SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
SEVEN SEAS PETROLEUM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
YUKON TERRITORY 73-1468669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 960, THREE POST OAK CENTRAL, 1990 POST OAK BOULEVARD, HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 622-8218
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS TO BE SO REGISTERED
NONE
NAME OF EACH EXCHANGE ON WHICH REGISTERED
EACH CLASS IS TO BE REGISTERED
NOT APPLICABLE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, NO PAR VALUE PER SHARE
(Title of Class)
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ITEM 1. BUSINESS
GENERAL.
Seven Seas Petroleum Inc. ("Seven Seas") is engaged in the exploration
and development of oil and gas properties outside of North America. Seven Seas,
through its subsidiaries, owns interests in seven prospective areas located in
Colombia, Australia and Papua New Guinea, all of which are in the initial stages
of exploration and development. Seven Seas and its subsidiaries are collectively
referred to herein as the "Company." Certain oil industry terms used herein are
defined in the Glossary of Technical Terms attached hereto as Appendix A.
The Company's principal asset is a 57.7% interest in the Dindal
Association Contract and Rio Seco Association Contract (collectively, the
"Association Contracts") which are located in the Upper Magdalena Basin in
Colombia, approximately 90 kilometers northwest of Bogota. In 1996, two
exploratory wells were drilled on the Dindal block. The Company also holds the
following interests in exploratory oil and gas properties: an 11.875% interest
in the Tapir Association Contract in the Llanos Basin in Colombia; an 11.77%
interest in the EP381 Permit and in the Whicher Range Permit Application in
Perth Basin, Australia; a 20% interest in Block T27P in the Bass Basin, offshore
southern Australia; and a 100% interest in PPL-182 in southern Papua New Guinea.
For a description of the Company's interests in these properties, see
"Properties."
The Company's primary business strategy is to explore and develop the
Dindal and Rio Seco Association Contracts in Colombia. The Company also intends
to explore its other oil and gas interests in Colombia, Australia and Papua New
Guinea and may acquire additional oil and gas exploration opportunities which
management believes have large reserve potential. Although this type of
exploration and development generally involves higher risks, in the view of
management, it holds the potential to produce greater economic rewards.
SUMMARY OF PROPERTIES
The following summary of the Company's properties is qualified in its
entirety by the more detailed information included herein under the headings
"Properties" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
DINDAL AND RIO SECO ASSOCIATION CONTRACTS, UPPER MAGDALENA BASIN,
COLOMBIA. The Company's principal asset is a 57.7% interest in the Association
Contracts which entitle the Company to engage in exploration, development and
production activities in approximately 106,000 acres located in the oil
producing Upper Magdalena Basin, about 90 kilometers northwest of Bogota. Recent
discoveries in the Magdalena Basin include Amoco's Opon Field, located
approximately 170 kilometers north of the prospect area, and Lasmo's
Venganza/Revancha complex, located approximately 150 kilometers to the south.
Three wells have been drilled, to date, on the Dindal block under the
Dindal Association Contract. The El Segundo #1 well commenced drilling on
December 10, 1995, reached total depth in mid-January 1996 and was placed on a
long-term production test in July 1996. The El Segundo #2 well was completed for
testing in November 1996 and a long-term production test commenced in February
1997. The Escuela #1 well, which was drilled in 1994 prior to the acquisition of
an interest in the block by the Company, was plugged and abandoned as a dry
hole. The following table provides a summary of the El Segundo #1 well and the
El Segundo #2 wells:
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TOTAL DRILLING MAXIMUM TESTED
DEPTH PRODUCTION
WELL DATE COMPLETED (FEET) BOPD RATE(1)
---- -------------- ------------- --------------
El Segundo #1 February 1996 5,718 3,415
El Segundo #2 November 1996 6,820 8,948
(1) References are from production testing only and are not necessarily
indicative of flow rates that may be utilized during long-term production.
Production tests are conducted to obtain an indication of the flow capacity of
individual wells and to give an indication of reservoir quality. Actual
producing rates from individual wells will depend on the results of an
integrated reservoir study and an engineering production plan which will
incorporate data from all wells in the field in a development plan to maximize
economic recovery of oil from the reservoir.
The first well for the Rio Seco Association Contract, the Tres Pasos #1
well, is expected to commence drilling operations in May 1997. The Tres Pasos #1
well is an appraisal well for the oil accumulation discovered in the Dindal
block and is located some 2.5 kilometers northwest of the surface location of
the El Segundo #1 and #2 wells. The Company plans to drill up to two additional
wells on the Dindal block in 1997 and to acquire permits for a seismic survey,
in each case, to determine the potential size of the oil accumulation by further
delineating the areal extent and reservoir geology of the structure. The Company
may expend up to $12 million on the exploration of the Dindal and Rio Seco
blocks in 1997, including the cost of two wells, estimated at approximately $4.4
million, which are required to be drilled under the terms of the Association
Contracts.
TAPIR ASSOCIATION CONTRACT, LLANOS BASIN, COLOMBIA. The Tapir Association
Contract is located in the Llanos Basin of east central Colombia and is crossed
by two oil pipelines carrying production from nearby oil fields. An exploratory
well is expected to commence on the Tapir block in late 1997 or in the first
quarter of 1998 following receipt of required permits from the Ministry of the
Environment. The estimated cost to the Company of this well is approximately
$250,000. An existing discovery well, the Macarenas #1, was drilled on the Tapir
block in 1993 and produced 320 BOPD in a short-term test, but was not completed
for production. Since the well was drilled and tested, additional oil pipeline
infrastructure has been built in the area. The operator plans to place the well
on long-term production test after the completion of the exploratory well to
determine sustainable production rates and the extent of the reservoir.
PERTH BASIN, EP381 AND WHICHER RANGE PERMITS, AUSTRALIA. The Company
currently holds an 11.765% working interest in EP 381, an exploration permit
covering 455,405 acres, and in the Whicher Range Permit Application, covering
439,141 acres, both of which are located in the Perth Basin, Western Australia.
The greater Perth Basin produces gas and oil from accumulations onshore in a
region north of the Company's permit areas and north of the city of Perth. The
Whicher Range Permit Application, which adjoins EP381 to the north and contains
the Whicher Range Gas Field discovered by Union Oil of California in 1968, was
reserved for the applicants pending resolution of native claims pursuant to the
Australian NATIVE CLAIMS ACT 1993.
The principal exploration interest in the EP 381 and the Whicher Range
Permit areas is for natural gas generated in Permian coal measures and
reservoired within adjacent Permian
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sandstones. The operator of the permit areas has conducted reservoir studies on
the Whicher Range Permit Application area, the results of which indicate that
the use of different drilling technologies and newer completion techniques could
make the Whicher Range Gas Field economic to develop. Based on this technical
assessment and the market for natural gas now believed to be available in the
area, the partners plan to re-enter and test the Whicher Range #1 well in 1997.
If this re-entry and test is successful, the parties may drill an additional
well in late 1997 and initiate additional seismic programs in the block. In
addition, a new seismic study was commenced in March 1997 to delineate further
prospects in the EP381 prospect area. In May 1995, the Scott River #1 well was
drilled in the southern portion of EP 381, encountered Permian sandstones which
had sub-commercial saturations of natural gas and was abandoned.
BASS BASIN, BLOCK T27P, AUSTRALIA. The Company holds a 20% working
interest in Block T27P, a 1.8 million acre block in about 70 meters of water, in
the Bass Basin, the central of three basins offshore southern Australia. The
easternmost basin is the Gippsland Basin where BHP Petroleum and Esso have a
series of large oil and gas fields. The westernmost basin is the Otway Basin,
the site of recent gas discoveries by BHP Petroleum and others which will likely
serve the South Australia and Victoria gas market. The Bass Basin has been the
site of a series of gas and oil shows and discoveries, including the Yolla
Field, which is adjacent to Block T27P. The Yolla Field was discovered by Amoco
in the mid-1980's but has not yet been appraised or developed for production.
Globex Exploration, the operator of the permit with a 80% working
interest, has completed a 1,000 kilometer 2D seismic program in the block. The
remaining work commitment in the block consists of a 3D seismic survey and two
exploration wells. Globex Exploration has selected a drillable prospect
approximately 10 kilometers north of the Yolla Field, and is seeking additional
participants in the block to share the cost of an exploratory well which is
estimated to be approximately $5 million. As suitable drilling rigs are not
available in the near term, Globex has applied for a permit extension in the
block until a suitable rig can be contracted.
PERMIT PPL-182, PAPUA NEW GUINEA. The Company was granted exploration
permit PPL-182 in southern Papua New Guinea effective June 11, 1996. The permit
covers an area of 1,200,000 acres located both onshore and offshore in the Fly
River Delta and the Gulf of Papua. The nearest discovery to the permit area is
the Pandora Gas Discovery located in PPL-82 approximately 150 kilometers to the
east in the Gulf of Papua.
