners that are used thereby for acquiring
or creating the property in the form of equipment, transport
facilities, structure elements, other material; resources, and
structures, buildings, transmitters transferred onto the Individual
Balance Sheet.
The demand in financial resources for performance of operations related
to production of gas and gas condensate (for current expenses) during
the initial period of activity under this Agreement, shall be covered
at the expense of the pecuniary assets transferred by the Partners onto
the Individual Balance Sheet and subsequently at the expense of the
incomes from sale of the produce of the Joint Activity.
7.8 For the purpose of co-ordination of the efforts of the Partners, the
Agreed Budget of the Joint Activity shall be developed. The Agreed
Budget shall be developed on the basis of the anticipated expenses
under the operations performed by "Poltavanaftogas" enterprise, of the
market prices on services and produce of contractors and suppliers
(hereinafter - the Settlement Prices), of the volumes of works and
services, of the rates of taxation and compulsory payments.
7.9 The Agreed Budget shall be approved by the Managing Committee for the
next fiscal year thirty days prior to commencement thereof and shall be
subject to revision and re- approval in case of alteration of the Joint
Activity program, and in case the settlement prices are changed due to
objective reasons. The Agreed Budget shall be formed with compliance
with the provisions of Section 2.1. At the same time, if one of the
Partners cannot fund 50% of expenses required for performance of the
optimal Joint Activity Program and the other Partner can cover the
deficit of the financial assets, the Managing Committee can stipulate
other ratio in funding as stipulated by Section 2.6 hereof.
7.10 If within a year it becomes evident that any of the Partners cannot
fund the expenses stipulated by the Agreed Budget for the current year,
it shall notify other Partners thereabout. The latter shall have to
notify within 30 days as to their intent and possible time period for
funding the expenses that are not covered by the Partner that has
notified thereabout. Within the subsequent 15 days the Partners shall
arrive to the consent on such issue or shall begin a special sitting of
the Managing Committee that will decide the issue of updating the Joint
Activity Program and the Agreed Budget.
7.11 A Partner shall have no right, with no consent of the other Partner,
to fund performance of the Joint Activity Program at the rate that
exceeds the amounts stipulated by the Agreed Budget.
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7.12 The Company shall place pecuniary assets for the purposes of the Joint
Activity from its accounts with foreign banks and from accounts of its
representative office in Ukraine to the Individual Settlement Account
to be opened by "Poltavanaftogasgeologiya" enterprise for
implementation of the goals of this Agreement.
7.13 "Poltavanaftogas" enterprise shall in operative way (not less than once
a decade) inform the Company as to the flow of the assets obtained
therefrom (through submission of registers of the credit payment orders
received from the serving bank).
7.14 Performance of the Joint Activity program and of the Agreed Budget
shall be controlled by the Managing Committee that considers the
results of operation for the first half of the year and the fiscal
year.
ARTICLE VIII
Project of Pilot Production Operation of Rudovsko-Chernovozavodsk Deposit
8.1 The Partners have agreed that the project of pilot production operation
developed by "UkrNGI" JSC in 1996 and approved through the established
procedure, shall be the basis for development of the Joint Activity
programs.
8.2 The Partners shall organize systematic control over realization of the
project of pilot production operation of the deposit and, when
necessary, shall carry out the works on adjusting the above project and
its re-approval.
ARTICLE IX
Great Risk Operations
9.1 The Great Risk Operations herein shall be understood as implementation
of the projects that are not included into the Joint Activity Programs
due to disconsent of one of the Partners.
9.2 The following can be considered as the Great Risk Operation:
- performance of the additional seismic survey on the lots where
similar works have been carried out;
- performance of three dimensional seismic explorations;
- drilling additional prospecting boreholes and individual outstripping
production wells in excess of the volumes stipulated by the projects
of pilot production operation that has been in effect as on the moment
of signing this Agreement.
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9.3 The Great Risk Operations can be conducted by "Poltavanaftogas"
enterprise at its own expense or can be funded by "Carpatsky Petroleum
Corporation" company under the risk conditions. In case of the negative
result of such Great Risk Operations, the expenses for performance
thereof shall not be accounted of when determining the Actual Shares of
the Partners. In case of the positive result the expenses for
performance of the above operations shall be accounted of when
determining the Actual Shares of the Partners with factor 2.0.
9.4 In case the Partners disagree as to assessment of the results of the
Great Risk Operations mentioned in Section 9.3, the dispute shall be
presented for consideration of a special expert group. The special
expert group shall be formed of three (3) persons. The expert group
shall have to be composed of:
- one specialist of a Ukrainian research institute or VNZu;
- one specialist of ANI or other internationally recognized scientific
institution of oil type of one of European countries;
- one specialist of a leading Russian oil research institute or VNZu.
Two first experts shall be appointed by respective parties, and the
third expert shall be appointed by the two first ones.
The award of the expert group shall be final.
ARTICLE X
Basic and Additional Hydrocarbons
10.1 Gas and gas condensate produced on the deposit shall be divided into
Basic and Additional Hydrocarbons.
10.2 Basic Hydrocarbons shall be the volumes of gas and gas condensate
produced from the wells (Chervonozavodsk ones Nos. 2, 3, 4, 5, 6, 7, 8,
9 and Rudivsk ones Nos. 2, 4, 10, 101, 105, 371) that are put into
operation by the Enterprise independently prior to the Effective Date
and/or are not transferred onto the Individual Balance Sheet. Basic
Hydrocrbons shall be the property of the Enterprise and shall not be
the product of the Joint Activity under this Agreement.
10.3 Additional Hydrocarbons shall be the volumes of gas and gas condensate
produced with application of the production capacities of the Joint
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Venture. Additional Hydrocarbons shall be the difference between the
total volumes of produced gas and gas condensate and the volumes
referred to Basic Hydrocarbons.
The Balance Profit from realization of Additional Hydrocarbons or they
themselves, in case an additional agreement is signed, shall be
distributed between the Partners to this Agreement.
ARTICLE XI
Accounting of the Property, of Operations under the Joint Activity,
of Expenses for Performance Thereof and of Production Results
11.1 The accounting of the pecuniary assets and the property integrated by
the Partners for performance of the Joint Activity, and of the property
created in the process of such activity, shall be kept by
"Poltavanaftogas" enterprise on the Individual Balance Sheet.
11.2 The expenses for performance of prospecting operations, for drilling
the production wells, for capital construction including the acquiring
of equipment in Ukraine, for performance of research works and other
expenses that are not referred to self-cost of the produce of the Joint
Activity, shall be paid from the Individual Settlement Account to be
opened by "Poltavanaftogas" enterprise to ensure the Joint Activity and
to be reflected in the Individual Balance Sheet.
In addition to the above, when necessary and under the Joint Activity
Programs, the Partners shall, at the expense of their own
(unintegrated) assets, incur expenses of capital character with
subsequently referring them to the value of the capital funds to be
transferred onto the Individual Balance Sheet of the Joint Activity.
11.3 Under the terms and conditions of a separate Operating Agreement,
"Poltavanaftogas" enterprise shall develop Rudivsk-Chervonozavodsk gas
condensate deposit and shall bear current expenses for rendering
services to the Joint Venture related to extraction of the produce of
the Joint Activity. The services on extraction of the produce of the
Joint Activity shall be paid from the Individual Settlement Account to
the settlement account of "Poltavanaftogas" enterprise.
11.4 As stipulated by the Working Program the Company shall perform
individual operations related to exploitation of the deposit under the
terms and conditions similar to those listed in Section 11.3.
11.5 Self-cost of the produce of the Joint Activity shall be formed from the
current expenses for payment for the services of "Poltavanaftogas"
enterprise and the Company mentioned in Sections 11.3 and 11.4, and of
other enterprises, from depreciation (amortization) of the fixed assets
on the records of the Individual Balance Sheet, from compulsory
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deductions and payments referred to the self-cost of the produce, from
expenses for acquiring materials and energy resources, and other
expenses referred to the self-cost of the produce in compliance with
the legislation of Ukraine in force.
11.6 After the expenses for extraction of the produce are entered onto the
Individual Balance Sheet the self-cost thereof and the financial
results of the Joint Activity are formed. The balance profit from the
Joint Activity shall be divided between the Partners.
11.7 The Partners shall fix the settlement prices on the services rendered
to the Joint Venture on the level of actual expenses for rendering
them. For the purpose of reliable determining of actual expenses for
rendering services the Partners shall organize the accountancy of
expenses for services to the Joint Venture with application of the
system of sub-accounts. General production expenses of the Enterprise
and the Company shall be referred to services to the Joint Venture at
the criterion to be established by a separate addendum to this
Agreement.
11.8 The Partners of the Joint Activity shall have the right of control over
and audit of all accounting documents related to the Joint Activity
through auditing by independent audit entities. The planned audits
shall be carried out not less than once a year and shall be paid for by
the Partners in proportion to their shares. Special audits shall be
paid for by the initiators thereof.
11.9 The compulsory audit stipulated by the legislation of Ukraine shall be
carried out within the prescribed time periods and shall be paid for
from the Individual Settlement Account.
11.10 The accounting shall be kept in terms of the national monetary unit of
Ukraine.
ARTICLE XII
Taxes and Payments to the Budget
12.1 Taxes and compulsory payments to the budget and non-budgetary funds
referred to the self-cost of the produce, and the value-added tax and
the rent shall be paid at the expense of the proceeds from realization
of the joint produce and shall be accounted of by the Individual
Balance Sheet. The tax on profit shall be paid by the Partners after
having earned a portion of the balance profit due thereto.
12.2 In case of distribution of the produce between the Partners they shall
pay independently the value-added tax, the rent, deductions for
exploration operations and payment for use of the subsoil, taxes on
property and land, and the tax on profit.
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ARTICLE XIII
Property Relations of the Partners
13.1 The property and the pecuniary assets transferred by the Partners onto
the Individual Balance Sheet and those created, obtained or acquired in
the process of the Joint Activity shall make up their joint property.
The Partners shall have no right to dispose of their share in the joint
property without consent of the other Partners to this Agreement.
13.2 The Balance Profit from realization of Additional Hydrocarbons produced
on Rudivsk- Chervonozavodsk deposit shall be distributed between the
Partners on the quarterly basis under the terms and conditions hereof.
13.3 The criterion of the profit distribution between the Partners shall be
their Actual Share in investing the Joint Activity. The Actual Share of
any of the Partners shall be determined by calculation as a ratio of
the Accrued Capital Expenses of such Partner for the whole period of
the Joint Activity hereunder to the total amount of the Accrued Capital
Expenses for the time period of the Joint Activity.
13.4 The Accrued Capital Expenses of the Enterprise shall be calculated at
the end of each quarter and shall include:
- the expenses for construction of the wells and improvement objects
(except the wells producing basic Hydrocarbons) incurred prior to the
Effective Date and not related to production of the Basic Hydrocarbons;
- pecuniary assets of the Enterprise entered to the Individual Balance
Sheet for funding the works related to drilling and repair of the
wells, to industrial construction which works are stipulated by the
Joint Activity Programs;
- the value of the material resources acquired for the assets of the
Enterprise that are transferred to the Individual Balance Sheet;
- the expenses of the Enterprise incurred for its own account on its
own or by involving contractors for performance in compliance with the
Joint Activity Program of the works related to contractual drilling,
industrial construction and overhaul at the actual contractual prices
with accounting of the value of material resources given to
contractors.
13.5 The accrued Capital Expenses of the Company shall be calculated on the
quarterly basis and shall include:
- pecuniary assets of the Company entered to the Individual Balance
Sheet for funding the works related to drilling and repair of the
wells, to industrial construction which works are stipulated by the
Joint Activity Programs;
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- the value of the material resources given directly to contractors or
the Enterprise for ensuring performance of the Joint Activity Programs;
- the value of the services related to drilling, construction and
overhaul rendered by the Company to the Joint Venture by way of
production cooperation, and to other enterprises at the expense of the
Company in compliance with the approved Joint Activity Programs.
13.6 The Actual Share of either Partner shall be determined on the basis of
the data on the Accrued Capital Expenses every quarter.
13.7 The Accrued Capital Expenses and the Actual Shares of the Partners
shall be subject to approval by the Managing Committee.
13.8 The Partners hereto have agreed that the Balance Profit from
realization of Additional Hydrocarbons shall be distributed between
them depending on the Actual Shares of Participation on the basis of
the base ratio of profit division to be agreed upon by the parties.
When the Parties comply with the Shares of Participation stipulated by
Section 2.1 hereof and making up 50:50, the Share of the Enterprise in
the Profit shall be 60% and respectively the Share of the Company shall
be 40%.
In case of deviation from the above correlation of the Shares of
Participation, the actual Share in the Profit shall be determined for
the Company as the product of the Actual participation of the Company
by factor 0.8 (the ration of the agreed upon proportion of division of
the profit in case of equal participation in investing, that is 40
divided by 50). The Actual Share of the Profit for the Enterprise shall
be determined as 100% minus the Actual Share of the Company Profit.
13.9 In case of division of the produce between the Partners applicable
shall be the above proportions and the mechanism of division.
ARTICLE XIV
Realization of the Joint Activity Produce
14.1 The Joint Activity produce shall be realized by the Enterprise under
the popwers of attorney of other Partners to the Agreement , providing
that in case of division of the produce it can be realized by either
Partner on its own.
ARTICLE XV
Procedure for Conducting the Joint Activity
15.1 Management of the joint business related to performance of the
Agreement terms and conditions, to organization and management of the
works, representation to third persons shall be assigned to the
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Enterprise which is vested with the respective authority on behalf of
the Partners. The operative management of the activity shall be
exercised by the charter managing bodies of the Enterprise.
15.2 The rights and obligations of the Enterprise assigned to manage the
joint business shall be determined in the power of attorney for
managing joint business to be filed in compliance with Article 66 of
the Civil Code of Ukraine and signed by the other partners hereto.
15.3 The Enterprise assigned to manage the joint business shall enter into
agreements related to ensuring the joint activity, shall obtain
civilian rights on its own behalf and shall bear liabilities under
agreements. The agreements entered into by the Enterprise shall
formulate the rights and obligations for other Partners in compliance
with the powers of attorney available.
15.4 The procedure for realization of the produce and for settlements shall
be determined by this Agreement and specific agreements with buyers of
the produce.
15.5 The control over the financial and business activity of the Partners
shall be exercised by the auditing bodies of the Partners determined by
their Charters. In so doing the Partners shall have the right to
familiarize themselves with any documentation within the sphere of
their Joint Activity. When necessary as the Partners may agree upon,
independent audits shall be carried out.
15.6 The issues related to exercising the Joint Activity and requiring
mutually agreed upon decisions shall be resolved, when necessary,
through convening sittings of the Managing Committee under the plan of
operation of the Committee, upon the initiave of the Chairman or upon a
request of any Partner. Decisions can also be made through exchange of
letters, cables, fax messages and so called written notices.