Past exploration activity within PPL-182 has resulted in the acquisition
of seismic data and the drilling of several exploration wells. The Company's
first year work program consists of a geological and geophysical review of
existing data. Based on the results of this study, the Company will decide
whether to proceed with the second year's work commitment which provides for
seismic reprocessing and acquisition of a high resolution aeromagnetic survey
and is expected to cost approximately $500,000. The Company plans to secure an
industry partner or partners to underwrite a significant portion of future
exploration costs.
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RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS.
EXPLORATION AND DEVELOPMENTAL RISKS. Oil and gas exploration and
development is a speculative business and involves a high degree of risk. The
Company has expended, and plans to continue to expend, significant amounts of
capital on the acquisition and exploration of its properties. Even if the
results of such activities are favorable, as in Colombia where the Company has
made an oil discovery, subsequent drilling at significant costs must be
conducted on the property to determine if commercial development of the property
is feasible. Oil and gas drilling may involve unprofitable efforts, not only
from dry wells but from wells that are productive but do not produce sufficient
net revenues to return a profit after drilling, operating and other costs. It is
difficult to project the costs of implementing an exploratory drilling program
due to the inherent uncertainties of drilling in unknown formations, the costs
associated with encountering various drilling conditions such as overpressured
zones and tools lost in the hole, and changes in drilling plans and locations as
a result of prior exploratory wells or additional seismic data and
interpretations thereof. Exploration of offshore oil and gas properties also
involves an increased degree of risk relative to onshore or close-to-shore
exploration primarily due to greater technical obstacles. The marketability of
oil and gas which may be acquired or discovered by the Company will be affected
by the quality and viscosity of the production and by numerous factors beyond
its control, including market fluctuations, the proximity and capacity of oil
and gas pipelines and processing equipment, government regulations, including
regulations relating to prices, taxes, royalties, land tenure, importing and
exporting of oil and gas and environmental protection. There can be no assurance
the Company will be able to discover, develop and produce sufficient reserves in
Colombia, Australia, Papua New Guinea, or elsewhere to recover the costs and
expenses incurred in connection with the acquisition, exploration and
development thereof and achieve profitability.
NEED FOR ADDITIONAL FINANCING. The Company has no significant income
producing properties and its principal asset, the Dindal and Rio Seco blocks, is
in the early stage of exploration and development. Since inception through
December 31, 1996, the Company incurred cumulative losses of $4,314,622 and,
because of its continued exploration activities, expects that it will continue
to incur losses and that its accumulated deficit will increase until
commencement of production from the Dindal and Rio Seco blocks in quantities
sufficient to cover operating expenses related thereto. The exploration and
development of the Company's current properties and any properties acquired in
the future is expected to require substantial amounts of additional capital
which the Company may be required to raise through debt or equity financings,
encumbering properties or entering into arrangements where by certain costs of
exploration will be paid by others to earn an interest in the property. There
can be no assurance that the additional debt or equity financing expected to be
necessary to fund the Company's operations and obligations will be available to
the Company on economically acceptable terms. If sufficient funds cannot be
raised to meet the Company's obligations with respect to a property, the Company
may elect to forfeit its interest in such property. See"Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISKS INHERENT IN FOREIGN OPERATIONS. There are risks inherent in the
fact that the Company has acquired and intends to continue to acquire interests
in oil and gas properties located outside of North America in some cases in
countries which may be considered politically and economically unstable.
Accordingly, the Company is subject to risks inherent in the ownership and
development of foreign properties including, without limitation, cancellation or
renegotiation of contracts, royalty and tax increases, retroactive tax claims,
expropriation, adverse changes in currency values, foreign exchange controls,
import and export regulations,
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environmental controls, and other laws, regulations or international
developments which may adversely affect the Company's properties. The Company's
operations and agreements may be governed by foreign laws and, in the event of a
dispute, the Company may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the United States. Certain of the properties for which
the Company has an application pending in Australia are the subject of native
claims which remain unresolved. In addition, there can be significant logistical
problems, costs and risks in conducting oil and gas activities in remote, rugged
and primitive regions such as Papua New Guinea, or in Colombia where the
Company's operations may be exposed to potentially detrimental activities by the
leftist guerrillas that have operated in the region for many years.
DEPENDENCE ON ACTIVITIES IN COLOMBIA. The Company's success currently
depends to a high degree on its activities in Colombia. This dependence is
likely to be reflected in both the short-term performance and the Company's
long-term financial results. The Company currently intends to drill up to three
additional wells on the Dindal and Rio Seco blocks in 1997. The market price of
the Common Shares may significantly fluctuate based on the outcome of individual
wells.
RISKS OF JOINT VENTURES. The Company has and expects to continue to
acquire only partial interests in oil and gas properties through joint venture
agreements with other oil and gas corporations which may, by the terms of such
joint venture agreements, be the operators of such programs. Although the
Company can take certain steps to determine if the risk of the program to be
conducted by the operator is appropriately spread over a number of prospects,
there can be no assurance that the risk will be so allocated, that the program
will be carried out by the operator in a manner deemed appropriate by the
Company or that the prospects will be successful. In addition, the Company's
ability to continue its exploration and development programs may be dependent
upon the decision of its joint venture partners to continue exploration and
development programs and to finance their portion of the costs and expenses of
the joint venture. If the Company's partners do not elect to continue and to
finance their obligations to the joint ventures, the Company may be required to
accept an assignment of the partners' interests therein and assume their
financing obligations or relinquish its interest in the joint venture.
OPERATING HAZARDS AND UNINSURED RISKS. The Company is also subject to all
the risks normally incident to drilling for and producing oil and gas, including
hazards such as over-pressured formations, blowouts, cratering, fires, spills,
or other hazards or conditions, any of which could result in damage to or loss
of life or property. In accordance with industry practice, the Company is not
fully insured against these risks nor are all such risks insurable. Payment of
such potential liabilities would reduce the funds available for exploration,
drilling and production and could have a material adverse effect on the Company.
LIMITED OPERATING HISTORY; DEPENDENCE ON KEY PERSONNEL. The Company has a
limited operating history and the success of the Company depends to a large
degree upon the efforts of its executive officers, the loss of whose services
could have a material adverse effect on the business and prospects of the
Company. The Company has entered into employment agreements with three of its
executive officers, the terms of which are more particularly described under
"Executive Compensation" below. The Company does not maintain key man insurance.
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POTENTIAL CONFLICTS. Certain of the directors of Seven Seas also serve as
officers, directors or consultants of other companies involved in natural
resource development which activities may be in competition with the Company and
may result in conflicts of interest. In the event a director has an interest in
an investment or proposed investment of the Company or other conflict of
interest, it is the Company's policy that such director not participate in the
Company's decision-making with respect thereto and that any transactions with
such officers or directors be on terms consistent with industry standards and
sound business practices.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES. Estimates of
the Company's proved oil and gas reserves and projected future net revenues
appearing elsewhere herein are based on reserve reports prepared by independent
petroleum engineers. The estimation of reserves requires substantial judgment on
the part of the petroleum engineers, resulting in imprecise determinations,
particularly with respect to new discoveries. Different reserve engineers may
make different estimates of reserve quantities and revenues attributable thereto
based on the same data. Estimates of proved undeveloped reserves, which comprise
a substantial portion of the Company's reserves, are by their nature less
certain. The accuracy of any reserve estimate depends on the quality of the
available data as well as engineering and geological interpretation and
judgment. Results of drilling, testing and production and changes in the
assumptions regarding decline and production rates, crude oil prices, revenues,
taxes, capital expenditures, operating expenses, geologic success and quantities
of recoverable crude oil may vary substantially from those assumed in the
estimates, may result in revisions to such estimates and could materially affect
the estimated quantities and related value of reserves set forth herein. The
estimates of future net revenues reflect oil and gas prices as of the date of
estimation, without escalation. There can be no assurance, however, that such
prices will be realized or that the estimated production volumes will be
produced during the periods indicated. Future performance that deviates
significantly from the reserve reports could have a material adverse effect on
the Company.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS. The Company is continued under
the laws of the Yukon Territory in Canada. Certain of the directors of the
Company, and certain experts utilized by the Company, are residents of Canada
and all or substantially all of such persons' assets are located outside of the
United States. As a result, it may be difficult for holders of the Common Shares
to effect service within the United States upon the directors and experts who
are not residents of the United States or to realize in the United States upon
judgments of courts of the United States against such persons and the Company
predicated upon civil liability under the United States federal securities laws.
The Company has been advised by its counsel that there is no assurance that
judgments of U.S. courts for liabilities predicated solely upon U.S. federal
securities laws will be enforceable in Canada against the Company or against any
of its directors or experts who are not residents of the United States.
MARKETS. There is substantial uncertainty as to the prices which the
Company may receive for production from its existing oil reserves or from oil
and gas reserves, if any, which the Company may discover. The availability of a
ready market and the prices received for oil and gas produced depend upon
numerous factors beyond the control of the Company including, but not limited
to, adequate transportation facilities (such as pipelines), the marketing of
competitive fuels, fluctuating market demand, governmental regulation and world
political and economic developments. Prices for crude oil are subject to wide
fluctuation in response to relatively minor changes in supply and demand, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. It is possible that, under market conditions prevailing in the
future, the production and sale of oil, if any, from certain of the Company's
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properties may not be commercially feasible and the production of gas from the
Company's properties in Colombia, the Bass Basin and Papua New Guinea, is not
currently expected to be commercially feasible. The sale of oil from the
long-term production tests on the Company's properties in Colombia is currently
being sold to Ecopetrol.