In case the made decisions of the Managing Committee require to amend
the provisions hereof, such amendments shall be filed by additional
agreements.
ARTICLE XVI
Coordination of the Joint Activity and Management of the Joint Venture
16.1 Co-ordination of the Joint Activity and management of the Joint Venture
shall be exercised on the basis of decisions of the Managing Committee.
Initially the Managing Committee shall consist of 3 representatives
from either Partner. The Chairman of the Managing Committee shall be
the Director General of "Poltavanaftogas" enterprise. Upon expiration
of the year of the Joint Activity hereunder the composition of the
18
<PAGE>
Managing Committee shall be revised in such a way in order to account
of the Actual Share of the Partners in the Joint Activity. Further on
the composition of the Managing Committee shall be revised with
accounting of the Actual Shares every two years. Upon a decision of
the Board of "Ukrnafta" JSC the Managing Committee may include its
(Board) representatives.
16.2 Decisions of the Managing Committee shall be made by individual vote.
In case the Partners fail to make a decision on operating issues of the
Joint Activity, such as selection of a contractor, approval of the
contract for performance of works or purchase of equipment, the issue
shall be submitted for consideration by an expert group to be formed
and to operate under the procedure set forth in Section 9.4.
16.3 The operative management of the Joint Venture shall be exercised by the
personnel of the Enterprise.
16.4 The Enterprise shall prepare the documents required for the Managing
Committee for making decisions on coordination of the Joint Activity.
ARTICLE XVII
Concession of Rights and Legal Succession
17.1 The Partners cannot concede their rights and obligations hereunder.
17.2 Joining the Agreement by new Partners irrespective of the terms and
conditions of such joining shall not constitute concession of the
rights.
17.3 In case of termination of any Partner's activity due to liquidation or
re-formation, the rights and obligation thereof under this Agreement
shall pass to the official successor under the condition of legal
confirmation of the rights of the latter.
ARTICLE XVIII
Joining the Agreement
18.1 This Agreement can be joined by any legal entity or a natural person
under the condition of consent of all Partners.
18.2 Joining the Agreement by new Partners shall involve an additional
agreement to be signed by all Partners.
19
<PAGE>
ARTICLE XIX
Confidentiality of Information
19.1 Any information transferred by one Partner to the other Partner within
the effective time period hereof and containing the information on the
works performed, produce, prices, negotiations and proposals including
the terms and conditions hereof disclosure of which may inflict losses
to any of the Partners, shall be confidential and shall not be subject
to disclosure to third persons except the cases stipulated by the
legislation in force.
19.2 Any other information proposed by any of the Partners or proposals or
ideas, shall not have to be considered as secret or confidential
information except the cases when it is specially stipulated in an
additional agreement signed by representatives of the Partners.
ARTICLE XX
Mutual Liability of the Partners and Settlement of Disputes
20.1 Either Partner shall be materially liable for default or undue
performance of the terms and conditions hereof and appendices hereto,
and in case of violation thereof shall have to indemnify to other
Partners direct losses occurred due to its fault.
20.2 The Partners to the Agreement shall be exempted from liability if the
due performance thereby of their obligations have been interfered with
circumstances of insuperable force (Force Majeure). Force Majeure shall
mean any action or circumstance that does not depend on the Partner and
is beyond the reasonable control of the Partner which has declared
Force Majeure that restricts or interferes with activities of the
Partner hereunder or ability to bear liability hereunder. Force Majeure
shall include fires, explosions, epidemics, inevitable circumstances,
military operations (declared and undeclared) or conditions occurring
in connection therewith, strikes or other workers disturbances, land
disputes and disputes related to use of the subsoil, absence or
impossibility to obtain, or restrictions in use of required technology,
information, equipment, personnel, and also floods, storms, earthquakes
and other natural disasters; blockades, embargoes, riots, insurrections
and other civil disturbances as well as changes in the legislation in
force, substantial reduction of the state prices on gas. The affected
Partner shall have to notify immediately the other Partner as to
commencement of such circumstances, expected duration and termination
thereof.
20.3 The Partners have agreed to apply all efforts to resolve disputes
between them through negotiations.
20.4 In case the Partners fail to resolve the disputes through negotiations
within sixty (60) days as from the moment of the notice of one of the
Partners to the other partner as to the disputes available, their
consideration shall be submitted to the International Commercial
Arbitration Court with the Chamber of Commerce and Industry of Ukraine
that will make the final award.
20
<PAGE>
20.5 The Arbitrage shall consist of 3 arbiters to be appointed in the
following way: the plaintiff and the defendant shall appoint one
arbiter each which arbiters shall jointly appoint the third arbiter. In
case the defendant fails to appoint the arbiter within 30 days as from
the date of the notice on commencement of the arbitration proceedings,
such arbiter upon the defendant's request shall be appointed by the
Chairman of the International Commercial Arbitration Court. In case two
arbiters fail to appoint the third arbiter within 60 days after
appointment of the second arbiter, the third arbiter shall be appointed
by the Chairman of the International Commercial Arbitration Court from
among three arbiters proposed by the plaintiff.
ARTICLE XXI
Termination of Activity under the Agreement or its Severance
21.1 This Agreement shall become nill and void in case of expiration of the
time period of its validity and in case of its premature severance.
21.2 The Partners can severe this Agreement on the basis of the mutual
consent or unilaterally.
21.3 In case one of the Partners intends to severe this Agreement, it shall
have to notify thereabout the other Partner not later than three (3)
months.
Upon expiration of the above time period the Agreement shall be
considered as terminated and within the next 3 months the Partners
shall perform mutual settlements related to distribution of the profit
and division of the joint property.
21.4 Under the unanimous consent of the Partners the Agreement can be
terminated in advance before expiration of the fixed 20 year time
period if the Partners arrive to the conclusion that the goals of the
Agreement cannot be achieved or that it is not advisable to continue it
in connection with unprofitability of the Joint Activity.
21.5 In case of severance of the Agreement upon the initiative of the
Enterprise, it (the Enterprise) shall, within six (6) months and under
the procedure stipulated by the legislation in force, return to the
foreign Partner its investments in pecuniary form with accounting of
the actual wear and tear (amortization) of the joint property as on the
moment of severance of the Agreement.
21.6 Upon expiration of the time period of the Agreement validity and in
case of severance hereof under the mutual consent or upon the
initiative of the Company, and when it is necessary, one shall consider
the issue of liquidation of the wells, pipelines and processing plants
under the established procedure. Liquidation shall be funded at the
expense of the balance of assets on the Individual Settlement Account
and the assets of the Partners that will fund the liquidation works at
the ratio formed during the last actual distribution of the profit
21
<PAGE>
from the Joint Activity. If liquidation of the above property is not
advisable or impossible due to technical, geological or other reasons,
it shall pass into disposal of the Liquidation Commission formed by
the Partners which is fully authorized to terminate the Joint Activity
including realization of the property, redemption of debts,
settlements with the Partners. If the Liquidation Commission fails to
realize such property as the wells, pipelines and processing plants
within six months, they shall be transferred free of charge to the
balance sheet of the principal activity of "Poltavanaftogas"
enterprise.
21.7 Upon expiration of the time period of validity or after severance of
this Agreement, the property given by the Partners for use to one
another shall be returned to the owners.
ARTICLE XXII
Miscellaneous
22.1 As mutually agreed upon by the Partners this Agreement can be amended
and supplemented including involvement of other Partners into the Joint
Activity.
22.2 The Partners represent:
- that they have all powers required to sign this Agreement;
- that they will not take actions that can be detrimental to goals and
tasks hereof.
This Agreement has been signed in 6 duplicates in Ukrainian and 2
duplicates in Russian four duplicates for each of the Partners. All
duplicates are of equal legal force.
THE AGREEMENT HAS BEEN SIGNED
For "Poltavanaftogas" Enterprise
V.P. Kozak
(Director General)
For "Carpatsky Petroleum Corporation"
Company
L. Texas
(Company President)
AGREED
Chairman of the Board
"Ukrnafta" JSC
P.M. Demchenko
22
<PAGE>
Appendix No.
to Agreement No. 410/95 as of
September 14, 1995, on the joint production and investment activity
related to development and exploitation of
Rudivsk-Chervonozavodsk deposit with amendments and addenda dated
October 15, 1996LIST
of equipment, tools, appliances, materials and chemical
reagents supplied by "Carpatsky Petroleum Corp." company as a
foreign investment in 1996
Description ............................ Unit of Qty. Amount in
measure thous. USD
1. Gushing fittings
Py = 750 with the column head for pipes, total ... set 5 554
Including:
12 3/4" x 9 5/8" x 5 3/4" ........................ set 3
12 3/4" x 9 5/8" x 6 5/8" ........................ set 2
2. Drill pipes, total ............................ m 6090 940
Including
2 7/8" G-105 ..................................... m 6000 400
127 x 9.19 G-105 ................................. m 60 450
Y[BE]T 178 spiral ................................ m 30 90
3. Casing pipes, total ........................... m 5400 390
Including:
7" P-110 ......................................... m 2500 180
168 x 10.59 P-110 ................................ m 2900 210
3. Pump-compressor pipes
2 7/8" P-110 VAM R-2 ............................. m 15200 192
4. Drill bits, total ............................. piece 23 149
Including:
295 ATX-G3 ....................................... piece 3 20
215.9 ATJ ........................................ piece 10 65
215.9 ATJ22 ...................................... piece 5 32
215.9 ATX-G3 ..................................... piece 5 32
5. Sealing grease for threads .................... kg 60 3
23
<PAGE>
Director General
"Poltavanaftogas" enterprise
V.P. Kozak
President
"Carpatsky Petroleum Corp." company
L. Texas
24
<PAGE>
ADDITIONAL AGREEMENT No. 1
to Agreement No. 410/95 as of September 14, 1995,
with the amendments and addenda dated October 15, 1996,
"On the joint investment and production activity related to development and
exploitation of Rudivsk-Chervonozavodsk deposit"
Poltava December 17, 1996
In compliance with Sections 2.2 and 2.3 the partners to the above
agreement have agreed that in January-February, 1997, "Carpatsky Petroleum
Corporation" company shall transfer to the balance of the joint activity as the
initial contribution the property investment: six drilling bits of the following
types
Brand .............. Qty. Price Amount
USD USD
8 1/2" EHP53A ER3465 ......... EA 1 2715.00 2715.00
8 1/2" EHP61A MR1112 BA1061 .. EA 2 2715.00 5430.00
8 1/2" EHP51H BA1459 ......... EA 1 2715.00 2715.00
8 1/2" EHP61 BA1191 BA1195 EA 2 2102.00 4204.00
The total cost FOB.RID, Houston - 15064 US dollars
Transportation - 1441.78
.......................
.......................
.......................
Shipper - "Reed Tool Company" (USA, Houston) .........................
THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY:
For "Poltavanaftogas" Enterprise
V.P. Kozak
Director General
For "Carpatsky Petroleum Corporation"
Company
L.C. Texas
President
Addresses of the parties:
12, Radyanska St.,
Poltava, 314000, Ukraine
17098, Richmond, Avenue, 3000
room 100
Houston, the State of Texas, USA
25
<PAGE>
ADDITIONAL AGREEMENT No. 2
to Agreement No. 410/95 as of September 14, 1995,
with the amendments and addenda dated October 15, 1996,
"On the joint investment and production activity related to development and
exploitation of Rudivsk-Chervonozavodsk deposit"
Poltava February 25, 1997
In compliance with Sections 2.2 and 2.3 the partners to the above
agreement have agreed that in March-April, 1997, "Carpatsky Petroleum
Corporation" company shall transfer to the balance of the joint activity as its
contribution to the joint activity the following investment property:
- 15387.38 metres of seamless pump-compressor pipes, external diameter 2 7/8",
steel quality P- 110, price $ 12.6 per 1 metre, the total cost CIP-Poltava one
hundred and ninety three thousand eight hundred and sixty six US dollars and
twenty four cents ($ 193866.24).
Shipper - "Pipeco Services" (USA, Houston, 8223 Willow Place South, room 190)
THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY:
For "Poltavanaftogas" Enterprise
V.P. Kozak
Director General
For "Carpatsky Petroleum Corporation"
Company
L.C. Texas
President
Addresses of the parties:
12, Radyanska St.,
Poltava, 314000, Ukraine
17098, Richmond, Avenue, 3000
room 100
Houston, the State of Texas, USA
26
<PAGE>
ADDITIONAL AGREEMENT No. 3
to Agreement No. 410/95 as of September 14, 1995,
with the amendments and addenda dated October 15, 1996,
"On the joint investment and production activity related to development and
exploitation of Rudivsk-Chervonozavodsk deposit"
Poltava February 25, 1997
In compliance with Sections 2.2 and 2.3 the partners to the above
agreement have agreed that in April-May, 1997, "Carpatsky Petroleum Corporation"
company shall transfer to the balance of the joint activity as its contribution
to the joint activity the property investment in the form of the following
drilling bits:
Nos.Size ............... Type Qty. Price Amount
USD USD
SIF Kiev SIF Kiev
1 6-1/2" ............. ATJ-S33 2 4725.00 9450.00
2 6-1/2" ............. ATJ-33C 2 4725.00 9450.00
3 6-1/2" ............. ATJ-55R 2 4725.00 9450.00
4 Tools for extensions 1 set 105.00 105.00
5 Extensions ......... "FF" (20/32) 6 sets Free of Free of
charge charge
Total cost SIF Kiev - 28455.00 US dollars
Shipper - "Hughes Christensen Company", Houston, USA
THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY:
For "Poltavanaftogas" Enterprise
V.P. Kozak
Director General
For "Carpatsky Petroleum Corporation"
Company
L.C. Texas
President
Addresses of the parties:
12, Radyanska St.,
Poltava, 314000, Ukraine
17098, Richmond, Avenue, 3000
room 100
Houston, the State of Texas, USA
27
<PAGE>
of "Ukrnafta" OJSC" made by ""Dokhod" Production Scientific Implementation
Company" having a general agreement with the State Property Fund of Ukraine, and
governed by Order of the Ministry of finance of Ukraine "Amendments and addenda
to the instruction on the procedure for filling out the forms of an annual
accounting report of an enterprise" No. 30 dated February 10, 1997, have made
this report that the investment cost of the objects of uncompleted construction
transferred by "Poltavanaftogas" enterprise to the individual balance sheet of
the joint activity is estimated in the amount of nine million thirty two
thousand six hundred and ninety nine (9 032 699) hryvnyas that at the rate of
NBU as on February 1, 1997, (1 US dollar = 1.8755 hryvnyas) equals to four
million eight hundred and sixteen thousand one hundred and fifty five (4 816
155) US dollars. In addition to that, during distribution of the results of the
joint activity one accounts of the value-added tax in the amount of 1 289 069
hryvnyas or 686 004 US dollars actually paid by "Poltavanaftogas" enterprise to
the contractors. The investment cost of separate objects amounts to:
28
<PAGE>
<TABLE>
<CAPTION>
Description of the object Hole Bottom, Cost of paid VAT paid Cost of the
m expenses for to the objects of
uncompleted contractors uncompleted
construction as on construction
under the 1.02.1997, according to
balance of hryvnyas the results of
Poltavanaftogas the expert
hryvnyas appraisal as on
1.02.1997,
hryvnyas
Project Actually
as on
1.02.1997
<S> <C> <C> <C> <C> <C>
Rudovsk well No. 102 5920 5101 3136585 612918 4264542
Rudovsk well No. 104 5920 3687 1591783 302741 1829032
Rudovsk well No. 106 5200 2629 1145421 221319 1372406
Rudovsk well No. 111 5200 2496 728346 134042 977610
Chervonozavodsk well No.100 5500 237785 1683 237785
Rudovsk well No. 109 5200 124339 16366 351324
Total 6964259 ................ 9032699
</TABLE>
Director General
of "Poltavanaftogas" Enterprise
V.P. Kozak
President
of "Carpatsky Petroleum Corporation"
Company
L.C. Texas
29
<PAGE>
ADDITIONAL AGREEMENT No. 5
to Agreement No. 410/95 as of September 14, 1995,
with the amendments and addenda dated October 15, 1996,
on the joint investment and production activity related to development and
exploitation of Rudovsk-Chervonozavodsk deposit
Poltava March 31, 1997
STATEMENT
of transfer of the objects of uncompleted construction onto
the individual balance sheet of the joint activity
The Partners to Agreement No. 410/95 as of September 14, 1995, with the
amendments and addenda dated October 15, 1996, on the joint investment and
production activity related to development and exploitation of
Rudovsk-Chervonozavodsk deposit, have familiarized themselves with the
documentation for construction of the production wells of Rudovsk-
Chervonozavodsk deposit, with the certificates for allocation of lands and the
permits for use thereof, with the progress of works related to construction of
the wells on the objects, and being governed by understandings of additional
agreement No. 4 as of February 28, 1997, by the decision of "Ukrneft" JSC as of
February 27, 1997, have drawn up this statement that in compliance with the
terms and conditions of agreement No. 410/95 dated September 14, 1995, on the
joint investment and production activity the following objects of uncompleted
construction have been transferred from the balance sheet of the principal
activity of "Poltavanaftogas" enterprise and entered to the balance sheet of the
joint activity:
30
<PAGE>
<TABLE>
<CAPTION>
Description of the object Hole Bottom, Cost of objects of VAT paid to
m uncompleted the contractors
construction hryvnyas
hryvnyas
Project Actually as
on 1.02.1997
<S> <C> <C> <C> <C>
Rudovsk well No. 102 5920 5101 4264542 612918
Rudovsk well No. 104 5920 3687 1829032 302741
Rudovsk well No. 106 5200 2629 1372406 221319
Rudovsk well No. 111 5200 2496 977610 134042
Chervonozavodsk well No.100 5500 237785 1683
Rudovsk well No. 109 5200 351324 16366
Total 9032699 1289069
</TABLE>
Volumes of the works performed by Borislav department of drilling works
for wells Nos. 102-P, 104-P, 109-P and by Pyryatin deep drilling expedition of
"Chernigovneftegasgeologiya" SGE for wells Nos. 111-P and 100-Ch as from
February 1, 1997, are subject to payment from the balance sheet of the joint
activity.
Director General
of "Poltavanaftogas" Enterprise
V.P. Kozak
President
of "Carpatsky Petroleum Corporation"
Company
L.C. Texas
31
<PAGE>
ADDITIONAL AGREEMENT No. 6
to Agreement No. 410/95 as of September 14, 1995,
with the amendments and addenda dated October 15, 1996,
"On the joint investment and production activity related to development and
exploitation of Rudivsk-Chervonozavodsk deposit"
Poltava March 31, 1997
In compliance with Sections 2.2 and 2.3 the partners to the above
agreement have agreed that in April-May, 1997, "Carpatsky Petroleum Corporation"
company shall transfer to the balance of the joint activity as its contribution
to the joint activity the property investment in the form of the following
drilling bits:
Nos. Size Type Qty. Price Amount
USD USD
SIF Kiev SIF Kiev
1 8-1/2" GT-20 4 6563.00 26252.00
Total cost SIF Kiev - 26262.00 US dollars
Shipper - "Hughes Christensen Company", Houston, USA
THE ADDITIONAL AGREEMENT HAS BEEN SIGNED BY:
For "Poltavanaftogas" Enterprise
V.P. Kozak
Director General
For "Carpatsky Petroleum Corporation"
Company
L.C. Texas
President
Addresses of the parties:
12, Radyanska St.,
Poltava, 314000, Ukraine
17098, Richmond, Avenue, 3000
room 100
Houston, the State of Texas, USA
32
<PAGE>
ATTACHMENT 3
TO OPINION LETTER
Addendum No. 5
to Agreement No. 410/95 dated September 14, 1995,
(State registration as of April 4, 1997, under No. 1353-001K)
Poltava December 25, 1997
The Partners to Agreement No. 410/95 dated September 14, 1995, with
amendments and addenda as of October 15, 1996, "On Joint Investment and
Production Activity on Development and Exploitation of Rudivsk-Chervonozavodsk
Deposit" have agreed as follows:
The following amendments shall have to be introduced into the text of
Agreement No. 410/95 dated September 14, 1995, with amendments and addenda as of
October 15, 1996, "On Joint Investment and Production Activity on Development
and Exploitation of Rudivsk- Chervonozavodsk Deposit":
1 Section 2.2 of the Agreement shall have to be set forth in the
following wording:
2.2 "Carpatsky Petroleum Corporation" company shall transfer in 1997 and
the first half of 1998 Investments in the form of pecuniary assets and
property onto the Individual Balance Sheet that will constitute the
initial contribution into the Joint Activity to the total amount of
5000 thousand US dollars. The lists of the property to be transferred
by "Carpatsky Petroleum Corporation" company shall be determined by
separate addenda hereto. The Investments in the form of foreign
currency shall be introduced by "Carpatsky Petroleum Corporation"
company within the time period agreed upon by the Partners within the
limits of the total amount of the investments fixed by this Section
less investments in terms of property.
2 Section 2.2 of the Agreement shall have to be included as such which
became nill and void under Addendum No. 3 as of August 12, 1997, to
Agreement No. 410/95 dated September 14, 1995.
Addresses of the Parties:
"Poltavanaftogas" enterprise: 12, Radyanska St., Poltava, 814000, Ukraine
"CARPATSKY PETROLEUM Corp." Company: 17098, Richmond Avenue, 3000, room 100,
Houston, Texas, USA
SIGNED BY:
For "Poltavanaftogas" OGPD
V.P. Kozak
(Director General)
<PAGE>
S.V. Manyuk
(Chief Engineer)
For Carpatsky Petroleum Corporation"
company
L.K. Texas
(President)
REGISTERED
Under No. 1353-013K as of February 3, 1998
Chief of Department
<PAGE>
ATTACHMENT 4
TO OPINION LETTER
Amendments and Addenda
to Agreement No. 410/95 as of September 14, 1995, on the joint investment and
production activity related to development and exploitation of Rudivsk-
Chervonozavodsk deposit in the wording as of October 15, 1996, with amendments
and addenda dated December 25, 1997
(State registration as of April 4, 1997, under No. 1353-001K with the Department
for foreign economic relations of Poltava oblast)
Poltava August 26, 1998
"Ukrnafta" OJSC represented by the chairman of the board Kozak Yaroslav
Ivanovych and the acting head of "Poltavanaftogas" oil and gas production
department (OGPD) Kolisnyk Volodymyr Feodosiyovych acting under the power of
attorney of "Ukrnafta" OJSC, on the one hand, and "Carpatsky Petroleum
Corporation" company, USA, represented by the president Lesly K. Texas acting in
compliance with the Charter, on the other hand, accounting of the fact that
"Ukrnafta" OJSC is the successor of "Poltavanaftogas" enterprise under Agreement
No. 410/95 and basing themselves on the provisions of the Law of Ukraine "On
Introducing Amendments and Addenda to the Law of Ukraine "On Taxation of
Enterprise Income" passed by the Verkhovna Rada of Ukraine and put into effect
as from July 1, 1997, and accounting of the initial experience of the joint
operations under the above agreement, have agreed to introduce the following
amendments and addenda into some articles of Agreement No. 410/95:
1. The introductory clause of the Agreement shall have to be set forth in the
following wording:
"Ukrnafta" OJSC and "Carpatsky Petroleum Corporation" company, USA, hereinafter
referred to as the "Partners" and severally as the "Partner" have made this
Agreement as follows:
2. In the text of the Agreement "Poltavanaftogas" Enterprise", "Enterprise"
shall have to be read and understood as "Ukrnafta" Open Joint Stock Company,
"Ukrnafta" OJSC in Sections 2.1 and 10.2, and in Sections 2.4, 6.2.4, 7.1, 7.2,
7.8, 7.13, 11.3, 15.1, 15.2, 15.3 the above terms shall have to be read and
understood as "Poltavanaftogas" oil and gas production department, OGPD.
3. In the chapter "DEFINITIONS OF PRINCIPAL TERMS" the definitions of the below
given terms shall have to be set forth in the following new wording:
Partners shall be understood as legal entities that have initially made and
entered into this Agreement or successors thereof, and any legal entities and
individuals that join the Agreement in the future.
Joint Activity shall be understood as the investment and ptoduction activity
based on the cooperation between the Partners to this Agreement on development
and exploitation of Rudivsk-Chervonozavodsk deposit and stipulating division of
risks and results of such operations governed by the Agreement of legal force,
<PAGE>
by the norms of the Civil Code of Ukraine as to the joint activity, by the Law
of Ukraine "On Investment Activity", by the Law of Ukraine "On Treatment of
Foreign Investment" and by other relevant normative legal acts of Ukraine.
Investments shall be understood as the pecuniary assets, property, property
rights and intangible assets including intellectual valuables transferred by the
Partners onto the Balance Sheet of the Joint Activity and to be used for
construction or improvement of the Investment Activity Objects in the process of
development of Rudivsk-Chervonozavodsk oil, gas and gas condensate deposit.
Initial Contribution (Initial Contributions) shall be understood as incompleted
wells Nos. 102- Rudivsk, 104-Rudivsk, 106-Rudivsk, 109-Rudivsk, 111-Rudivsk and
100-Chervonozavodsk entered by "Ukrnafta" OJSC into the Individual Balance
Sheet, and other tangible and intangible assets and money contributed within the
time period of 1997-1999 and which will be contributed by the Partners to the
Individual Balance Sheet till the date of full completion of construction of the
above listed wells. The total amount of the Initial Contributions of all
Partners shall have to be equal to the full value of the wells listed above in
this paragraph.
Managing Committee shall be understood as the supreme managerial body composed
of the authorized representatives of the Partners, which body has the right of
making decisions on the principal issues of the Joint Activity as stipulated in
Article XVI hereof.
Individual Balance Sheet, Joint Activity Balance Sheet shall be understood as an
individual balance sheet that under the powers of attorney of the Partners to
the Agreement has been kept by "Poltavanaftogas" OGPD as from February 1, 1997,
and is designated for the accounting of assets and liabilities related to the
Joint Activity including pecuniary assets, property, etc., that are pooled by
the partners to this Agreement for the purpose of exercising the Joint Activity
and that have been created in the process of the above operations, and for the
accounting of the business operations under the Joint Activity and of the
financial results.
Agreed Budget of Joint Activity shall be understood as a financial plan of
activity under the Agreement for any fiscal year or other time period depending
on the context. The Agreed Budget of Joint Activity shall account of all funding
sources including the own money of the Partners allocated for acquiring material
resources to be transferred by the partners onto the Balance Sheet of the Joint
Activity.
Licensee shall be understood as "Ukrnafta" OJSC that in the person of
"Poltavanaftogas" OGPD owns the license for geological exploration of the
subsoil of Rudivsk-Chervonozavodsk oil, gas and gas condensate deposit including
its pilot production operation and in the name of which a license will be
obtained for its (Rudivsk-Chervonozavodsk oil, gas and gas condensate deposit)
production development for the joint interests of the Partners to the Agreement.
2
<PAGE>
Fiscal Year shall be understood as the time period as from February 1, 1997,
through to December 31, 1997, and the next full calendar years.
Capital Costs shall be understood as one-time expenses for creation or acquiring
of the Capital Funds, and the Costs for Improvement of such Capital Funds that
are created in connection with development and exploitation of
Rudivsk-Chervonozavodsk deposit under the terms and conditions hereof and that
are subject to depreciation under the procedure stipulated by the legislation of
Ukraine.
Current Costs (Gross Expenditures) shall be understood as the costs for
production of Hydrocarbons that, in compliance with the legislation of Ukraine,
are excluded (deducted) from the gross income erned from the Joint Activity when
determining the taxable income.
4. The chapter "DEFINITIONS OF PRINCIPAL TERMS" shall have to be supplemented
with definitions of the following terms:
Manager shall be understood as "Poltavanaftogas" OGPD that in the person of the
head thereof and other executives, exercises management of the Joint Activity
and organizes transaction of the affairs of the Partners.
Objects of Investment Activity (Investment Objects) shall be understood as the
wells and surface structures existing in Rudivsk-Chervonozavodsk oil, gas and
gas condensate deposit that upon consent of the Partners are separated for the
Balance Sheet of the Joint Activity including those construction of which has
not yet been completed, on which hereunder one carries out the works for
completing construction, for overhaul, for intensifying inflow, etc., for the
purpose of ensuring production of the Additional Hydrocarbons, and respectively
new objects to be built in the deposit in the process of the Joint Activity.
Contribution (Contributions) shall be understood as any money, tangible and
intangible assets that are transferred onto the Individual Balance Sheet of the
Joint Activity and under the terms and conditions hereof and are the Objects of
Investment Activity and Investments, and also the services in the form of the
Labour Contribution into the Joint Activity. Exception shall be made of the
money designated for indemnification of the Gross Expenditures in case when the
incomes from sale of the produce from the Joint Activity are not sufficient
therefor, and the tangible assets that are transferred from the Balance Sheet of
the Joint Activity to third entities for use which entities perform the works
(render services) for the joint production as co-performers (subcontractors) of
the Partners of the Joint Activity.
Labour Contribution shall be understood as services and works related to
construction or improvement of the Objects of Investment Activity performed by
the Partners for their own money, and to maintenance thereof in the process of
the subsequent operation and rendering services related to the Joint Activity
and performed under similar terms and conditions.