COMPETITION. Oil and gas exploration is extremely competitive in all of
its phases and particularly in exploration for and development of new sources of
crude oil and natural gas. The Company must compete with other companies that
are larger and financially stronger in acquiring properties suitable for
exploration, in contracting for drilling equipment and in securing trained
personnel. The Company is not a significant participant in the oil and gas
industry and it may not always be possible to acquire properties suitable for
drilling at economic prices.
REGULATION. The Company's operations are subject to regulations imposed
by the local regulatory authorities including, without limitation, currency
regulation, import and export regulation, taxation and environmental controls.
The regulations also generally specify, among other things, the extent to which
properties may be acquired or relinquished, permits necessary for drilling of
wells, spacing of wells, measures required for preventing waste of oil and gas
resources and, in some cases, rates of production and sales prices to be charged
to purchasers. Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,
and the Ministry of the Environment. It is possible that the administration and
enforcement of current environmental laws and regulations or the passage of new
environmental laws or regulations in Colombia could result in substantial costs
and liabilities in the future or in delays in obtaining the necessary permits to
conduct and expand the Company's operations in such country. The Company has
experienced and may continue to experience delays in obtaining the necessary
environmental permits to expand its operations in Colombia. Operations in
Australia are governed by the State of Western Australia and by the State of
Tasmania. Operations in Papua New Guinea are currently governed by the
Department of Mining and Petroleum.
FORWARD-LOOKING INFORMATION. All statements other than statements of
historical fact contained herein, including statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and "Properties," are forward-looking statements. Forward-looking
statements in this Prospectus generally are accompanied by words such as
"anticipate," "believe," "estimate," "project," "potential" or "expect" or
similar statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, no assurance can be
given that such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in such
forward-looking statements include the aforementioned risks, such as the
uncertainty of costs associated with exploratory drilling, drilling results and
reserve estimates, operating hazards, need for additional capital, competition
from other exploration, development and production companies, the fluctuations
of the prices received or demand for the Company's oil and gas, and the effects
of governmental and environmental regulation. All forward-looking statements
included herein are expressly qualified in their entirety by the cautionary
statements in this paragraph.
HISTORY AND ORGANIZATIONAL STRUCTURE.
Seven Seas became subject to the laws of the Yukon Territory in August
1996. Seven Seas was formed effective June 29, 1995 as a result of an
amalgamation (the "Amalgamation")
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under the laws of the province of British Columbia of Rusty Lake Resources Ltd.
("Rusty Lake") and Seven Seas Petroleum Inc. (the "Predecessor"), which was
incorporated under the laws of British Columbia on February 3, 1995. Under the
terms of the Amalgamation, the shares of Rusty Lake were exchanged for shares of
Seven Seas on a 35-to-1 basis, while the shares of the Predecessor were
exchanged for shares of Seven Seas on a 1-to-1 basis. Rusty Lake was formed by
an amalgamation of the Lithium Corporation of Canada, Limited and Stockgold
Resources Inc. under the laws of Ontario effective January 31, 1993. Prior to
the Amalgamation, Rusty Lake was a dormant mineral exploration and development
corporation whose common shares were quoted for trading on the Canadian Dealer
Network.
The Company's principal executive office is located at Suite 960, Three
Post Oak Central, 1990 Post Oak Boulevard, Houston, Texas 77056 and its
telephone number is (713) 622-8218. The Company's operations are managed from
its Houston, Texas headquarters which consists of a staff of five employees,
using professional consulting services as needed. The Company also maintains an
office in Tulsa, Oklahoma with a staff of two employees.
The following chart details the structure of Seven Seas and its
subsidiaries as of March 31, 1997. Except as noted, all of the subsidiaries are
directly or indirectly wholly owned by Seven Seas:
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------------------------
| |
| |
----------------| Seven Seas Petroleum Inc. |---------------------------------
| | (Yukon) | | |
| | | | |
| | | | |
| | | | |
| -------------------------------------------- | |
| | | |
---------------- --------------------------------- ---------------------- ---------------
Seven Seas Seven Seas Petroleum Seven Seas Seven Seas
Resources Holdings Inc. Petroleum Petroleum
Australia Inc. (Cayman Islands) Turkey USA, Inc.
(B.C.) Holding Company Inc. (B.C.) (U.S.A.)
(Dormant) (Dormant)
---------------- --------------------------------- ---------------------- ---------------
| |
| |
--------------------------------------- |
| |
| |
-----------------------------------------------------------------------------------------------------------------
| | | | | | |
| | | | | | |
- -------------------- | ---------------------- ---------------------- ---------------- ---------------- ----------------
Seven Seas | Seven Seas Seven Seas Seven Seas Seven Seas Seven Seas
Petroleum Argentina | Petroleum Australia Petroleum Colombia Petroleum Petroleum Petroleum PNG Inc.
Inc. | Inc. Inc. Mediterranean Turkey (Cayman Islands)
(Cayman Islands) | (Cayman Islands) (Cayman Islands) Inc. (Cayman Islands) Oil and Gas
(Dormant) | Oil and Gas Oil and Gas (Cayman Islands) (Dormant) Exploration
| Exploration Exploration (Dormant)
- -------------------- | ---------------------- ---------------------- ---------------- ---------------- ----------------
| |
| |
| ---------------------------------------------------------------------------------------------
| | | | |
| | | | |
---------------------------- ---------------------- ---------------------- ----------------------
Esmeralda Limited Liability GHK Company Colombia Cimarrona Limited Liability Petrolinson, S.A.
Company (Oklahoma) (Oklahoma) Company (Panama)
Oil and Gas Exploration Oil and Gas Exploration (Oklahoma) Oil and Gas Exploration
Oil and Gas Exploration
---------------------------- ---------------------- ---------------------- ----------------------
</TABLE>
The Company, through Seven Seas Petroleum Colombia Inc., owns a 62.963%
membership interest in Cimarrona Limited Liability Company. The remaining
37.037%
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membership interest is owned by MTV Investments, Limited Partnership, a party at
arms' length to the Company. Seven Seas Petroleum Holdings Inc. and Seven Seas
Petroleum Colombia Inc. each own 50% of the membership interests of Esmeralda
Limited Liability Company, as a limited liability company is required to have a
minimum of two members. The Company intends to dissolve its dormant British
Columbia subsidiaries.
Financial information about foreign operations may be found in Note 5 of
the Notes to Consolidated Financial Statements contained in Item 13 below.
ITEM 2. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included herein.
Period from Inception
Year Ended (February 3, 1995)
December 31, through December 31,
INCOME STATEMENT DATA 1996 1995
------------ ---------------------
Revenues 575,281 152,383
Net loss (2,194,637) (2,119,985)
Net loss per common share (0.17) (0.23)
Weighted average shares outstanding 12,971,871 9,247,101
Period from Inception
Year Ended (February 3, 1995)
December 31, through December 31,
BALANCE SHEET DATA 1996 1995
------------ ---------------------
Cash and cash equivalents 10,620,477 3,365,603
Total assets 171,533,207 4,170,437
Current liabilities 2,805,665 120,305
Minority interest 1,060,433 --
Stockholder's equity 167,667,109 4,050,132
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES.
Since inception, the Company's activities have been funded primarily by
proceeds from private placements of the Company's securities resulting in
aggregate net cash proceeds of $19,000,000. In 1996, the Company acquired an
additional 36.7% interest in the Association Contracts in Colombia in exchange
for the issuance of the Company's securities valued at $153,091,430 in the
aggregate. Since inception the Company has expended approximately $7,533,200 for
the acquisition, exploration and development of its oil and gas properties
including approximately $5,934,600 with respect to its interests in Colombia,
approximately $454,600 with respect to its interests in Australia, approximately
$16,300 with respect to its
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interest in Papua New Guinea, and approximately $1,127,700 for exploration
activities in Argentina, Turkey and other countries, which have been expensed.
COLOMBIA. The Company is required to drill an additional well on each of
the Dindal and Rio Seco blocks by August and September 1997, respectively, at an
estimated total cost to the Company of $4,400,000, to fulfill its work
commitments for the current contract year. In 1997, the Company also plans to
drill one additional well on the Dindal block and to perform a seismic survey at
an aggregate estimated cost to the Company of approximately $5,200,000. The
Company may also spend up to an additional $2,400,000 in operating costs. An
exploration well is also required to be drilled on the Tapir block at an
estimated proportionate cost to the Company of $250,000.