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Joint Property shall be understood as pecuniary assets, tangible and intangible
assets, property and non-property rights integrated by the Partners hereunder,
and other pecuniary assets, tangible and intangible assets, property and
non-property rights created or acquired as a result of the Joint Investment
Ptoduction activity which are reflected in the Individual Balance Sheet and
belong to the Partners hereto by the Joint Ownership Right.
Joint Ownership Right shall be understood as the right of joint possession,
disposal of and use of the property, money, tangible and intangible assets which
are on the records of the Individual Balance Sheet and are the Joint Property.
The Joint property shall be used and disposed of as agreed upon by the Partners
to the Agreement.
Initial Period shall be understood as a period commencing as from the date of
registration hereof and ending as on the date of putting the last of the six
wells contributed by "Ukrnafta" OJSC into the Joint Property as the Initial
Contribution into operation. Exploration of Rudivsk-Chervonozavodsk Deposit
shall be understood as a package of works, including the drilling of the
individual prospecting holes, performed for the purpose of the further
exploration of the geological composition and reserves of Hydrocarbons of
Rudivsk- Chervonozavodsk oil, gas and gas condensate deposit, and organization
of calculations of the reserves and submission of the relevant materials for
consideration by the State Commission on Reserves.
Individual Account in Foreign Currency shall be understood as a separate
account in foreign currency to be opened by any non-Ukrainian partner to this
Agreement with one of the banks of Ukraine to provide for the Joint Activity.
Great Risk Operations shall be understood as specific operations of exploration
and development of Rudivsk-Chervonozavodsk deposit related to exercising capital
costs necessity to include which into the Joint Activity Program is not
recognized by the Managing Committee and which, upon a decision of the above
Committee, are individually performed by one of the Partners under the procedure
stipulated by Article IX hereof.
Share in Investment of the Joint Activity (Actual Share) shall be understood as
the ratio between the accumulated amount of the actual Contributions of any of
the Partners to the Agreement and the total amount of the Contributions for the
time period as from commencement of the Joint Activity the procedure for
determining which ratio is established by Section 13.2 hereof.
Obligations to Fund the Joint Activity (Obligations) shall be understood as a
Contribution which under the Joint Activity program and the Agreed Budget is
stipulated to be made by any partner within the current fiscal year.
Planned Share in Funding the Joint Activity shall be understood as the ratio
between the Accumulated Amount of the actual Contributions of any Partner to the
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Agreement for the time period preceding the current fiscal year and its
Obligations for the current fiscal year, and the total amount of the
Contributions and the Obligations.
Hydrocarbons shall be understood as the free and dissolved (oil) gas, gas
condensate and oil being produced or will be produced in Rudivsk-Chervonozavodsk
deposit.
Basic Hydrocarbons shall be understood as a volume of Hydrocarbons that has been
produced in Rudivsk-Chervonozavodsk deposit or can be produced therein in the
future from the wells built prior to signing this Agreement, providing that
there are no works carried out therein at the expense of the Joint Assests for
the purpose of intensifying the inflow of Hydrocarbons. The volumes of Basic
Hydrocarbons shall be determined through instrumentation measurements on the
wells. In case when the Objects of Investment Activity for the purpose of
intensifying the inflow of Hydrocarbons are the wells built prior to
commencement of the Joint Activity, Basic Hydrocarbons shall be determined as on
the date of commencement of the respective works through instrumentation
measurements, and in the future through calculations.
Additional Hydrocarbons (Hydrocarbons of Joint Activity) shall be understood as
a volume of Hydrocarbons to be produced in the future in Rudivsk-Chervonozavodsk
deposit in excess of basic Hydrocarbons at the expense of investments and
application of up-to-date technologies therein.
Incomes from Joint Activity (Incomes, Income) shall be understood as pecuniary
receipts earned as a payment from sale of Hydrocarbons of Joint Activity. Gross
Costs shall be reimbursed and depreciation deductions and the Profit from Joint
Activity shall be formed at the expense of the Incomes Joint Activity. A portion
of the Incomes from Joint Activity shall be distributed between the Partners
under the procedure stipulated by the legislation of Ukraine.
Profit from Joint Activity shall be understood as a profit determined for the
purpose of taxation under the requirements of the legislation of Ukraine.
Capital Funds shall be understood as material valuables applied in the business
activity through the time period exceeding 365 calendar days and depreciated at
the rates determined by the legislation of Ukraine.
Expenses for Improvement of Capital Funds shall be understood as expenses for
peformance of all types of repairs, reconstruction, modification and other types
of improvement of the capital funds available on the Individual Balance Sheet of
Joint Activity which are depreciated under the procedure stipulated by the
legislation of Ukraine.
5. Sections 1.2 (the last paragraph), 1.5, 1.6, 1.7, 1.13 of Article I "GENERAL
PROVISIONS" shall have to be set forth in the following wording:
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1.2 ... - distribution of the Incomes from Joint Activity or the produce in
cases stipulated by the legislation of Ukraine, under additional
agreements (addenda to this Agreement).
1.5 Obligations arising in the process of the Joint Activity to third
persons under civil agreements and recorded in the Individual Balance
Sheet, shall be the subject-matter of the joint liability of the
Partners. Either Partner shall bear liability under the above
obligations in proportion to the Planned Shares. In case of bankruptcy
of any of the Partners, the liability under the obligations kept on
records in the Individual Balance Sheet shall be redistributed between
other Partners in proportion to the Planned Shares.
Obligations related to the Contributions to the Joint Activity shall be
the subject-matter of the individual (separate) liability of either of
the Partners. In case failure to perform the Obligations related to the
Contributions results in failure to perform the obligations on the
records in the Individual Balance Sheet, the claims originating from
such situation may be enforced by the motion of a creditor against the
Partner that has failed to perform the above Obligations.
The Partners shall bear civil responsibility for the damage inflicted
to the state or any legal entities or natural persons in the course of
use of the subsoil in proportion to the Shares in the Obligations. If a
faulty party of the inflicted damage is any of the contractors,
recourse shall be taken thereupon under the procedure stipulated by the
legislation of Ukraine.
1.6 In case when obligations are not recorded on the Individual Balance
Sheet or assumed by one of the Partners on the basis of powers of
attorney of all other Partners, the liability for the above obligations
shall be born by all Partners in the proportion and under the procedure
set forth in Section 1.5. The provisions of this Section shall in no
way cover the obligations related to the acquiring by a Foreign Partner
of the equipment or other property subject to supplies to Ukraine as a
foreign investment (Contribution into Joint Activity).
Obligations arising from performance of the Great Risk Operations shall
be the subject- matter of the individual liability of the Partner that
has initiated and is carying out such operations.
1.7 The risk of accidental loss or damage of the property that is on
records of the individual Balance Sheet and is the general share
ownership, shall be borne by the Partners according to their Shares in
the Investment.
1.13 This Agreement with all amendments and addenda to be adopted by mutual
consent of the Partners hereto, shall be valid till March 3, 2023. The
Agreement may be terminated under the terms and conditions stipulated
by Article XXI.
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6. Article I "GENERAL PROVISIONS" shall have to be added with Section 1.14 as
follows:
1.14 For the purpose of determining the ways for achieving the highest
economic indices of the investment and other business activity the
Partners to the Joint Activity shall consider the issue of deepening
the cooperation related to development of Rudivsk-Chervonozavodsk
deposit through creation of a new business entity (a joint venture) and
of possible expansion of cooperation sphere onto other oil and gas
deposits. In such case the Partners shall be governed by the principal
arrangements achieved herein.
7. Article III "LICENSES FOR EXPLORATION AND OPERATION OF HYDROCARBONS DEPOSITS"
shall be set forth in the following wording:
3.1 License No. 968 for exploration of Rudivsk-Chervonozavodsk deposit for
the time period of 5 years was obtained by "Ukrnafta" OJSC on March 30,
1998. The purpose of the license (works) shall be exploration of oil
and gas pools in the low-coal deposits, pilot production operation of
the wells, approval of the deposit reserves by the State Commission on
Reserves (SCR) of Ukraine with subsequent development of the deposit.
The copies of the above License and appendices thereto shall be
appendices hereto.
3.2 The license shall stipulate that the operations on exploration of the
deposit will be carried out under the terms and conditions of the
"Agreement on Joint Activity on Geological Exploration of the Subsoil
and Preparation for production Developement of Rudivsk- Chervonozavodsk
Oil, Gas and Gas Condensate Deposit" No. 5/27 as of December 30, 1997,
between "Ukrnafta" OJSC and "Chernihivnaftogasgeologiya" SGE. The above
agreement does not contain specific commercial terms and conditions for
co-operation but rather determines the procedure for subsequent conduct
of the exploratory operations, providing that, when the license belongs
to "Ukrnafta" OJSC, "Chernihivnaftogasgeologiya" SGE participates in
performance of exploratory operations on Rudivsk-Chervonozavodsk
deposit on the grounds of separate contract agreements with the
Licensee.
The Company shall assume the obligation to facilitate the available
arrangements between "Ukrnafta" OJSC and "Chernihivnaftogasgeologiya"
SGE.
3.3 For the purpose of formation of the contractual terms and conditions
for use of the subsoil of Rudivsk-Chervonozavodsk deposit "Ukrnafta"
OJSC with participation of the Company experts shall prepare a draft
License Agreement to determine the procedure and terms and conditions
for use of the subsoil of Rudivsk-Chervonozavodsk deposit, the role,
rights and obligations of "Ukrnafta" OJSC that will act as a Licensee,
and the terms and conditions for participation of the Company in the
above operations as well as other potential partners to this Agreement.
"Ukrnafta" OJSC shall organize approval of the above License Agreement
and the signing thereof by the relevant governmental authorities.
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3.4 Upon completion of exploration of the deposit and approval of the
reserves "Ukrnafta" OJSC shall apply for obtaining a License for
production operation of Rudivsk- Chervonozavodsk deposit for the time
period of 20 years. The application for the License shall set forth
that "Ukrnafta" OJSC acts for the best interests of the Partners
hereto. Other Partners hereto shall not compete with "Ukrnafta" OJSC in
respect of obtaining the above License.
3.5 In case the Agreement is terminated in connection with making a
decision on deepening co-operation in development of
Rudivsk-Chervonozavodsk deposit through formation of a new business
entity (a joint venture), "Ukrnafta" OJSC shall facilitate such venture
in obtaining the License.
8. Article IV "ORGANIZATION OF WORKS FOR DEVELOPMENT AND OPERATION OF
RUDIVSK-CHERVONOZAVODSK DEPOSIT" shall be set forth in the following wording:
4.1 As the Partners hereto agree and under the power of attorney of
"Ukrnafta" OJSC "Poltavanaftogas" OGPD shall act as an Operator as it
is understood traditionally in the international oil business and in
compliance with decisions of the Managing Committee shall conduct all
organizational and practical operations related to exploration and
operation of Rudivsk-Chervonozavodsk deposit.
4.2 Individual operations related to development of the deposit, drilling
and overhaul of the wells can, under decisions of the Managing
Committee, be carried out by the Company individually or with
involvement of Ukrainian and foreign co-performers (subcontractors).
4.3 The Partners have agreed that drilling entities of "Ukrnafta" OJSC and
"Chernihivnaftogasgeologiya" SGE shall act as direct performers for
drilling prospecting and production boreholes. The Company shall resort
to technical re-equipment of the drilling teams with the advanced
foreign engineering, materials and technology, geophysical support of
the drilling that would provide for reduced time period of drilling the
boreholes and would facilitate preservation of filtration properties of
seams to be opened. The specific measures related to technical
re-equipment of the drilling teams will be stipulated by the Joint
Activity Programs. The value of the above measures will be accounted of
as a Contribution into the Joint Activity.
The Company is intending to organize that within the second half of
1998 the Ukrainian specialists would study the expertise of some
drilling companies of the USA and Great Britain. The Company
specialists and the Ukrainian specialists shall jointly develop a
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program for stage-by-stage re-equipment of the Ukrainian drilling
entities engaged in Rudivsk-Chervonozavodsk deposit which program will
stipulate specific volumes of works and deliveries of the equipment
and tools, sources for funding and organizational and legal forms for
implementation of such measures. In case of implementation of the
above intentions the organizational expenses for performance of the
relevant measures will be accounted of as the Labour Contribution to
the Joint Activity.
4.4 The Partners to the Agreement shall resort to the measures related to
completion of the prospecting of Rudivsk-Chervonozavodsk deposit,
qualitative and complete exploration of the wells and seams, timely
transfer of the obtained data to "Chernihivnaftogasgeologiya" state-run
geological enterprise (SGE), and by participating in the summarizing
assessment of geophysical, geological and production data shall
facilitate the services of "Chernihivnaftogasgeologiya" SGE in
completing calculations of the reserves of hydrocarbons in
Rudivsk-Chervonozavodsk deposit and approval thereof by the State
Commission on Reserves by June, 2002, that is earlier than the date
stipulated by the License.
4.5 The Company shall provide for supplies into Ukraine of the progressive
equipment and tools for operation of the wells, their overhaul and
exploration, shall organize performance of highly technological
operations by foreign contractors in compliance with the subject-matter
of the Agreement and the Joint Activity Program.
4.6 The business relations as to performance by the Partners of the
operations (works, services) related to development and exploitation of
Rudivsk-Chervonozavodsk deposit paid for from the joint accounts, shall
be equalled to the relations connected with performance of individual
civil agreements per sample of the contract agreements and agreements
on rendering services and performing works. In such case the Partners
that are performers of such operations shall bear material liability
for timely, full and qualitative performance thereof in compliance with
requirements of the legislation in force and appendices hereto
(operation agreements). Performance of such operations free of charge
shall be the Labour Contribution into the Joint Activity. Quality of
the Labour Contribution shall be subject to mutual control by the
Partners.
4.7 The business relations as to transfer of the property on records of the
Balance Sheet of Joint Activity, used by any of the partners to the
Agreement that uses such property when performing the works for the
Joint Activity, shall be equalled to the relations connected with
performance of individual civil agreements per sample of lease contract
(leasing).
4.8 In the course of the Joint Activity the Partners shall consider the
issues of alteration of the form of organization of the drilling works
keeping in mind implementation of such a system when drilling entities
are performers of works (services related to drilling) rather than
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prime contractors. In so doing organization and logistic support of
the construction of the wells shall be exercised by the Manager who at
the same time supervises formation of the total value of the wells and
funding their construction.
9. Section 5.1.3 of Article V "RIGHTS OF THE PARTNERS TO THE AGREEMENT" shall
have to be set forth in the following wording:
5.1.3 To obtain a share of the Incomes from the Joint Activity and in cases
stipulated by the legislation of Ukraine, on the basis of an additional
agreement - a share of the produce extracted hereunder.
10. The first and second paragraphs of Section 6.2 and Section 6.3 of Article VI
"DUTIES OF THE PARTNERS TO THE AGREEMENT" shall have to be set forth in the
following wording:
6.2 In addition to the general duties "Ukrnafta" OJSC shall undertake:
6.2.1 To organize works related to exploration and operation of
Rudivsk-Chervonozavodsk deposit, to keeping records of the Individual
Balance Sheet of the property of the Partners, of the business
operations and the financial results of the Joint Activity thereof, and
to assign to "Poltavanaftogas" OGPD performance of all deeds related to
the duties of the Operator.
6.3 In addition to the general obligations the Company shall upon the
request of the Manager undertake ....
11. Section 7.6 of Article VII "Joint Activity PROGRAM AND FUNDING THEREOF"
shall have to be set forth in the following wording:
7.6 The Joint Activity Programs in line with the Great Risk Operations
shall have to provide for compliance with the requirements of the
design documents for exploration and development of
Rudivsk-Chervonozavodsk deposit approved under the established
procedure, licenses and the license agreement. The Partners shall have
no right to carry out in Rudivsk-Chervonozavodsk deposit works that are
not stipulated by the Joint Activity programs and are not separated as
the Great Risk Operations.
12. The title of Article VIII "DESIGN FOR PILOT PRODUCTION OPERATION OF
RUDIVSK-CHERVONOZAVODSK DEPOSIT" shall have to be changed into "DESIGN
DOCUMETATION FOR OPERATION OF RUDIVSK-CHERVONOZAVODSK DEPOSIT" and to supplement
the above article with Sections 8.3, 8.4, 8.5 in the following wording:
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8.3 Within the Initial Period the Partners to the Agreement shall carry out
the works on making more precise the geological structure of the
deposit, and shall assess substantiation of placement of the production
wells planned for drilling, their number and advisability of use of six
derricks for subsequent construction of wells.
8.4 The Company is intending to submit for consideration of the Managing
Committee the proposals on application of the up-to-date technologies
for drilling wells with slant-straight and horizontal borehole, for
perforation of the wells, for seam hydrofracture, for simultaneous and
separate operation of a number of levels in one well, etc., for the
purpose of formation of an optimal grid of wells on
Rudivsk-Chervonozavodsk deposit, of achieving the highest economic
indices of development thereof.
8.5 The technological documentation for production development shall be
prepared not later than in a year after the reserves of
Rudivsk-Chervonozavodsk deposit are approved.
13. Sections 9.2 and 9.3 of Article IX "GREAT RISK OPERATIONS" shall have to be
set forth in the following wording:
9.2 The following can be considered as a Great Risk Operation:
- carrying out additional seismic prospecting in plots of the earlier
similar works carried out;
- carrying out three-dimensional seismic studies;
- drilling additional prospecting wells, and individual production
wells;
- other operations related to exploration and development of the
deposit.
9.3 The Great Risk Operations can be carried out by the Partners at their
own expense under risk terms and conditions. In case of a negative
result of such Great Risk Operations the expenses for carrying out
shall not be accounted of when determining the Partners' Actual Shares.
In case of obtaining a positive result, as the Partners to this
Agreement agree upon, the initiator of the Great Risk Operations shall
be entitled to use the results of such operations, namely to obtain
100% of Hydrocarbons produced from the wells built or renovated under
the Great Risk Operations until the expenses incurred when performing
the above are reimbursed in the double amount. After that Hydrocarbons
produced from the above wells shall be considered as the produce of the
Joint Activity, and the value of the Great Risk Operations have no
impact whatsoever upon distribution of the incomes between the Partners
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of the Joint Activity. In such case when seismic works are determined
as the Great Risk Operations, the expenses allocated for conducting
the above operations can, upon a decision of the Managing Committee,
be referred to the Balance Sheet of Joint Activity and shall be
accounted of when determining the Partners' Actual Shares.
14. In Article X "BASIC AND ADDITIONAL HYDROCARBONS" the last paragraph of
Section 10.3 shall have to be amended and the article shall have to be
supplemented with Sections 10.4 and 10.5, 10.6 having set them forth in the
following wording:
10.3 ... the Income from sale of the Additional Hydrocarbons or they
themselves, in case an additional agreement is signed, shall be
distributed between the partners to this Agreement.
10.4 "Poltavanaftogas" OGPD, prior to putting into operation the wells that
are the Objects of Investment Activity, shall have to provide for
technical facilities to measure the produce from each well, the total
volume of produce extracted in the deposit and the commercial produce.
Representatives of the Partners to the Agreement together with
specialists of OGPD shall have to check operation of the measuring
units prior to launching the first well and later on not less than once
a quarter.
Operation of the wells shall not be allowed for over 10 days in case
the measuring units are not available or out of operation.
10.5 Division of the commercial produce of Rudivsk-Chervonozavodsk
deposit into the Basic and Additional Hydrocarbons shall be exercised
on the grounds of individual measurements of the produce from each
well. OGPD shall keep records of production of the Basic and
Additional Hydrocarbons, of the commercial produce per each day. The
Balance Sheet of Joint Activity shall keep records of the volumes of
the Additional Hydrocarbons under the reports made by representatives
of the Partners upon the end of a month.
10.6 OGPD shall bear liability for improper performance of the obligations
related to operation of the wells in compliance with technological
conditions, for superstandard idleness of the wells, for loss and short
production under the conditions to be determined in a separate
Operation Agreement.
15. Sections 11.2, 11.5, 11.6, 11.7, 11.10 of Article XI "ACCOUNTING OF
PROPERTY, ACTIVITIES UNDER Joint Activity, EXPENSES FOR IMPLEMENTATION THEREOF
AND RESULTS OF PRODUCTION" shall have to be set forth in the following wording:
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11.2 Expenses for carrying out exploratory works, drilling of production
wells, capital construction including acquiring equipment in Ukraine,
performance of research and other expenses that are not referred to the
Gross Costs on extracting the produce of the Joint Activity, shall be
paid for from the Individual Settlement Account to be kept by
"Poltavanaftogas" OGPD in order to provide for the Joint Activity, and
are reflected in the Individual Balance Sheet.
When necessary, under the Joint Activity Programs, the Partners, at the
expense of the own (unintegrated) assets, shall incur expenses of the
capital type and shall refer them to the value of the capital funds
which later on are put into records of the Individual Balance Sheet of
Joint Activity.
11.5 The Gross Costs for extraction of the produce of the Joint Activity
shall be formed from the current expenses for payment for the services
of "Poltavanaftogas" OGPD and the Company listed in Sections 11.3 and
11.4, and the services of other enterprises, from compulsory deductions
and payments referred to the Gross Costs in compliance with the
legislation in force, from expenses for acquiring materials and energy
resources, and other expenses.
Wear and tear (amortization) of the fixed assets on the records of the
Individual Balance Sheet shall be calculated under the procedure
established by the legislation of Ukraine in force.
11.6 After the expenses for extraction of the produce are recorded into the
Individual Balance Sheet, the financial results of the Joint Activity
shall be formed. Payment of the tax on the Profit from the Joint
Activity and distribution of thwe Incomes between the Partners shall be
exercised in compliance with the requirements of the legislation of
Ukraine in force.
11.7 The Partners shall fix reasonable settlement prices of the services for
the Joint Venture on the basis of actual expenses related to rendering
such services. For the purpose of reliable determining of the actual
expenses for rendering services the Partners shall organize the
accounting of expenses for services rendered to the Joint Venture with
application of a system of sub-accounts. The general production
expenses of OGPD and the Company shall be referred to services to the
Joint Venture at the criterion to be determined by a separate
agreement.
11.10 The accounting shall be kept under the rules fixed in Ukraine, and
additionally under the rules of the country of origin of the Company,
as from January 1, 1999, unless it (the Company) declares other, later
dates.
16. Section 12.1 of Article XII "TAXES AND PAYMENTS TO THE BUDGET" shall have
to be set forth in the following wording:
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12.1 Taxes and compulsory payments to the budget and non-budgetary funds
shall be paid in compliance with the requirements of the legislation of
Ukraine in force at the expense of receipts from sale of the Joint
Produce and shall be kept on records of the Individual Balance Sheet.
17. Article XIII "PROPERTY RELATIONS OF THE PARTNERS" shall have to be set forth
in the following wording:
13.1 The property and pecuniary assets transferred by the Partners onto the
Individual Balance Sheet as well as those created, obtained or acquired
in the process of the Joint Activity and recorded into the Individual
Balance Sheet, shall form the Joint Share Property. The Partners shall
have no right to dispose of their share in the Joint Property without
consent of the other Partners to this Agreement.
13.2 The incomes from the Joint Activity shall be distributed between the
Partners to this Agreement depending on the Actual Shares.
The Partners to the Agreement have agreed that if the Accrued
Contributions of the Partners make up the ratio of 50:50 as stipulated
by Section 21 hereof, the Actual Share of "Ukrnafta" OJSC shall be 55%
and the Actual Share of the Company shall be 45%.
In case of deviation from the above ratio of the Accrued
Contributions, the Actual Share of the Company shall be determined as
the product of a share of its Contribution in the total amount of the
Contributions by the factor 0.9 (the ratio of the agreed upon
percentage of distribution of the Incomes to the agreed upon percentage
of participation in investment, that is 45 divided by 50). The Actual
Share of "Ukrnafta" shall be determined as 100% minus the Actual Share
of the Company.
13.3 The Accrued Contributions of "Ukrnafta" OJSC shall be calculated at the
end of each quarter and shall include:
- expenses for construction and overhaul of the wells and objects of
improvement transferred to the Individual Balance Sheet which are not
related to production of Basic Hydrocarbons (on the basis of a report
on assessment of the above tangible assets at the estimating value to
be determined by a licensed specialized entity, which report to be
signed by all Partners);
- pecuniary assets transferred onto the Individual Balance Sheet for
funding the works of drilling and repair of the wells, industrial
construction, acquiring the equipment and tools that are stipulated by
the Joint Activity Programs;
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- the value of the material resources acquired at the expense of the
assets of "Ukrnafta" OJSC that are transferred onto the Individual
Balance Sheet;
- the Labour Contribution namely the costs of OGPD incurred by way of
cooperation at its own expense for performance in compliance with the
Joint Activity Program of the work, on its own or with involvement of
contractors, related to contractual drilling, industrial construction
and overhaul at actual contractual prices with accounting of the value
of the material resources transferred to the contractors.
13.4 The Accrued Contributions of the Company shall be calculated on the
quarterly basis and shall include:
- pecuniary assets transferred onto the Individual Balance Sheet for
funding the works stipulated by the Joint Activity Programs for
drilling and repair of the wells, industrial construction, acquiring
the equipment and tools;
- value of the material resources transferred onto the Individual
Balance Sheet as a Contribution; - value of the services related to
drilling, construction and overhaul rendered by the Company to the
Joint Venture by way of production cooperation (the Labour
Contribution) in compliance with the approved Joint Activity Programs.
13.5 In case the incomes from the Joint Activity are not distributed within
a quarter of accounting, they shall be deemed distributed hereunder and
shall be subject to entering into the Accrued Contributions of the
Partners in the amounts of due payments.
13.6 The Accrued Contributions and the Shares in the Investment shall be
subject to approval by the Managing Committee.
13.7 In case of distribution of the produce between the Partners one shall
account of the requirements of the legislation of Ukraine and the
agreements achieved herein as to the ratio for distribution of the
Incomes.
18. Article XIV "SALE OF PRODUCE OF THE Joint Activity" shall have to be set
forth in the following wording:
14.1 The produce of the Joint Activity shall be sold by OGPD under the
powers of attorney of other Partners to the Agreement. In case of the
produce distribution on the basis of an additional agreement sale
thereof shall be carried out by either partner independently.
14.2 The business relations as to performance by OGPD of operations related
to sale of Hydrocarbons of the Joint Activity shall be equalled to the
relations connected with performance of specific civil agreements per
sample of the commission agreements. In case such sale is not
15
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exercised within 30 days and there are no pecuniary assets received on
the Individual Settlement Account of the Joint Activity, "Ukrnafta"
OJSC, within the subsequent 30 days, can and will transfer into the
Joint Property oil, gas condensate or other highly liquid produce in
the amount equivalent to the value of the gas subject to payment.
Recalculation into the natural equivalent (oil, gas condensate or
other highly liquid produce) shall be made at the prices in effect as
on the moment of its (such produce) transfer into the Joint Property.
(This provision shall be in effect within the time period of
aggravations in sale of and payments for gas).
19. Article XVI "COORDINATION OF THE Joint Activity AND MANAGEMENT OF THE JOINT
VENTURE" shall have to be set forth in the following wording:
16.1 Coordination of the Joint Activity and management of the Joint Venture
shall be exercised on the basis of decisions of the Managing Committee.
The exclusive competence of the managing Committee shall include:
- preparation of amendments and addenda hereto;
- reconciliation of projects for development of deposits and projects
of improvement, and submission for approval by governmental authorities;
- approval of the Joint Activity Programs and of the Agreed Budgets,
and control over performance of such decisions;
- selection of contractors for performance of the works related to
drilling the boreholes, comprehensive geophysical explorations,
hydrofracture of seams and/or other works of high value;
- reconciliation of contracts for performance of works for the amount
in excess of one hundred thousand US dollars and contracts for purchase
of the property to be transfered onto the Individual Balance Sheet in
the amount over fifty thousand US dollars;
- reconciliation of the terms and conditions for termination of the
Joint Activity;
- disposal of the Joint Property including determining the procedure
for sale of the produce of the Joint Venture.
16.2 Within the Initial Period of the Joint Activity in 1997-1999 the
Managing Committee shall constitute of 4 representatives from either
Partner. Upon expiration of the above time period the composition of
the Managing Committee shall have to be revised in such a way in order
16
<PAGE>
to account of the Actual Share of the Partners in the Joint Activity.
Further on the composition of the Managing Committee shall be revised
every two years depending on the Actual Shares.
The Managing Committee shall be headed by an executive of
"Poltavanaftogas" OGPD.
The expenses for organization of operation of the Managing Committee
shall be funded from the Balance of the Joint Activity.
16.3 Decisions of the Managing Committee shall be made through the majority
individual vote of the Committee members.
In case the Partners fail to make a decision on day-to-day issues of
the Joint Activity such as selection of a contractor, reconciliation of
a contract for performance works or purchase of equipment, the issue
shall be submitted for consideration by an expert group to be formed
and operate under the procedure set forth in Section 9.4, and after
that the Managing Committee shall make the final decision.
16.4 The operative management of the Joint Activity shall be exercised by
the Manager's staff. The Company shall have the right to recommend
specialists from among foreign or Ukrainian citizens to be included
into the personnel of "Poltavanaftogas" OGPD to the position of the
deputy Manager and 3 leading engineers.
16.5 The Manager shall prepare documents required for the Managing Committee
to make decisions on coordination of the Joint Activity.