In the third and fourth quarters of 1996, the Company had oil and gas
sales of $233,682 which pertained solely to production testing of the Company's
two wells in Colombia. Although the Company intends to continue to sell oil
resulting from long-term production tests, significant production from the El
Segundo #1 well and the El Segundo #2 well is not expected to commence until
further work is done to evaluate the field through the drilling of additional
wells, and producing facilities and pipelines have been constructed. Although
the Company has solicited proposals for various pipeline options, the substance
and timing of any decision regarding appropriate pipeline and production
facilities will depend on the results of the evaluation and appraisal of the
Company's discovery.
AUSTRALIA. Upon issuance of the Whicher Range Permit Application, the
parties to the permit plan to re-enter the Whicher Range #1 well and perform an
acid-fracture stimulation of the productive intervals in the well at an
estimated cost to the Company of $380,000.
The operator of the Bass Basin permit plans to drill an exploratory well
on a prospect located 10 kilometers north of the Yolla Field and has applied for
a permit extension until a suitable rig can be contracted. As the operator is
also seeking additional participants in the block to share the cost of the well,
which is estimated to be $5,000,000, the estimated cost of the well to the
Company cannot now be determined.
PAPUA NEW GUINEA. The cost of the first year work program planned for PPL
182 in Papua New Guinea is estimated to be approximately $100,000. Based on the
results of the first year program, the Company will decide whether to proceed
with the second year work program which is expected to cost approximately
$500,000.
The Company had working capital of approximately $9,100,000 as of
December 31, 1996 and realized an additional $3,500,000 in cash proceeds in
March 1997 as a result of the exercise of outstanding Common Share purchase
warrants. As the current funds on hand will not be sufficient to meet all
planned exploration costs, additional financing will be necessary to complete
these projects prior to the start-up of production and generation of cash flows
from the Company's oil discovery in Colombia in quantities sufficient to cover
operating expenses related thereto. In addition, it is anticipated that the
Company's future exploration activities with respect to its current properties
and any additional properties which may be acquired will require substantial
amounts of additional capital which the Company may be required to raise through
debt or equity financing, encumbering properties or entering into arrangements
whereby certain costs of exploration will be paid by others to earn an interest
in the property. There can
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be no assurance that the additional debt or equity financing expected to be
necessary to fund the Company's operations and obligations will be available to
the Company on economically acceptable terms. If sufficient funds are not
available to meet the Company's obligations with respect to a property, the
Company may elect to forfeit its interest in such property. The Company has no
significant lines of credit.
RESULTS OF OPERATIONS.
The Company reported a net loss of $2,194,637 ($.17 per share) for the
year ended December 31, 1996 which compares with a net loss of $2,119,985 ($.23
per share) for the period from inception through December 31, 1995. Oil and gas
revenues and production costs for 1996 were $233,700 and $252,500, respectively.
There were no oil and gas revenues or production costs for the year ended
December 31, 1995. Depreciation and amortization increased from $37,700 for the
period from inception through December 31, 1995 to $111,300 for the year ended
December 31, 1996 primarily as a result of the acquisition of GHK Company
Colombia, Esmeralda Limited Liability Company and Cimarrona Limited Liability
Company and the inclusion of a full year of depreciation expense for the
Company.
Colombian oil production (net to the Company) of 14,188 barrels in 1996
pertained solely to the Company's share of oil produced from production testing
of the Company's two wells and was sold to Ecopetrol at an average price of
$16.47 per barrel.
Interest income increased from $152,400 for the period from inception
through December 31, 1995 to $341,600 for the year ended December 31, 1996 as a
consequence of higher cash balances resulting from the private placements of the
Company's securities. General and administrative expenses increased from
$1,070,800 for the period from inception through December 31, 1995 to $2,452,500
for the year ended December 31, 1996 principally as a result of the expansion of
the Company's activities, the acquisition of an additional interest in the
Dindal and Rio Seco blocks in Colombia and costs associated with listing the
Company's securities on The Toronto Stock Exchange.
ITEM 3. PROPERTIES.
COLOMBIA.
DINDAL AND RIO SECO ASSOCIATION CONTRACTS; UPPER MAGDALENA BASIN.
INTRODUCTION AND REGIONAL OVERVIEW. Two major physiographic features
dominate the geography of Colombia. To the west lie the Andes mountains, which,
north of the Ecuador border, bifurcate into three ranges, the Western, Central
and Eastern Cordillera, extending toward the Caribbean coast. These ranges are
separated by the Cauca and Magdalena valleys, respectively. To the east lies the
Llanos, a savanna within the bounds of the Orinoco Basin, which extends over the
remainder of the country.
The geology of Colombia has been studied since the mid 1800's and has
continued to the present, amassing some detail of the tectonic framework and
related stratigraphy. During the evolution of the geological knowledge of
Colombia, oil and natural gas exploration has been pursued in the Llanos,
Putumayo and Magdalena basins. Exploration in the Upper Magdalena
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Valley Basin began in 1918 with the drilling of the Guataqui wells in the
Girardot subbasin, followed in 1951 by the Ortega discovery. As of December
1993, 210 exploratory wells had been drilled, resulting in the discovery of 30
fields.
This page consists of a map outlining the state of Colombia, South
America and portions of the bordering states of Venezuela, Brazil, Peru and
Ecuador. The Company's Dindal and Rio Seco Blocks and the Tapir Block are shown
in yellow; producing oil fields are indicated by green ovals and the Cusiana,
Cano Limon-Guafita and Shushufindi oil fields are also identified by name; oil
pipelines are indicated by green lines, including outlets to the Pacific Ocean
and Caribbean Sea. The map references distance measurements in kilometers and
miles.
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<PAGE>
This page consists of a color map entitled: "Cimarrona Depth Structure
Map" and shows the Dindal and Rio Seco Blocks with a small insert in the upper
left hand corner showing the location of the blocks and Bogota on a small map of
Colombia. The map references distance measurements in kilometers and miles, and
shows the depth in feet of certain areas. The map shows the location of the El
Segundo No. 1 and El Segundo No. 2 oil wells, the proposed appraisal location of
the Tres Pasos No. 1 well and additional proposed appraisal locations. The map
also shows the location of the following wells: Escuela No. 1, Madrigal No. 1,
Ocobo No. 1, Quina No. 1, Las Palmas No. 1, and Tomate No. 1, and additional
wells drilled in the area and, in each case, indicates by symbol whether such
well was a dry well with gas and oil shows, a dry well with gas shows, or a dry
well with oil shows. The map also indicates the existence of oil seeps,
Cimarrona outcrop, the potential oil field area and the location of the Guaduas
Fault.
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The Company's principal asset is a 57.7% interest in the Association
Contracts with Empresa Colombiana de Petroleos, the Colombian national oil
company ("Ecopetrol") which entitle the Company to engage in exploration,
development and production activities in approximately 106,000 acres located in
the oil producing Upper Magdalena Basin, about 90 kilometers northwest of
Bogota. The area is accessible via the main road between Bogota and Honda. The
village of Guaduas lies within the block and provides infrastructure for the
local economy which is primarily agrarian in nature.
Recent discoveries in the Magdalena Basin include Amoco's Opon Field,
located approximately 170 kilometers north of the prospect area, and Lasmo's
Venganza/Revancha complex, located approximately 150 kilometers to the south.
The main Rio Magdalena oil pipelines (12" to 20" diameters) lie approximately 20
kilometers west of the prospect area and provide an opportunity for oil
transportation from the Company's discovery. Early production from the discovery
well and subsequent wells in Dindal and Rio Seco blocks will likely be truck
transported by road to an oil terminal on the Rio Magdalena pipeline system
approximately 78 miles away, prior to full field development and pipeline
installation.
PROSPECT GEOLOGY. The Dindal structure is formed by a faulted anticlinal
closure in the foot wall of the Bituima thrust fault system on the eastern side
of the Rio Magdalena river valley. The primary oil reservoir is the Upper
Cretaceous Cimarrona formation which is comprised of both limestones and
sandstones in the vicinity of the Dindal structure. These reservoir sequences
are charged with oil generated from the immediately underlying Villeta shale
which is considered the principal source rock for the oil accumulations
throughout Colombia and Venezuela. The Villeta shale is present in area wells
both in and adjacent to the Dindal block.
The Cimarrona formation is seen in surface outcrop to the north and west
of the structure, as well as in the Lasmo Madrigal #1 well, the AIPC Quina #1
well and the GHK El Segundo #1 and #2 wells. From this geologic control
information, the Cimarrona is shown to be depositionally complex, exhibiting
rapid changes in both gross thickness and rock types in the region of the Dindal
structure. In the Madrigal #1 well, the Cimarrona is approximately 1,600 feet
thick with mixed rock types including sandstones, conglomerates, siltstones and
shales. Only 9 kilometers east in the El Segundo #2 well, the Cimarrona has
thinned to approximately 450 feet in thickness and contains limestones,
calcareous sandstones, and siltstones. Additional data from appraisal wells
concerning these variations is required before oil reserves can be reliably
assessed for the structure and an appropriate field development plan drafted.