16.6 The Partners have agreed to consider, within six months as from the
date this wording of the Agreement is signed, the issues of
advisability of and terms and conditions for use of foreign specialists
recommended by the Company in the Manager's staff.
20. Article XVIII "JOINING THE AGREEMENT" shall have to be supplemented by
Section 18.3 in the following wording:
18.3 Any new Partner to the Agreement joining it upon consent of all other
Partners can purchase from any of them a portion of the share in the
Joint Property that will also require a relevant consent of all
Partners.
21. Sections 20.4 and 20.5 of Article XX "MUTUAL RESPONSIBILITY OF THE PARTNERS
AND RESOLUTION OF DISPUTES" shall have to be set forth in the following wording:
20.4 In case the Partners fail to agree upon the issues of dispute through
negotiations within 60 (sixty) days as from the date of forwarding a
17
<PAGE>
notice by one partner to the other Partner on the dispute available,
the dispute shall be submitted for consideration to the Arbitration
Institute of Stockholm Chamber of Commerce that finally resolves the
dispute. The Partners have agreed that the Arbitration shall be
carried out in compliance with the provisions of UNCITRAL Arbitration
Rules. The place of the Arbitrage shall be Stockholm, Sweden. The law
of substance of Ukraine - the country of performance hereof shall be
applied in the course of consideration of disputes. The Arbitration
proceedings shall have to be carried out in Ukrainian and English.
20.5 The Arbitrage shall be constituted of 3 arbiters to be appointed in the
following way: the plaintiff and the defendant shall appoint one
arbiter each who will jointly appoint the third arbiter. If within 30
days after the date of a notice on commencement of the arbitration
proceeding the defendant fails to appoint an arbiter, such arbiter upon
request of the plaintiff shall be appointed by the Institute. If two
arbiters fail to appoint the third arbiter within 30 days after
appointment of the second arbiter, such third arbiter shall be
appointed by the Institute from among three arbiters proposed by the
plaintiff.
22. Article XXI "TERMINATION OF OPERATIONS UNDER THE AGREEMENT OR SEVERANCE
THEREOF" shall have to be set forth in the following wording:
21.1 This Agreement shall become nill and void upon expiration of the time
period of its validity and in case of its premature severance.
21.2 Under the unanimous consent of the Partners the Agreement can be
terminated prematurely, prior to expiration of the fixed 25 year time
period in case the Partners arrive to a conclusion that the goals of
the Agreement cannot be achieved or that it is not advisable to
continue it in connection with unprofitability of the Joint Activity.
21.3 Either Partner can sever this Agreement unilaterally in case other
Partners fail to perform or improperly perform the terms and conditions
of the Agreement.
21.4 In case one of the Partners intends to withdraw from the composition of
the partners to this Agreement, it shall have to notify the other
Partner thereabout indicating the reasons thereof. In case the latter
has no objections, it shall notify about that within a fortnight. In
case of objections available it shall also notify about its objections
within the same time period and about its plans to remedy the reasons
that have initiated severance of the Agreement. The Partner acting as
the initiator of severance of the Agreement shall have to declare
confirmation of its intent or continuation of the Joint Activity. In
case the Partner - the initiator of severance of the Agreement -
declares its confirmation of the intent to sever the Agreement and the
other Partner proceeds with objections, the issue shall be submitted to
the Arbitrage.
18
<PAGE>
21.5 In case of the Partners' consent to sever the Agreement or of a
respective award of the Arbitrage, the Managing Committee can consider
the issue of situation with creditor indebtedness. In case of the
credit indebtedness available, the issue of repayment thereof shall
have to be resolved.
21.6 In case the credit indebtedness is not available or fully repaid, the
Agreement shall be deemed as terminated after expiration of the three
month time period after the consent for severance of the Agreement is
received or a relevant award of the Arbitrage is made, and within the
next three months the Partners shall perform mutual settlements related
to distribution of the profit and division of the Joint Property.
21.7 In case of severance of the Agreement "Ukrnafta" OJSC shall undertake
to buy from the Company a share of the Joint Property owned thereby. In
so doing the price of the share of the property to be redeemed by
"Ukrnafta" OJSC shall have to equal to its estimate value determined by
an expert (experts) having a relevant license. The expert (experts)
shall be appointed upon the mutual consent of the Partners, their
services shall be paid for from the Balance of the Joint Activity. In
such case if the Partners fail to agree as to candidature for the
expert, the issue shall be forwarded to the Arbitrage. In such case the
Company shall act as the plaintiff. Settlements related to redemption
of a share in the Joint property, shall be exercised within six (6)
months under the procedure stipulated by the legislation in force.
21.8 Upon termination of the Agreement "Ukrnafta" OJSC can redeem the share
of the Joint Property owned by the Company at any prices to be
respectively agreed upon. If the Partners disagree as to sale-and-buy
of the share of the Joint Property owned by the Company, the following
procedures shall be exercised.
Firstly, one shall consider the issues related to liquidation of
wells, pipelines and process plants under the prescribed procedure.
Liquidation shall be funded at the expense of balance of assets on the
Individual Settlement Account and assets of the Partners that will fund
the liquidation works at the ratio formed under the last actual
distribution of the profit from the Joint Activity. In case liquidation
of the above property is not advisable or impossible due to technical,
geological or other reasons, it shall pass at the disposal of the
Liquidation Commission to be formed by the Partners which commission is
fully authorized to terminate the Joint Activity, to realize the
property including its sale at auctions with no starting price fixed,
settlements with the Partners. In case the Liquidation Commission fails
to realize such property as wells, pipelines and process plants within
six months, they shall be transferred onto the balance sheet of the
principal activity of "Ukrnafta" OJSC.
21.9 Upon termination or severance of this Agreement the property given by
the Partners for use to one another shall be given back to the owners.
19
<PAGE>
21.10 The Partners agree that this Agreement can be terminated in case they
create an individual business subject (a joint venture) that will be
given the rights for development of Rudivsk- Chervonozavodsk deposit.
In such case the shares of the Partners in the Joint Property shall be
transferred onto the balance of such business subject as a contribution
to the charter fund.
23. The Agreement shall remain valid with accounting of amendments listed in
Sections 1 - 22 of these amendments and addenda. As from the moment of the state
registration of the above amendments and addenda "The Amendments to Agreement
No. 410/95 as of September 14, 1995, between "Poltavanaftogas" enterprise and
"Carpatsky Petroleum Corporation" company, USA, on the joint investment and
ptoduction activity related to development and exploitation of
Rudivsk-Chervonozavodsk deposit" dated May 12, 1998, shall become nill and void.
Signed in 4 duplicates in Ukrainian and 4 duplicates in Russian 4
duplicates for either Partner. All duplicates are of similar legal force.
SIGNED BY:
For "Ukrnafta" OJSC
Ya.I. Kozak
(Chairman of the Board)
V.F. Kolisnyk
(acting head of "Poltavanaftogas" OGPD
under a power of attorney)
For Carpatsky Petroleum Corporation"
company
L.K. Texas
(President)
20
<PAGE>
ATTACHMENT 5
TO OPINION LETTER
Additions and Changes
to the Contract # 410/95 dated September 14, 1995
for the investment, exploration and operation of Rudivsko-Krasnozavodskoye field
revised on October 15, 1996 with amendments dated December 25, 1997 and August
26, 1998
(State Registration #1353-OO1K dated April 4, 1997
Registered in Poltava Regional Foreign Relations Department)
City of Poltava April 23, 1999
OJSC Ukrnafta, represented by its Chairman of the Board Eger Dmitrii
Alexandrovich, who is acting in accordance with the Charter, and by the Head of
the Production Department (NGDU) of Poltavanaftogas Kozak Vladimir Pavlovich,
who is acting in accordance with the Power of Attorney from OJSC Ukrnafta on one
side, and Carpatsky Petroleum Corporation, USA, represented by its President
Leslie Texas and by the Member of the Board of Directors Fred Khofheins, who are
acting in accordance with the Charter on the other side, taking into account the
initial experience of joint implementation of this Contract, have agreed to the
following changes and additions to the said Contract # 410/95:
Section XIV "SALE OF TIM PRODUCTION OUTPUT" shall be read as follows:
<PAGE>
14.1 Sale of the joint production output shall be conducted by OJSC Ukrnafta
represented by NGDU Poltavanaftogas through Powers of Attorney form the
other parties. If the Company is not satisfied with the work performed
by NGDU, it has the right to propose to the Managing Committee that the
sale of the joint production output, or any part of it, for a certain
period of time will be conducted by the Company though Powers of
Attorney from the other parties.
If an additional agreement provides that the output shall be divided
between the parties, each party is responsible for the sale of its
share of the output.
14.2. The relationship between parties with respect to the We of the output
performed by NGDU or the Company is the same as in the contract of
agency.
14.3. If NGDU, performing its obligations defined in Section 14.1 of this
Contract, does not transfer the money into the Joint Account during the
period of 30 days from the date of the sale, OJSC Ukrnafta has the
right, during next 30 days, to transfer into the Joint Assets the oil,
condensate and other output in the amount equal to the price of gas
sold by NGDU. The volume of the oil, condensate, and other output
transferred into the Joint Assets shall be calculated based on the
prices on the day of the transfer. This Section also applies when
difficulties with sale or collection of payments exist.
This document is executed in four counterparts for each Party to the Contract.
All four counterparts are in the Russian language and have equal legal force.
Signed:
OJSC Ukrnafta Carpatsky Petroleum Corporation
By: D. A. Eger By: L.K. Texas
(Chairman of the Board) (President)
By: V.P. Kozak By: Fred Khofheins
(Head of NGDU Poltavanaftogas (Member of the Board of Directors)
through Power of Attorney)
<PAGE>
ATTACHMENT 6
TO OPINION LETTER
APPROVED
By the decree of the Ministry of Foreign
Economic Relations and Trade of Ukraine
20 February 1997, #125
CARD OF STATE REGISTRATION OF THE
CONTRACT ON JOINT INVESTMENT
ACTIVITY WITH PARTICIPATION OF THE
FOREIGN INVESTOR.
Contract #410/95 of September 14, 1995
1. The subject of foreign economic activity of Ukraine - contract participant to
whom is entrusted with conducting joint businesses of the participants.
(Name, pattern of property, legal address, code ZUKPO, surname, name of the
chief, telephone)
The enterprise "Poltavnaftogas" of open joint-stock company
"Ukrnafta"
The collective property Ukraine, 314000, city Poltava, 12 Radyanska
Street
Code ZUKPO 22525915
General director - Kozak Vladimir
Tel: 7-45-91 fax: 7-91-57
2. Other participants of the contract
(Name, pattern of property, legal address, code ZUKPO, surname, name of the
chief, telephone)
Carpatsky Petroleum Corporation
The corporate property
3000 Richmond Ave. Houston, TX 77098
President - Leslie Texas
Tel: 713 524-1745 fax: 713 524-2427
Registered representation in Ukraine: #II I-1249 from April 24, 1996
Code 23735804
Address of representation: room 505, Kudryavsky spusk 7, Kiev, Ukraine
Tel: 417-4371 fax: 417-1046
3. Kind of joint investment activity, stipulated in the contract:
Joint investment activity and joint production in the field of production of gas
and condensate, development of Rudovsko-Chervonozavodsky gas-condensate field.
4. Validity of the contract
20 (twenty) years from the moment of the conclusion
Post, surname, name of the chief of the state registration body Head of foreign
economic relations department of Poltava area
<PAGE>
- Peretyatko Petro
--------------------
(Signature)
Date of issue - April 4, 1997
Registration number #1353-001k
<PAGE>
ATTACHMENT 7
TO OPINION LETTER
State Committee of Ukraine for Geology
and Subsoil Use
L I C E N S E
for exploratory operations
Kiev
<PAGE>
The license is issued for geological exploration (exploratory & production
development)
Object name Rudivske-Chervonozavodske deposit
Mineral resources hydrocarbons
Object location Poltava oblast, Lokhvytsky rayon
NL 50o 30' - EL 33o 19'
NL 50o 27' - EL 33o 32'
NL 50o 24' - EL 33o 32'
NL 50o 24' - EL 33o 18
License holder "Poltavanaftogas" a subsidiary enterprise of "Ukrnafta" JSC
License holder's address 12, Radyanska St., Poltava
Purpose of operations Studies into the geological & production characteristics
of deposits and determining optimal conditions for operation of the wells
Special conditions Extraction of hydrocarbons must not exceed 10% of the
assessed reserves
The license validity term has been extended for two (2) years
Deputy Chairman of the State Committee of Ukraine for Geology B.O. Vyalyuk
January 28, 1997
License validity term 2 (two) years
Date of issue July 31, 1995
License registration number 470
Head of organization
Chairman of the State Committee of Ukraine for Geology M. Gavrylenko
<PAGE>
ATTACHMENT 8
TO OPINION LETTER
State Committee of Ukraine for Geology
and Subsoil Use
L I C E N S E
for exploratory operations
Kiev
<PAGE>
The license is issued for geological exploration
Object name Rudivske-Chervonozavodske deposit
Mineral resources hydrocarbons
Object location Poltava oblast, Lokhvytsky rayon
NL 50o 30' - EL 33o 19'
NL 50o 27' - EL 33o 32'
NL 50o 24' - EL 33o 32'
NL 50o 24' - EL 33o 18
License holder "Chernihivnaftogasgeologiya" SGE
License holder's address 15, Shevchenko St., Chernihiv
Purpose of operations Exploration of the geological structure of the deposit,
assessment of hydrocarbons reserves
Special conditions
License validity term 2 (two) years
Date of issue July 31, 1995
License registration number 469
Head of organization
Chairman of the State Committee of Ukraine for Geology M. Gavrylenko
<PAGE>
ATTACHMENT 9
TO OPINION LETTER
STATE COMMITTEE OF UKRAINE ON GEOLOGY AND USE OF MINERAL
RESOURCES
THE L I C E N S E
(special resolution on use of mineral resources)
Registered No 968 from March 30, 1998
Type of use by mineral resources: geological investigation (exploration)
including pilot- commercial development
geological investigation, (search,
exploration), recovery etc.
Object of licensing: Ruduvsko-Chervonozavodskoye field
Title of the field, section, geological
territories etc.
Mineral resources: oil, gas, condensate
main, associated, range of application
Object location: Poltava
Administrative region: Lokhvitsky
Landmarks: village Ruda and Chervonozavodskoye
Direction, distance from the nearest
locality, railway station, points of
natural conservations
Geographic coordinates:
Northern Latitude 50'30'05" 50'30'00" 50'25'40" 50'23'40"
50'23'35"
East Longitude 33'17'30" 33'22'55" 33'35'10" 33'21'20"
33'17'50"
Area: 189.5 km2
quantity, unit
The purpose of the license (operations):
Exploration of oil and gas reservoirs
in Low-Carbonic depositions, pilot-
commercial development of wells,
reserves distribution approval by State
Commission of Reserves of Ukraine
with consequent industrial development of
the field
Special (additional) license conditions:
1. The operations are conducted
according to the terms and
conditions of contract "About
joint activity on geological
investigation of mineral
resources and preparation for
industrial development of
Rudovkso- Chervonozavodskoye
oil-gas-condensate field "from
December 30, 1997, #5/27
between joint-stock company
"Ukrnafta" and GGP
"Chernigivnaftogasgeologia". 2.
Fulfillment the conditions of
State Control of ecological
safety in Poltava region from
February 19, 1998 #07-06-340
(ecological card No. 97)
<PAGE>
The license owner:
1. Opened joint-stock company
"Ukrnafta" (NGDU "Poltavanaftogas")
Code 00135390 254655, Kiev, Nesterovsky
by-str. 3/5
The license is agreed:
1. State control of ecological safety in
Poltava region from February 19, 1998
No. 07-06-340 (ecological card No. 97)
Validity of the license: 5 (five) years
Chairman of the Committee S.V. Goshovsky
C:\1US-USER\CARPATSK\License 968.wpd
<PAGE>
ATTACHMENT 10
TO OPINION LETTER
Approval from: Agreed with:
Deputy Head of State Pozalin Y., Kozak Y.I.
Committee of Geology
Signature Tkach I. V.
(SEAL)
Agreement No. 5/27
on joint productive activity for geological exploration of subsoils and
preparation to production development of Rudivsko-Chervonozavodske
oil and gas condensate field
city of Poltava December 30, 199__
Guiding by the Directive to grant licenses to gas and oil extraction
enterprises for geological exploration of subsoils with right to subsequent
production development of fields within IV quarter of 1997, formulated in
Protocol Resolution of Cabinet of Ministers of Ukraine on immediate measures for
stabilization of oil and gas extraction dated July 31, 1997; guiding by the
Directive of operational conference determining further works at fields of
Mehedivsko- Rudivska zone with view to accelerate and increase effectiveness of
pilot production exploitation (PPE), attended by representatives from State
Committee of Oil and Gas Industry, State Committee of Geology and OJSC
"Ukrnafta" on December 13, 1997; ChernigivNaftogasGeologia, state geological
enterprise, hereinafter referred to as the SGE "CNGG" in person of Maruhnyak
V.M. as acting General Director, acting in virtue of charter of the enterprise
from one side, OJSC Ukrnafta, acting in virtue of the charter, in person of
Kozak V.P. as acting manager of NGVU "Poltavanaftogaz", structural subdivision
of OJSC Ukrnafta, acting in virtue of power of attorney, from another side,
hereinafter referred to as the "Participants" have entered into this Agreement
as follows:
1. Basis of agreement
NGVU Poltavanaftogaz of OJSC Ukrnafta shall obtain licenses for
geological exploration of subsoils with right to subsequent production
development of Rudivsko-Chervonozavodske, Svistunkovske, Chervono-lutske gas
condensate fields up to ___________ 1998.
NGVU Poltavanaftogaz of OJSC Ukrnafta shall be responsible for
completion of exploration, PPE of said fields, calculation of hydrocarbons'
deposits and preparation thereof for production development.
The "participants" shall act jointly and coordinately for
implementation of aforementioned assignments based on the terms hereof.
2. Subject of agreement
The subject of agreement shall constitute activity on geological exploration of
subsoils at Rudivsko-Chervonozavodske, Svistunkovske, Chervonolutske fields and
preparation thereof for production development.
<PAGE>
3. Performance procedure
Joint activities of participants hereto shall be carried out as per
their joint approval. The profit shall be attributable to each party with due
account to the results of its business activity and no liability shall be
incurred for business activity of other party.
3.1. The parties shall arrange for completion of exploration, PPE,
calculation of hydrocarbons' deposits and submission thereof to State Commission
of Ukraine on Subsoil Reserves with view to explicitly research the operation
regimes, parameters of deposits, and evaluation of productive potential thereof.
3.2. Implementation of present agreement within five years.
3.3. The parties agree for search of investor to finance drilling and
wells equipping works at said fields.
3.4. Oil and gas explorative expeditions of CNGG shall drill
explorative, exploitative wells on the basis of bilateral agreements with NGVU
Poltavanaftogaz.
3.5. The Participants shall have joint thematic geological
accompaniment of works for geological research of field under specific
agreement.
4. Obligations of parties
4.1. CNGG shall acquire the following obligations:
4.1.1. To construct wells, to test objects and to prepare them for PPE.
4.1.2. To dismantle drilling equipment and reclaim the soil on territory
adjacent to wells in accordance with schedule. 4.1.3. To transfer deposits at
Rudivsko-Chervonozavodske, Svistunkovske, Chervonolutske fields on balance of
OJSC Ukrnafta up to April 1, 1998. 4.1.4. To compile a summary on geological
constitution and calculation of hydrocarbons' deposits and jointly with NGVU
Poltavanaftogaz of OJSC Ukrnafta to obtain approval for it in State Commission
of Ukraine on Subsoil Reserves.
4.2. NGVU Poltavanaftogaz of OJSC Uknafta shall acquire the following
obligations: 4.2.1. to finance wells drilling works on customer-contractor
terms. 4.2.2. to enter into agreements (contracts) for investments with
investors. 4.2.3. to issue engagements for construction of explorative,
exploitative wells, allocation of land plot for constructing and equipping
wells. 4.2.4. to prepare and approve plans for exploitation and drilling wells
with CNGG 4.2.5. to arrange for extraction of oil and gas, equipping wells,
inputting thereof into PPE. 4.2.6. to exploit wells in accordance with PPE plans
and to quarterly transfer the results of research and information on wells to
CNGG. 4.2.7. to prepare jointly with CNGG calculation of hydrocarbons' deposits
at Rudivsko- Chervonozavodske field for submission to consideration of State
Commission of Ukraine on Subsoil Reserves and to finance these works.
5. Special provisions
5.1. The financing of joint works shall be made from various sources: of
internal origin, from state budget and in form of investments.
<PAGE>
5.2. Settlements with CNGG for the works done shall be made in accordance with
project-budget documentation (based on acts [EF]-2) 5.3. SGE CNGG shall drill
not less than three explorative and exploitative wells yearly. 5.4. In case of
impossibility for reasons not dependent upon parties to perform the terms of
this agreement, the parties shall resolve to concretize its certain provisions
within five days.
6. Liability of parties
6.1. For non-performance or undue performance of this agreement, the parties
shall be liable in accordance with effective legislation of Ukraine. 6.2. If the
parties came to no compromise, the dispute shall be settled in Arbitrage.
7. Term of agreement
The agreement having been executed in two copies each with equal force shall be
effective as of the date of its signing and shall act under sec. 3.2
8. Addresses and requisites of parties
"Poltavanaftogaz" enterprise SGE "ChernigivNaftogasGeologia"
Radyanska str., 12, city of Poltava, Shevchenko str.,15, city of Chernigiv,
314000 250006
tel: 7-45-91, facsimile 7-91-57 tel: 7-70-81, facimile: 7-48-56
teletype 164106 "[EF]ak[ie][el]" teletype 192196 "Ikap"
Checking account Checking account 208503 in Regional
209713, MFO 331478 Department of Prominvestbank
Code of enterprise 22525915 MFO 353456
in Zhovtneve branch of JS city of Chernigiv
Prominvestbank, city of Poltava
(SEAL)
General Director of Poltavanaftogaz Acting General Director
(Signature) Kozak V.P. (Signature) Maruhnyak V. M.
Agreed with:
Deputy Head of State Committee of Oil and Gas Industry
Signature Zarubin Y.O.
January 25, 1999
<PAGE>
ATTACHMENT 11
TO OPINION LETTER
Appendix No.
to Agreement No. 410/95 as of
September 14, 1995, on the joint
production and investment operations
related to development and working of
Rudivsk-Chervonozavodsk deposit with
amendments and addenda dated
August 28, 1998
(State registration as of April 4, 1997, under
No. 1353-0015 with the Department for
foreign economic relations of
Poltava oblast)
AGREEMENT
on the procedure for operation of the wells of Rudivsk-Chervonozavodsk
deposit to be the joint property of "Ukrnafta" OJSC and "Carpatsky Petroleum
Corporation" American company, collection, preparation, transportation of gas
and gas condensate from the above wells
Poltava August 31, 1998
The Partners to Agreement No. 410/95 dated September 14, 1995, on the
joint production and investment operations related to development and working of
Rudivsk-Chervonozavodsk deposit "Ukrnafta" CJSC represented by the chairman of
the board Kozak Yaroslav Ivanovych and the acting head of "Poltavanaftogas" OGPE
Kolisnyk Volodymyr Feodosiyovych, on the one hand, and "Carpatsky Petroleum
Corporation" company represented by the president Lesly K. Texas, on the other
hand, have agreed as follows:
1. General Provisions
1.1 This Agreement has been entered into in compliance with the provisions
of Agreement No. 410/95 (Sections 4.1, 4.6, 10.4, 10.5, 10.6, 11.3,
11.5).
1.2 This Agreement shall stipulate operation of the wells of
Rudivsk-Chervonozavodsk deposit Nos. 106-P, 102-P, 104-P, 109-P,
111-Ch, 100-Ch that are the joint property of "Ukrnafta" CJSC and
"Carpatsky Petroleum Corporation" company, and of other wells which
will be built in the future at the expense of the assets of the
Partners to Agreement No. 410/95, maintenance of the pipelines running
from the above wells.
1.3 The relations between the Partners in connection with performance
of works related to operation of the wells listed in Section 1.2, with
collection, preparation and transportation of gas and gas condensate
from the above wells, shall be equalled to performance of works
<PAGE>
under specific civil agreements per sample of agreements for
performance of works (rendering services).
The Partners to Agreement No. 410/95 "Ukrnafta" CJSC and "Carpatsky
Petroleum Corporation" company have agreed that under their powers of
attorney the functions of the Customer as to operation of the property
shall be performed by "Poltavanaftogas" OGPE, a division of "Ukrnafta"
CJSC. At the same time "Poltavanaftogas" OGPE shall act as a performer
of works for the joint interests of the Partners in the Joint
Operations. Acceptance of the works performed hereunder and taxation
thereof shall be exercised similar to agreements on performance of
works (rendering services).
1.4 Operation of the wells listed in Section 1.2 shall be exercised in line
with the wells of Rudivsk-Chervonozavodsk deposit, the objects of the
deposit improvement for collection, preparation, transportation of the
produce, other structures and objects that are not the subject-matter
of Agreement No. 410/95.
The indices of operation of the above wells shall be reflected in the
statistic reporting, geological reports to be prepared by
"Poltavanaftogas" OGPE for the deposit as a whole.
1.5 The terms meaningful for understanding the content of the text hereof
and the terms specifically defined in Agreement No. 410/95 shall be
written in the text of this Agreement with capital letter.
2. Subject-Matter of the Agreement
2.1 In compliance with the terms and conditions of Agreement No. 410/95
"Ukrnafta" CJSC and "Carpatsky Petroleum Corporation" company shall
assign and "Poltavanaftogas" OGPE shall assume the obligations as to
performance of the following works:
- operation and maintenance of the wells and pipelines in compliance
with the effective standards and rules for protection of the subsoil,
for protection of the environment, industrial safety, and in compliance
with the processing conditions approved by the Managing Committee;
- organization and performance of exploration of the wells and seams;
- provision for intra-deposit collection of well produce, systematic
measurement of discharge of the wells, accounting total volumes of
production of the natural gas and gas condensate;
- preparation of the natural gas, gas condensate, transportation of the
commercial produce to consumers;
- underground repair of the wells;
<PAGE>
- current repairs of the capital funds of joint ownership.
2.2 The procedure for sale of the natural gas and gas condensate (Joint
Operations Hydrocarbons) shall be determined by a separate agreement
(per sample of a commission agreement) to be signed by the chairman of
the board of "Ukrnafta" CJSC, by the president of "Carpatsky Petroleum
Corporation" company and the head of "Poltavanaftogas" OGPE, and it
shall not be the subject-matter hereof.
3. Organization and Procedure for Performance of Works
3.1 The works listed in Section 2.1 (except the works stipulated by the
last two paragraphs of the above Section 2.1) shall be performed by
"Poltavanaftogas" OGPE in line with the respective operations related
to other objects of the deposit which are not the Joint Property. Such
works shall be hereinafter referred to as the Complex Operations. The
works listed in the two last paragraphs of Section 2.1 shall be
performed as separate Individual Operations.
3.2 "Poltavanaftogas" OGPE shall perform the works in compliance with this
Agreement through its own capacities as well as with participation of
other divisions of "Ukrnafta" CJSC and other entities. The agreements
entered into by "Poltavanaftogas" OGPE with other divisions and other
entities as to performance of the Complex Operations, shall not
correspond hereto as sub-contracts.
3.3 OGPE shall guarantee access to any objects of the deposit for
representatives of the Company who have been properly briefed as to the
industrial safety as well as submission to the Company representatives
all initial documents necessary for analysing operation of the wells
and preparing proposals as to optimization of their functioning,
implementation of geological and technical measures for intensifying
the influx, for ensuring accident-free operation of structures and
equipment.
3.4 Technological conditions for operation of the wells shall be developed
by OGPE services and shall be subject to approval by the management of
"Ukrnafta" CJSC and "Carpatsky Petroleum Corporation" company.
The Company shall submit proposals on operation of the wells, on
performance of works related to exploration of the wells and
optimization of their functioning including involvement of specialized
foreign and Ukrainian enterprises in writing to OGPE or to "Ukrnafta"
CJSC. Within a week time period OGPE shall have to accept the Company
proposals or to notify in writing that they cannot be implemented with
setting forth the reasons. The Company proposals disapproved by OGPE
shall be considered by the Managing Committee as the Company may
require.
3.5 The operating data as to the wells functioning, the works performed
thereon, the results
<PAGE>
of measurements of discharges shall be presented to the Company
representative in Ukraine (contact telephone number in Kiev 2-61).
Measurement of discharge of the wells shall have to be made not less
than once in ten days. OGPE shall have to ensure performance of the
check measurements upon request of the Company with participation of
representatives thereof. A relevant report shall have to be drawn
according to the results of the check measurements of the well
discharges to be signed by representatives of OGPE and the Company.
3.6 OGPE shall provide for implementation of organizational and
technological measures for efficient protection of the underground and
surface equipment against corrosion, for preventing hydration. The
above organizational and technological measures to be developed by OGPE
services with participation of the Company representatives, shall be
subject to consideration and approval by the Managing Committee.
3.7 OGPE shall provide for bringing gas and gas condensate to commercial
conditions in compliance with the effective state standards and
technical requirements of consumers. OGPE shall bear property liability
for the produce failure to comply with such standards and requirements.