Evidence for the anticlinal trap at the structure is found in both
seismic data over the prospect and in surface geologic mapping. The trapping
mechanism is believed to be formed by structural closure in three directions
(north, south and west), and an imbricate fault within the Bituima Fault system
to the east, which is evidenced in the Escuela #1 well which was drilled in
1994, prior to the acquisition of an interest in the block by the Company, and
was plugged and abandoned as a dry hole. The Escuela #1 well is located four
kilometers southeast of the El Segundo #1 well location and encountered Tertiary
and Cretaceous shales and siltstones from surface to total depth. This
predominantly shale section, emplaced by thrust faulting adjacent to the
Cimarrona reservoir section, is believed to form the critical element of the
trap for the prospect.
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<PAGE>
EXPLORATION ACTIVITY. The El Segundo #1 discovery well commenced drilling
in December 1995 and reached total depth in mid-January, 1996. The well reached
the objective Cimarrona formation at a depth of 5,630 feet, but stopped drilling
after penetrating only 88 feet of the Cimarrona due to circulation problems
encountered while drilling. The well was then completed for testing in February
1996 and drill stem tests recovered 19(degree) API oil at surface limited rates
of 300-500 barrels per day. Operations were then suspended pending receipt of a
permit to transport produced oil by truck from a long-term production test.
Permits for the long-term production test were received in late June 1996 and
production testing commenced in early July. Tests using electric submersible
pumps produced oil at rates of 3,400 barrels per day. No aquifer water was
produced during the tests, and analysis of reservoir pressure response during
testing and the shut-in period following testing showed no evidence of reservoir
boundaries, geologic complexities or oil-water contact. Analysis of oil
recovered during testing showed 19(degree) API gravity, low sulphur crude oil,
with reservoir temperature of 120(degree)F, pressure of 1,640 psi and bubble
point of 1,570 psi (at collection datum). Following testing during August, El
Segundo #1 was shut-in to allow drilling of the El Segundo #2 well from the same
surface location.
The El Segundo #2 well commenced drilling in early September 1996 and
reached total drilling depth of 6,820 feet in late October. The well was
intentionally deviated from the surface location of the EL SEGUNDO #1 well to a
bottom hole location some 2,000 feet north of the surface location. The well
encountered approximately 450 feet of oil saturated and highly fractured Upper
Cretaceous Cimarrona formation at a drilling depth of 6,052 feet (vertical depth
of 5,588 feet). The well was completed for testing in November, and five drill
stem tests were conducted in late November through February. The first two tests
in the upper Villeta formation and the lower Cimarrona formation recovered no
oil and have been interpreted to be low permeability. The last three tests,
conducted in separate intervals of the upper Cimarrona between 6,052 and 6,280
feet, produced oil at rates from 3,866 to 6,154 barrels per day each. Following
these tests in February 1997, production tests were conducted of the combined
interval between 6,052 and 6,315 feet. These tests produced oil at rates as high
as 8,948 barrels per day. Analysis of reservoir pressure performance during and
following the production testing in El Segundo #2 well supported the conclusions
from the production testing of the El Segundo #1 well in July and August 1996.
In March, 1997 the El Segundo #2 well was placed on long-term production test to
gather further reservoir information.
The first well for the Rio Seco Association Contract, the Tres Pasos #1
well, is expected to commence drilling operations in May 1997. The Tres Pasos #1
well is an appraisal well for the oil accumulation discovered in the Dindal
block and is located some 2.5 kilometers northwest of the surface location of
the El Segundo #1 and #2 wells. The Company plans to drill up to two additional
wells on the Dindal block in 1997 and to acquire permits for a seismic survey to
further delineate the areal extent and reservoir geology of the structure.
The Company and its partners have paid all costs of the exploration
program under the Association Contracts to date. Under the terms of the
Association Contract, the Company and its partners are required to drill one
well on each contract per year and will continue to bear all exploration costs
relating to a field until such field is declared commercial. The Company plans
to submit a commerciality application to Ecopetrol during the fourth quarter of
1997 or the first quarter of 1998 with respect to its first discovery.
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GHK Company Colombia, an indirect wholly-owned subsidiary of the Company,
serves as the operator of the joint venture to develop the Dindal and Rio Seco
blocks, pursuant to the terms of operating agreements between the Company, its
respective subsidiaries and its joint venture partners. GHK Company Colombia has
exclusive charge of carrying out the program of operations within the budgets
approved by the operating committee and may demand payment in advance from each
party of its respective shares of estimated monthly expenditures. GHK Company
Colombia has retained GHK Company L.L.C., the principal owner of which is Robert
A. Hefner, III, a director of the Company, to perform the duties and obligations
of GHK Company Colombia under the Association Contracts and as operator of the
Dindal and Rio Seco blocks pursuant to the terms of a Management Agreement more
particularly described under "Certain Relationships and Related Transactions -
The GHK Transaction."
TERMS OF ASSOCIATION CONTRACTS AND RELATED MATTERS. The Association
Contracts were issued by Ecopetrol in March 1993 and August 1995, respectively,
and provide generally for a six year exploration phase followed by a twenty-two
year production period, with partial relinquishments of acreage, excluding
commercial fields, required commencing at the end of the sixth year of each
contract. Under the terms of the Association Contracts, Ecopetrol will receive a
royalty equal to 20% of production (after pipeline tariffs are deducted) on
behalf of the Colombian government and, in the event a commercially feasible
discovery is made, Ecopetrol will acquire a 50% interest in the remaining
production, bear 50% of the development costs, and reimburse the joint venture,
from Ecopetrol's share of future production, for 50% of the joint venture's
costs of certain exploration activities. Upon acceptance of a field as
commercial, Ecopetrol will acquire a 50% interest therein and the interests of
the other parties to the contract, including the Company, will be reduced by
50%; all decisions regarding the development of a commercial field will be made
by an Executive Committee consisting of representatives of the parties to the
contract who will vote in proportion to their respective interests in such
contract. Decisions of the Executive Committee will be made by the affirmative
vote of the holders of over 50% of the interests in the contract.
If any commercial field in the respective contract areas produces in
excess of 60 million barrels, Ecopetrol's interest in production and costs for
such contract area increases as follows: (i) under the terms of the Dindal
Association Contract, such increases occur in 5% increments from 50% to 70% as
accumulated production from any field increases in 30 million barrel increments
from 60 million barrels to 150 million barrels; and (ii) under the terms of the
Rio Seco Association Contract, Ecopetrol's interest increases from 50% to 75% as
the ratio of the accumulated income attributable to the parties to the contract
other than Ecopetrol to the accumulated development, exploration and operating
costs of such parties (less any expenses reimbursed by Ecopetrol) increases from
one to one to two to one.
Under the terms of the Association Contracts, in the event a discovery is
made and is not deemed to be commercially feasible, the joint venture may expend
up to $2 million over a one year period to further develop the field, 50% of
which will be reimbursed if Ecopetrol subsequently accepts the commercial
feasibility thereof. If Ecopetrol does not declare the field commercial, the
joint venture may continue to develop the field at its own expense. In such
event, Ecopetrol will have the right to acquire a 50% interest therein upon
payment of 200% of the amounts expended by the joint venture, which payment may
be made out of Ecopetrol's share of future production.
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<PAGE>
Oil produced from the Dindal block to date under the long term production
tests has been sold to Ecopetrol. Upon Ecopetrol's declaration of the
commerciality of the Company's discovery, oil produced from the Dindal and Rio
Seco blocks may be sold to Ecopetrol or to third parties provided that 75% of
the purchase price is paid in U.S. dollars and the remainder in Colombian pesos.
In the event the production is required to satisfy internal demand for oil in
Colombia, the Company may be required to sell some or all of its production to
Ecopetrol at prevailing market prices.
The Company's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian corporate income tax at a rate of 35%. An
additional remittance tax is imposed upon the remittance of profits abroad at a
rate of 7%.
ACQUISITION OF INTEREST. Pursuant to an agreement dated August 14, 1995,
as amended, the Company acquired from GHK Company Colombia, a 15% interest in
the Association Contracts in consideration of the payment of $100,000 and its
share of the cost of drilling, testing and completing the El Segundo #1 well and
its proportionate share of the obligations for the first year of the Rio Seco
Association Contract. The Company acquired an additional 36.7% interest in the
Association Contracts indirectly through its acquisition of 100% of the
outstanding securities of GHK Company Colombia and Esmeralda Limited Liability
Company and its acquisition of 62.963% of the outstanding securities of
Cimarrona Limited Liability Company. For a more particular description of these
transactions, see "Certain Transactions."
The Company acquired a 6% interest in the Association Contracts
indirectly through its acquisition of 100% of the outstanding securities of
Petrolinson S.A. (Petrolinson"), the holder of such 6% interest, in
consideration of the issuance of 1,000,000 Common Shares to the shareholder of
Petrolinson, of which 995,000 shares are held in escrow until July 1997. As the
holders of the remaining 94% interest in the Association Contracts, including
the Company, had previously agreed to pay 100% of the exploration costs
attributable to such 6% interest through the exploration period, approximately
45% of the exploration costs for the Association Contracts attributable to the
6% interest acquired by the Company are paid by the other holders of interests
in the Association Contracts. The exploration period will terminate upon
Ecopetrol's declaration of the commerciality of a field.