4. Requirements to Performance of Works
4.1 The works related to production of gas and gas condensate, maintenance
of the wells and other objects to be the Joint Property of the Partners
to the Agreement, shall be carried out by complying with the effective
standards and rules. OGPE shall be liable for preservation of the
environment.
4.2 The works related to collection and itra-deposit transportation of
the well produce, separation, drying, ............ and supply thereof
to the system of the main transportation, shall be performed by OGPE
capacities with application of the property thereof, and with
participation of other divisions of "Ukrnafta" CJSC and other
entities.
5. Accounting of the Produce
5.1 OGPE shall keep the accounting of the gross and commercial gas and gas
condensate. The total volume of the commercial gas and gas condensate
shall be calculated as a sum of production of the natural gas ( gas
condensate respectively) from individual wells. In its turn the volume
of production shall be calculated as product of the discharge and
duration of operation less technological costs for the system of
collection, preparation, storage and transportation which costs exceed
the standard costs effective in OGPE.
5.2 "Poltavanaftogas" OGPE shall draw up reports as to the volumes of
production, transportation of the natural gas and gas condensate from
the wells that are the joint property of the Partners to Agreement No.
410/95. The above reports shall be subject to being agreed upon with
representatives of "Carpatsky Petroleum Corporation" company
<PAGE>
and transferred to the service of "Poltavanaftogas" OGPE in charge of
keeping the Individual Balance Sheet of the Joint Operations in
compliance with Agreement No. 410/95 (the samples of the reports are
given in Appendices 1 and 2).
6. Cost of Works
6.1 The cost of the Complex Operations related to maintenance of the wells
in III quarter of 1998 is given in Appendix 3 hereto.
6.2 Further on the cost of the Complex Operations shall be determined on
the basis of actual expenses on production of gas and oil with gas
condensate incurred in "Poltavanaftogas" OGPE within a quarter.
The cost of performance of the Complex Operations shall be determined
upon completion of each quarter and approved by the Partners to
Agreement No. 410/95.
6.3 When determining the cost of the Complex Operations the following
calculations shall have to be made.
The total sum of the actual costs of OGPE for production of the own
gross produce and rendering services related to production of
Hydrocarbons of the Joint Operations shall be calculated with
accounting of the following items:
1. Power for production of oil.
2. The basic wage of the principal employees.
3. Additional wage.
4. Deductions for social insurance.
5. Amortization of the wells.
6. Costs for maintaining seam pressure.
7. Costs for collection and transportation of oil and gas.
8. Costs for preparation of oil, gas condensate and gas.
9. Costs for maintenance and operation of the equipment.
10. Department costs.
11. Total production costs,
including
a) charge for use of ............, state levy and a
charge into the innovation fund.
12 Other production costs.
The total sum of the costs under the above listed items shall be
allocated for production of the own produce and for rendering services
related to production of Hydrocarbons of the Joint Operations. In so
doing the costs under Items 1, 5, 6, 11a and 12 shall be referred to
the produce of the own production exclusively.
The costs under Items 2, 3, 4 shall be referred to the self-cost of the
own produce and
<PAGE>
services related to production of Hydrocarbons of the Joint Operations
on the basis of the initial documents on the actual labour consumption.
The costs under Item 7 shall be referred to the own produce and
Hydrocarbone of the Joint Operations in proportion to the volumes of
production thereof.
The costs under Item 8 shall be referred to oil and gas condensate of
the own production and the services related to production of the
respective types of Hydrocarbons of the Joint Operations in proportion
to the volumes of production thereof.
The costs under Items 9, 10, 11 (less 11a) shall be referred to the
produce of the own production and the services related to production of
Hydrocarbons of the Joint Operations in proportion to the effective
fund of the production wells.
The costs under Item 11 less 11a shall be referred to the produce of
the own production and the services related to production of
Hydrocarbons of the Joint Operations in proportion to the volumes of
production thereof.
On the basis of such allocation the total sum of costs shall be
determined relative to rendering services related to production of
Hydrocarbons of the Joint Operations.
The total value of the works performed and the services rendered for
production of the produce of the Joint Operations shall be equal to the
above costs. VAT shall be paid in addition to the above.
6.4 The value of ............performance of such works. The estimates shall
be developed by "Poltavanaftogas" OGPE services and approved by the
Managing Committee.
7. Procedure for Settlements
7.1 Settlements for the Complex Operations performed shall be
exercised by .............payments by the 29th day of each month in
the amount of 15% of the value of the anticipated volume of production
of the Joint Operations Produce in a quarter. The balance settlement
shall be exercised upon the end of the quarter, after having
determined the cost of the services, within 10 days after a relevant
report has been signed (a sample is given in Appendix 4).
7.2 Settlements for performance of the works determined as the
Individual Operations shall be exercised within a 10 day time period
after a relevant report has been signed. The Individual Operations
performance of which is caused due to the fault of OGPE as a result of
violation of the technological conditions of the wells functioning or
of the requirements to operation of structures, equipment through
........................ organizational and technological measures for
protection of the equipment and structures agaunst corrosion, and
prevention of hydration, shall not be subject to payment from
............. of the Joint Operations.
<PAGE>
8. Procedure for Acceptance of Works
8.1 The works determined as the Complex Operations and the Individual
Operations shall be considered as performed after the relevant reports
on the works performed have been approved by the head of
"Poltavanaftogas" OGPE. The above reports shall be subject to mandatory
agreement on the part of a representative of "Carpatsky Petroleum
Corporation" company.
<PAGE>
ATTACHMENT 12
TO OPINION LETTER
APPROVED APPROVED
Chairman of the Board Vice Chairman of
Opened JSC Ukmafta Goskomgeology
_______________B.V. Zaritsky ______________B.O. Byaluk
May 16,1995 May 16,1995
City of Poltava
CONTRACT
between Chernigovneftegasgeologiya and Poltavaneftegas
for the joint exploration and operation of Rudivsko-Krasnozavodskoye field
The state geological entity Chernigovneftegasgeologiya, represented by its
General Manager Ginda Stepan Mefodievich (hereinafter called "ChNGG") on one
side, and JSC Ukrnafta of Poltavaneftegas, represented by its General Manager
Kazak Vladimir Pavlovich (hereinafter called "PNG") on the other side, have
entered into this contract for the joint exploration and operation of wells
#2,3,4,5,6,7,8, and 9 of Krasnozavodskoye field and wells #7 and 9 of Rudivskoye
field.
1. Subject and Implementation of the Contract Both parties have
agreed to the following:
1.1 To ensure detailed evaluation of the field parameters and working
conditions, and accurate assessment of the industrial value of the
filed, both parties agreed to jointly commence a final construction
stage for the above-listed wells, as well as to jointly explore,
operate, process, transport and sell raw materials (gas, condensate) on
both internal and international markets.
1.2. This contract shall be implemented in two stages. Stage one is to
finish well construction in 1995-1996, and stage two is to complete
wells (according to the exploration data) and to commence well
operation in 1995-1996.
1.3. Production volumes shall be calculated based on the exploration data
and according to the IPE schedules.
2. Obligations of the Parties
2.1. ChNGG shall:
2.1.1. Complete the construction of wells, test them and transfer to PNG as
assets in accordance with the agreed schedule.
2.1.2. Disassemble the drilling equipment and reclaim the land around wells in
accordance with the timetable.
2.1.3. Furnish equipment and drilling crews for the completion of wells of
Krasnozavodskoye field. 2.2. PNG shall:
2.2.1. Finance and procure casing, tubing X-mas Trees.
2.2.2. Create the exploration and production schedules and submit them to PNG
for approval. 2.2.3. Ensure well completion. 2.2.4. Ensure that wells
operate in accordance with the IPE schedules, current Well Operation
Rules and published standards.
2.2.5. Conduct all exploration according to the IPE schedules and transfer the
results to ChNGG.
2.2.6. Produce, collect, and pre-process the well output, as well as
transport gas (gas condensate) from the well to the railroad
(pipeline). A special two-party agreement shall be executed when
gas is delivered to the pipeline.
2.2.7. Finance well completion performed by the Nezhinsk NGREVC.
3. Important Conditions
3.1. ChNGG shall prepare separate transfer-acceptance documents when
unloading the ChNGG's share of gas (gas condensate) to the consumer.
3.2. Well output (gas and gas condensate) shall be divided as follows:
3.2.1. From the wells that belong to PNG, PNG shall receive 70%, and ChNGG
shall receive 30%. 3.2.2. From Krasnozavodskoye wells #2,3,4,5,6, and 7
that belong to PNG, PNG shall receive 80%, and ChNGG shall receive 20%.
3.3. Production cost of gas and gas condensate that is transferred to ChNGG
shall be calculated according to the wholesale prices on the day of the
transaction. These prices shall include the applicable taxes
established by the Ukrainian Government.
<PAGE>
In 1996 PNG shall reimburse ChNGG with oil (condensate) for the
drilling of production wells. The volume shall be calculated in
accordance with prices listed in Section 3.3.
3.4. ChNGG has a right to inspect the timing and quality of the exploration
works.
3.5. If the performance of this contract is prevented by a cause that is
beyond the control of both parties, the parties have five days to make
a decision on adjusting the conditions of the contract.
4. Responsibilities of the Parties
4.1. Parties are responsible for nonperformance or incomplete performance of
their obligations set forth in this contract according to the current
laws of the state of Llkraine.
4.2. All disputes between parties that cannot be settled by the mutual
agreement shall be referred to arbitration.
5. Term of the Contract
5.1. This contract is executed in two counterparts, which have equal legal
force, and is valid from the date of its execution until January 1,
1997.
6. Addresses, Bank Accounts
Poltavaneftegas
314000 Poltava
Ul. Sovietskaya, 2
Tel: 7-4591
Fax: 7-9157
Telex: 164106 "Fakel"
Account Number: 209713 MFO 331478
Code: 2252915 at Oktyabrskoye branch of AK Prominvestbank City of
Poltava
GGP Chernigovneftegasgeologiya
250006 Chernigov
Ul.Shevchenka,15
Tel: 7-7081
Fax: 7-4856
Telex: 192196 "Ikar"
Account Number: 208503 at regional branch of Prominvestbank, MFO
353456, City of Chernigov
General Manager, PNG General Manager, ChNGG
V.P. Kazak S.M. Ginda
May 16, 1995 May 16, 1995
<PAGE>
ATTACHMENT 13
TO OPINION LETTER
AGREEMENT (PROTOCOL)
between Chernigovneftegasgeologia and Poltavaneftegas for the joint exploration
and operation of Rudivsko-Krasnozavodskoye, Mekhedivskoye, Svistunkovskoye,
Sviridovskoye, and Chervonolutskoye gas condensate fields
City of Poltava 1995
1. Subject and Implementation of the Agreement
The state geological entity Chernigovneftegasgeologiya, represented by
its General Manager Ginda Stepan Mefodievich (hereinafter called "ChNGG") on one
side, and JSC Ukrnafta of Poltavaneftegas, represented by its General Manager
Kazak Vladimir Pavlovich (hereinafter called "PNG") on the other side, have
entered into this agreement for the joint exploration and operation of
Rudivsko-Krasnozavodskoye, Sviridovskoye, Mekhedivskoye and other fields.
Both parties have agreed to the following:
1. To ensure detailed evaluation of the field parameters and working
conditions, and accurate assessment of the industrial value of the filed,
both parties agreed to jointly commence a construction of exploration and
pilot production wells for exploration, production, transportation and sale
of raw materials (gas, condensate).
2. Both parties agreed to jointly look for an Investor to finance the final
stage of exploration, as well as IPE and well completion at
Rudivsko-Krasnozavodskoye, Sviridovskoye, Mekhedivskoye and other fields.
PNG, after ChNGG's approval, shall execute the agreement with an Investor
for the performance of said services.
3. Both parties shall jointly create a budget that accounts for:
1. Upgrading of ChNGG's drilling equipment-up to 5 drilling rigs (in
1995-1996).
2. Financing of construction of surface facilities.
3. Financing of utilization of western technologies such as GRN,
development of productive horizons within hydrocarbon bearing basin,
and others.
3.1. Both parties shall name the Investor in a separate agreement and then shall
agree to the amount of the investment.
4. Production volumes shall be calculated based on the exploration data and
according to the IPE schedules.
4.1. Both parties agreed to the following division of the well output: 30% ChNGG
70% PNG
4.2. Additional output that was produced due to the utilization of new
technologies financed by the Investor shall be divided as follows:
1. PNG and ChNGG jointly define the Investor's share that shall be
detailed in a three party agreement.
<PAGE>
2. The rest of the output shall be divided as follows: ChNGG receives
25%, PNG receives 75%.
3. Payments between PNG and ChNGG shall be calculated based on the
wholesale prices for PNG on the day of the transaction.
4. Each party receives profit based on its activity and is not
responsible for the activity of the other party.
PNG shall finance the following:
1. Pilot production drilling
2. Surface facilities
3. Loan payments (including interest)
[**TRANSLATOR'S NOTE: Sections 5 and 6 are missing from the original**]
7. Within three months from the date of execution of the Agreement, ChNGG and
PNG shall receive licenses for the geological exploration and operation of
Rudivsko- Krasnozavodskoye, Sviridovskoye, Mekhedivskoye, Svistunkovskoye,
and Chervonolutskoye fields.
8. PNG shall:
1. Transfer to ChNGG all drilling sites at Rudivsko-Krasnozavodskoye,
Sviridovskoye, and Mekhedivskoye fields upon the completion of wells #
102, 103, and 105 of Rudivskoye field.
2. Finance the next stage of pilot production at the above-listed fields.
9. Parties are responsible for non-performance or incomplete performance of
their obligations set forth in this agreement in accordance with the
current laws of the state of Ukraine.
10. his agreement is executed in two counterparts, which have equal legal
force, and is valid from the date of its execution until January 1, 1997.
11. Addresses, Bank Accounts:
11.1. Poltavaneftegas
314000 Poltava
Ul. Sovietskaya, 2
Tel: 7-4591
Fax: 7-9157
Telex: 164106 "Fakel"
Account Number: 209713 MFO 331478
Code: 2252915 at Oktyabrskoye branch of AK Prominvestbank
City of Poltava
11.2. GGP Chernigovneftegasgeologiya
250006 Chernigov
Ul. Shevchenka, 15
Tel: 7-7081
Fax: 7-4856
Telex: 192196 "Ikar"
Account Number: 208503 at regional branch of Prominvestbank, MFO
353456, City of Chernigov
General Manager, PNG General Manager, ChNGG
V.P. Kazak S.M. Ginda
May 16, 1995 May 16, 1995
<PAGE>
APPROVED APPROVED
Chairman of the Board Vice Chairman of
JSC Ukrnafta Goskomgeology
_____________B.V. Zan'tsky _________________B.O. Byaluk
May 16, 1995 May 16,1995