Under the terms of a letter agreement dated September 11, 1992, as
amended, between GHK Company Colombia and Dr. Jay Namson, the holders of
interests in the Association Contracts, as a group, will be required to assign a
2% working interest in the Dindal Association Contract and the Rio Seco
Association Contract to Dr. Namson after recovery from production of 100% of all
costs incurred in connection with the exploration and development of the Dindal
and Rio Seco blocks since the completion of the first year work obligations
under the Dindal Association Contract. Accordingly, when such costs have been
recovered, the Company will be required to assign to Dr. Namson 2% of its
interests (or a 0.577% interest in each Association Contract, after adjusting
for the acquisition of a 50% interest by Ecopetrol which is expected to occur
prior to the assignment to Dr. Namson).
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TAPIR ASSOCIATION CONTRACT, LLANOS BASIN
INTRODUCTION. The Company acquired an 11.875% interest in the Tapir
Association Contract (the "Tapir Association Contract") in April 1996. The Tapir
block consists of 250,000 acres located in the Llanos Basin of east central
Colombia and is crossed by two oil pipelines carrying production from nearby oil
fields. Other Tapir Association Contract interests are held by Ampolex (56.25%),
Mohave Oil & Gas Corp. ("Mohave") (10.205%), Doreal Energy (11.67%) and Heritage
Minerals Colombia ("Heritage Minerals") (10%), which serves as the operator.
EXPLORATION PROSPECTS. There are three exploration prospect types on the
Tapir block: several conventional Llanos Basin small structural closures, a deep
Paleozoic anomaly and two basal Cretaceous stratigraphic prospects. The small
structural closures are relatively low risk, but are expected to have low
reserves potential (10-30 MMBO each). The Paleozoic prospect is of geologic
interest, but relies on unproven source and reservoir rocks, and is therefore
high risk until further geologic work can be completed. The geologic risk for
the two Cretaceous stratigraphic prospects depends on the effectiveness of the
lateral seal between the Ubaque sandstone and the adjacent Paleozoic section.
The Mateguafa prospect, one of the small structural closures in the
central portion of the Tapir block, has been selected as the first exploration
drill site in the Tapir block and is expected to commence drilling in late 1997
or the first quarter of 1998, following receipt of required permits from the
Ministry of Environment.
EXISTING WELL. In 1993, the Macarenas #1 well, a discovery well, was
drilled on the Tapir block and produced 320 BOPD in a short-term test, but was
not completed for production. Since the well was drilled and tested, additional
oil pipeline infrastructure has been built in the area. The operator plans to
place the well on long-term production test after the completion of the
exploratory well to determine sustainable production rates and the extent of the
reservoir.
TERMS OF TAPIR CONTRACT. The Tapir Association Contract was effective on
February 6, 1995 on terms substantially similar to the Rio Seco Association
Contract. Heritage Minerals, the Tapir Association Contract operator, has
completed an 83 kilometer seismic program in the field, which satisfied the work
program for the first year of the Tapir Association Contract and part of the
second year. The commitment for the second year well has been extended and the
exploration well required in the second year work program is expected to
commence drilling in late 1997 or the first quarter of 1998.
The Company acquired its interest in the Tapir Association Contract in
April 1996 in consideration of the payment for $104,000 which represents
reimbursement for past seismic costs and permit administration, and its
agreement to pay its proportionate share of the costs of a seismic program, the
first exploratory well, the long-term production test on the Macarenas #1 well
(assuming the parties elect to proceed therewith) and certain additional costs
to earn its interest in the Tapir Contract. The Company estimates that its
proportionate share of these costs, which are required to be paid to retain its
interest in the Tapir Association Contract, is approximately $300,000.
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AUSTRALIA
PERTH BASIN, EP381 AND WHICHER RANGE PERMITS.
The Company holds an 11.77% working interest in Exploration Permit 381
and the Whicher Range Permit Application (which has been conditionally granted
but not yet issued), both of which are located in the southern Perth Basin,
Western Australia. Other interests in these permit areas are held by: Pennzoil
(44.115%), Amity Oil (30.115%) and GeoPetro Company (14%).
The EP 381 Permit covers an area of 455,405 acres; the Whicher Range
Permit Application covers 439,141 acres and adjoins the EP 381 Permit to the
north for a total area of 894,546 acres. The Whicher Range Permit Application
has been reserved for the applicants pending resolution of native claims
pursuant to the Australian NATIVE CLAIMS ACT 1993.
The greater Perth Basin produces gas and oil from accumulations onshore
in a region north of the Company's permit areas and north of the city of Perth.
The area in and around the Company's permit areas is the site of farming and
mining activities which has created an apparent strong local demand for energy
which would be the intended market for any natural gas produced from the EP 381
or the Whicher Range Permits.
The principal exploration interest in the EP 381 and the Whicher Range
Permit areas is for natural gas generated in Permian coal measures and
reservoired within adjacent Permian sandstones. The operator of the permit areas
has conducted reservoir studies on the Whicher Range Permit Application area,
which contains the Whicher Range Gas Field discovered by Union Oil of California
in 1968. The results of these studies indicate that the use of different
drilling technologies and newer completion techniques could make the Whicher
Range Gas Field economic to develop. Based on this technical assessment and the
market for natural gas now believed to be available in the area, the partners
plan to re-enter and test the Whicher Range #1 well in 1997. If this re-entry
and test is successful, the parties may drill an additional well in late 1997
and initiate additional seismic programs in the block. In addition, a new
seismic study was commenced in March 1997 to delineate further prospects in the
EP 381 prospect area. In May 1995, the Scott River #1 well was drilled in the
southern portion of EP 381, encountered Permian sandstones which had
sub-commercial saturations of natural gas and was abandoned.
The Company acquired its interest in EP381 and the Whicher Range Permit
Application by virtue of a farm-in agreement dated March 6, 1995 and an
additional assignment of an interest in 1996. The parties to EP 381 have
complied with the work commitments required under EP 381 through the end of the
current contract year; the parties to the Whicher Range Permit Application
believe that the planned re-entry in the Whicher Range #1 well will satisfy the
work commitment at least through the first year of such permit.
BASS BASIN, BLOCK T27P.
The Company holds a 20% working interest in Block T27P, a 1.8 million
acre block in approximately 70 meters of water, in the Bass Basin, the central
of three basins offshore southern Australia. The easternmost basin is the
Gippsland Basin where BHP Petroleum and Esso have a series of large oil and gas
fields. The westernmost basin is the Otway Basin, the
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site of recent gas discoveries by BHP Petroleum and others which will likely
serve the South Australia and Victoria gas market. The T27P block lies about
halfway between the Victoria coast to the north and the Tasmania coast to the
south (about 90 kilometers each way). The Bass Basin has been the site of a
series of gas and oil shows and discoveries, including the Yolla Field, which is
adjacent to Block T27P. The Yolla Field was discovered by Amoco in the
mid-1980's and has not yet been appraised or developed.
Globex Exploration, the operator of the permit with an 80% working
interest, was granted the Offshore Petroleum Exploration Permit effective August
10, 1994 (the "Bass Basin Permit"). Globex completed a 1,000 kilometer 2D
seismic program in the block. The remaining work commitment in the block
consists of a 3D seismic survey and two exploration wells. Globex has selected a
drillable prospect some 10 kilometers north of the Yolla Field and is seeking
additional participants in the block to share the cost of an exploratory well
which is estimated to be approximately $5 million. As suitable drilling rigs are
not available in the near term, Globex has applied for a permit extension in the
block until a suitable rig can be contracted.
In March 1996, the Company acquired a six-month option to purchase its
interest in the block for $250,000 and exercised that option in September 1996.
Pursuant to the terms of the option agreement, the Company may elect to farmout
up to 50% of its interest in the Bass Basin Permit. In addition, if Globex
Exploration and the other interest holders seek to enter into a farmout, the
Company has agreed to participate proportionally with such parties in such
farmout provided that its interest may not be reduced below 10%.
PAPUA NEW GUINEA
PERMIT PPL-182
The Company holds 100% of exploration permit PPL-182 in southern Papua
New Guinea effective June 11, 1996. The permit covers an area of 1,200,000 acres
located both onshore and offshore in the Fly River Delta and the Gulf of Papua.
The nearest discovery to the permit area is the Pandora Gas Discovery
located in PPL-82 approximately 150 kilometers to the east in the Gulf of Papua.
The International Petroleum Corporation and Chevron announced in March 1996 a
feasibility study for the delivery of gas from the Pandora Gas Field and from
other fields in Papua New Guinea to be transported south to northern Australia.
Past exploration activity within PPL-182 has resulted in the acquisition
of seismic data and the drilling of several exploration wells. The Company's
first year work program consists of a geological and geophysical review of
existing data. Based on the results of this study, the Company will decide
whether to proceed with the second year's work commitment which provides for
seismic reprocessing and acquisition of a high resolution aeromagnetic survey
and is expected to cost approximately $500,000. At the end of the second year
work program, the Company will decide whether to continue its exploration
program or relinquish the permit. The Company plans to secure an industry
partner or partners to underwrite a significant portion of future exploration
costs.
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OTHER PROPERTIES
As a result of the Amalgamation, Seven Seas acquired three mineral
properties owned by Rusty Lake, two of which have been sold. The remaining
property, consisting of a 60% interest in two patented mining parcels located in
Whitney Township in the Province of Ontario, is being offered for sale. The
Company has no plans to explore these mining properties.
Since its inception, the Company has been involved in exploration
activities in Colombia, Australia, Argentina, Turkey and Papua New Guinea.
Exploration activities in Argentina and Turkey have been discontinued and an
option for the right to participate in future exploration activities in North
Africa was never exercised.
SUPPLEMENTARY INFORMATION IN RESPECT OF OIL AND GAS PROPERTIES
RESERVES REPORTED TO OTHER AGENCIES. No estimates of the Company's total
proved net oil and gas reserves have been filed with or included in reports to
any federal authority or agency in the United States other than the Commission.
PRODUCTIVE WELLS AND ACREAGE. The following table sets forth the
productive oil and gas wells and developed acreage owned by the Company as of
December 31, 1996:
Wells 1
--------------------------------------
Developed
Oil Gas Acreage
------------------ ----------------- ------------------
GROSS NET GROSS NET GROSS 2 NET
Colombia........... 2 1.034 640 331
- ----- -- -- --- ---
TOTAL....... 2 1.034 640 331
== ===== == == === ===
1One or more completions in the same well bore are counted as one well.
2Assumes 320 acre well spacing.
UNDEVELOPED ACREAGE. The following table sets forth estimates of the
undeveloped acreage for which oil and gas leases or concessions were held by the
Company as of December 31, 1996.
- 21 -
<PAGE>
Gross Acres Net Acres
--------------- ------------
Colombia.................. 355,360 84,138
Papua New Guinea.......... 1,200,000 1,200,000
Australia................. 2,694,546 317,148
--------- ---------
TOTAL.............. 4,249,906 1,601,286
========= =========
DRILLING ACTIVITIES. The following table sets forth the number of wells
drilled by the Company since its inception:
EXPLORATORY DEVELOPMENT
----------------------------- --------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
---------- --- ---------- ---
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
Year ended
December 31, 1996:
Colombia 2 1.034 - - - - - -
Argentina - - 1 .25 - - - -
-- ----- -- --- -- -- -- --
2 1.034 1 .25
== ===== == === == == == ==
Year ended
December 31, 1995:
Australia - - 1 .1 - - - -
== ===== == === == == == ==
PRESENT ACTIVITIES. As of December 31, 1996, one well was in progress.
ADDITIONAL INFORMATION. Reference is made to the Supplemental Oil and Gas
Information (Unaudited) included in the Notes to Consolidated Financial
Statements of the Company included herein for additional information regarding
the Company's oil and gas producing activities prepared in accordance with the
requirements of Statement of Financial Accounting Standards No. 69 "Disclosures
About Oil and Gas Producing Activities."
- 22 -
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of April 29, 1997
with respect to the beneficial ownership of the Common Shares, by (i) each
person known by the Company to own beneficially more than 5% of the issued and
outstanding Common Shares, (ii) each director of the Company and each of the
Named Officers, and (iii) all executive officers and directors of the Company as
a group.
NUMBER OF SHARES PERCENT
BENEFICIAL OWNER OF COMMON SHARES (1) CLASS
- ---------------- --------------------- --------
Robert A. Hefner III
c/o The GHK Company
Suite 470
6305 Waterford Boulevard
Oklahoma City, Oklahoma 731118 6,750,300(2) 19.5%
Breene M. Kerr 3,885,885(3) 11.2%
c/o Brookside Company
115 Bay Street
Easton, Maryland 21601
Brian Egolf 126,386(4) *
William G. McIntosh 55,000 *
James A. Millard 65,000(5) *
Harvey S. Robinson 46,700(6) *
Timothy T. Stephens 355,172(7) 1.0%
Albert E. Whitehead 1,291,858(8) 3.7%
John B. Zaozirny 65,000(9) *
David F. DeCort 206,915(10) *
John P. Dorrier 237,486(11) *
ALL EXECUTIVE OFFICERS AND DIRECTORS
AS A GROUP (10 PERSONS) 9,199,817(12) 25.8%
- ---------------
* Less than 1%
(1) Based on 34,699,575 Common Shares issued and outstanding on April 24, 1997.
Unless otherwise indicated, each of the parties listed has sole voting and
investment power over the shares owned. The number of shares indicated
includes, in each case, the number of Common Shares issuable upon exercise
of stock options ("Options") subject to the Amended 1996 Stock Option Plan,
to the extent that such Options are currently exercisable. For purposes of
this table, Options are deemed to be "currently exercisable" if they may be
exercised within 60 days following April 24, 1997. In addition, certain of
the shares listed above are currently held in escrow pursuant to the terms
of the GHK Escrow Agreement, which is more particularly described under
"Certain Relationships and Related Transactions - GHK Transaction" and under
the Founder's Escrow Agreement, which is more particularly described under
"Certain Relationships and Related Transactions - Transactions with
Promoter". Both the GHK Escrow
- 23 -
<PAGE>
Agreement and the Founder's Escrow Agreement restrict the ability of the
holders of securities subject thereto to transfer such securities but do not
restrict such holders from exercising voting rights with respect to such
securities.
(2) Includes 50,000 Common Shares currently issuable upon exercise of an Option,
20,000 shares held by an entity in which Mr. Hefner has a substantial
interest and 5,040,910 Common Shares beneficially owned by Mr. Hefner and
held in escrow pursuant to the Escrow Agreement.
(3) Consists solely of shares beneficially owned by a limited partnership in
which Mr. Kerr serves as a general partner and includes 2,872,826 Common
Shares held in escrow pursuant to the Escrow Agreement.
(4) Includes 12,650 Common Shares owned by a member of Mr. Egolf's family, 2,000
Common Shares owned by a trust for the benefit of members of Mr. Egolf's
family and 50,000 Common Shares currently issuable upon exercise of an
Option.
(5) Includes 30,000 Common Shares currently issuable upon exercise of Options.
(6) Includes 8,000 shares owned by Mr. Robinson's wife and 1,700 shares owned by
members of his immediate family over which he has a power of attorney but no
pecuniary interest and in which he disclaims beneficial ownership.
(7) Includes 172,000 Common Shares currently issuable upon exercise of Options.
(8) Includes 185,000 Common Shares currently issuable upon exercise of Options
and 333,333 Common Shares held in escrow pursuant to the Founder's Escrow
Agreement.
(9) Includes 60,000 Common Shares currently issuable upon exercise of Options.
(10)Includes 801 shares owned by Mr. DeCort's wife and 154,000 Common Shares
currently issuable upon exercise of Options.
(11)Includes 75,000 Common Shares currently issuable upon exercise of Options
and an additional 151,000 Common Shares which may be issuable upon exercise
of Options granted by the Company.
(12)Includes 927,000 Common Shares currently issuable upon exercise of Options
and an aggregate of 7,913,736 Common Shares and 333,333 Common Shares held
in escrow pursuant to the GHK Escrow Agreement and the Founder's Escrow
Agreement, respectively.
VOTING SUPPORT AGREEMENTS
Under the terms of a Voting Support Agreement executed in connection with
the GHK Transaction described below under "Certain Relationships and Related
Transactions," Seven Seas, Robert A. Hefner III, Breene M. Kerr, Albert E.
Whitehead, George H. Plewes, and Timothy T. Stephens agreed to vote or cause to
be voted all shares owned or controlled by them in favor of the slate of
directors proposed by the Company's chief executive officer. The Voting Support
Agreement also provides that a sale by Messrs. Hefner and Kerr of a block of
10,000 Common Shares or more which were initially subject to the GHK Escrow
Agreement, must first be offered to be made through Yorkton Securities Inc. or
such other investment dealer as may be designated by the Board of Directors or
the securities sold will remain subject to the Voting Support Agreement. In the
event any such dealer is unable or unwilling to sell such securities in a timely
manner at a price acceptable to the seller, the seller may sell to a third party
without being subject to the Voting Support Agreement provided that such sale is
not to a person or one or more of a group of persons acting in concert, who is
acquiring the securities of the seller in connection with a takeover bid, other
than where such takeover bid is an offer made generally to the shareholders of
the Company. The Voting Support Agreement will terminate on the earlier to occur
of July 19, 1998, the date either Messrs. Egolf and Hefner are not elected as
directors; the date two of Messrs. Albert E. Whitehead, George H. Plewes and
Timothy T. Stephens are not elected as directors or cease to be officers of the
Company; if, during any six month period, the Company issues in excess
- 24 -
<PAGE>
of 25% of the then issued and outstanding shares of the Company at the beginning
of such period, without obtaining shareholder approval; or the failure of the
Company to maintain directors' and officers' insurance.
Under the terms of a voting support agreement by and between the Company and
Hazel Ventures Ltd., the sole shareholder of Petrolinson ("Hazel Ventures"),
Hazel Ventures agreed that prior to July 19, 1998, it will vote all Common
Shares of the Company owned or controlled by it in favor of the slate of
directors proposed by the Company's chief executive officer and will require any
purchaser of its shares to agree to be bound by the terms of the agreement
unless the purchaser acquires the shares in the open market. Hazel acquired
1,000,000 Common Shares, or 2.9% of the Company's outstanding Common Shares, in
exchange for the transfer of its ownership of Petrolinson, the holder of a 6%
interest in the Association Contracts, to a subsidiary of the Company.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information set forth below, furnished to the Company by the
respective individuals, shows as to each director and executive officer of the
Company (i) his name and age; (ii) his principal positions with the Company;
(iii) his principal occupation or employment during the last five years; (iv)
other directorships, and (v) the month and year in which he began to serve as a
director. No family relationship exists among any of the executive officers and
directors of the Company.
PRINCIPAL OCCUPATION
DURING THE LAST FIVE
NAME AND AGE PRESENT POSITION YEARS; OTHER
SINCE WITH THE COMPANY DIRECTORSHIPS DIRECTOR
- ------------ ---------------- -------------------- --------
Albert E. Whitehead Chairman, Chief Chairman and Chief February 1995
(67)(1) Executive Officer Executive Officer of
and a Director the Company since
February 1995; Chairman
and Chief Executive
Officer of Garnet
Resources Corporation,
a publicly held oil and
gas exploration
company, from 1987
through February 1995;
Director, Americomm
Resources Corporation
- 25 -
<PAGE>
Timothy T. Stephens President and a President of the March 1995
(44)(1) Director Company since March
1995; Vice President of
Enron Capital and Trade
Resources, the merchant
bank and trading
subsidiary of Enron
Corporation, from 1991
to 1995.
John P. Dorrier (44) Executive Vice Executive Vice N/A
President President of the
Company since March
1995; from 1987 through
March 1995, Mr. Dorrier
held various positions
with BHP Petroleum,
including Vice
President Exploration,
the Americas
David F. DeCort (41) Vice President Vice President - N/A
- Finance; Finance of the Company
Secretary and since June 1995;
Chief Financial Treasurer/Controller of
Officer Huffco Group Inc., a
Houston independent oil
and gas company, from
August 1990 to June
1995
Brian Egolf (48) Director President, Petroleum November, 1996
Management Corporation,
a private oil and gas
exploration company
Robert A. Hefner III Director President, The GHK November, 1996
(62)(1) Corporation, a private
company engaged in oil
and gas exploration
William G. McIntosh Director Retired Banker February 1995
(67)(2)
James A. Millard Director Solicitor with February 1995
(65)(3) MacKimmie Matthews,
Barristers and
Solicitors
Harvey S. Robinson Director Retired oilman; from February 1995
(70)(3) 1991 to 1993, Mr.
Robinson served as
president and the
geologist of Robinson
Resources Ltd., a
- 26 -
<PAGE>
private company engaged
in petroleum
exploration and
development.
John B. Zaozirny Director Counsel to McCarthy February 1995
(49)(2) Tetrault, Barristers
and Solicitors
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Stock Option and Compensation Committee.
Executive officers of the Company serve at the pleasure of the Board of
Directors. The term of office of each director of the Company ends at the next
annual meeting of the Company's shareholders or when his or her successor is
elected and qualifies. Vacancies on the Board are filled by the remaining
directors and directors elected to fill such vacancies hold office until the
next annual meeting of the Company's shareholders.
As a condition of completing the GHK transaction, Messrs. Robert A Hefner,
III and Brian Egolf were appointed as members of the Board of Directors. Under
the terms of the Voting Support Agreement executed in connection with the GHK
Transaction, Seven Seas, Robert A. Hefner III, Breene M. Kerr, Albert E.
Whitehead, George H. Plewes, and Timothy T. Stephens agreed to vote or cause to
be voted all shares owned or controlled by them in favor of the slate of
directors proposed by the Company's chief executive officer. Under the terms of
the voting support agreement executed in connection with the acquisition of
Petrolinson, Hazel Ventures has agreed to vote or cause to be voted all shares
owned or controlled by it in favor of the slate of directors proposed by the
Company's chief executive officer. For additional information on the Voting
Support Agreements, including their term, see "Principal Stockholders - Voting
Support Agreements." For additional information on the GHK Transaction, see
"Certain Relationships and Related Transactions - GHK Transaction."
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company held three meetings during 1996 and
took action by unanimous written consent twenty times during 1996. All directors
attended 75% or more of the total number of meetings of the Board and of the
committees of which they were members.
The Executive Committee, the Audit Committee and the Stock Option and
Compensation Committee (the "Compensation Committee") are the only standing
committees of the Board. There is no formal nominating committee; the Board of
Directors or the Executive Committee performs this function.
The Executive Committee, which is currently composed of Messrs. Whitehead,
Stephens, and Hefner, has all the powers of the Board of Directors in the
management of the business and affairs of the Company, except as such powers are
limited by the Yukon Business Corporations Act. During 1996, the Executive
Committee met one time.
- 27 -
<PAGE>
The Audit Committee, which is currently composed of Messrs. McIntosh and
Zaozirny, consults with the auditors of the Company and such other persons as
the members deem appropriate, reviews the preparations for and scope of the
audit of the Company's annual financial statements, makes recommendations
concerning the engagement and fees of the independent auditors, and performs
such other duties relating to the financial statements of the Company as the
Board of Directors may assign from time to time. The Audit Committee met two
times during 1996 and took action by unanimous consent twice during 1996.
The Compensation Committee, which currently is composed of Messrs. Millard
and Robinson, has all of the powers of the Board of Directors, including the
authority to issue shares or other securities of the Company, in respect of any
matters relating to the administration of the Company's 1996 Stock Option Plan
and the compensation of officers, directors, employees and other persons
performing substantial services for the Company. The Compensation Committee took
action by unanimous written consent twice during 1996.
DIRECTORS' FEES
Directors who are officers or employees of the Company receive no
additional compensation for their service as members of the Board of Directors
or as members of Board committees. Directors who are not officers or employees
of the Company are eligible to participate in the Company's Amended 1996 Stock
Option Plan and are reimbursed for their out-of-pocket expenses incurred in
connection with their service as directors, including travel expenses. In July
1996, each non-employee director received a five year option to purchase 10,000
Common Shares at an exercise price of $7.125 per share. In November 1996, upon
their election as directors, Messrs. Hefner and Egolf each received a five year
option to purchase 50,000 Common Shares at an exercise price of $18.75 per
share. In each case, the exercise price of the options was equal to the market
value for a Common Share on the date of grant.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
which was awarded or paid to, or earned by, the Company's Chief Executive
Officer and the Company's four most highly compensated officers (other than the
Chief Executive Officer) who were serving as officers at December 31, 1996, and
whose total salary and bonus during the fiscal year ended December 31, 1996
exceeded $100,000 (the "Named Officers").
- 28 -
<PAGE>
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ -------------------- --------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- SHARES LTIP COMPEN-
NAME AND PRINCIPAL BONUS SATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY ($) ($) ($)(1) ($) SARS(#) ($) ($)(3)
- ------------------ ---- ---------- ---- ------ ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albert E. Whitehead 1996 $150,000 -0- -0- -0- 185,000 -0- 14,634
Chief Executive 1995 125,000 -0- -0- -0- 200,000 -0- --
Officer
Timothy T. Stephens 1996 $135,000 93,840 -0- -0- 172,000 -0- 13,170
President 1995 106,875(2) -0- -0- -0- 250,000 -0- --
John P. Dorrier 1996 $120,000 83,520 -0- 151,000 -0- 11,707
Executive Vice 1995 80,000(2) -0- -0- -0- 125,000 -0- --
President
David F. DeCort 1996 $ 90,000 62,640 -0- -0- 124,000 -0- 8,780
Vice President - 1995 52,500(2) -0- -0- -0- 100,000 -0- --
Finance
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Except as otherwise indicated, the dollar value of perquisites and other
personal benefits for each of the Named Executive Officers was less than
established reporting thresholds.
(2) Represents salary received from commencement of employment through December
31, 1995 from the Company and the Predecessor, which amount does not reflect
an annual rate of compensation.
(3) Consists solely of amounts contributed by the Company to the Named Executive
Officer's account in the Company's 401(k) Plan.
- 29 -
<PAGE>
OPTION/SAR GRANTS DURING 1996
The following table sets forth information regarding individual grants of
Options by the Company during the fiscal year ended December 31, 1996 to each of
the Named Officers, and their potential realizable values.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
SHARE PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
- -------------------------------------------------------------------------- -----------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS/SAR'S
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SAR'S EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED # FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------- -------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Albert E. Whitehead 85,000 13.1% $18.75 11/26/2001 440,324 973,000
100,000 15.4% $7.125 07/23/2001 196,851 434,988
Timothy T. Stephens 82,000 12.6% $18.75 11/26/2001 424,783 938,659
90,000 13.8% $7.125 07/23/2001 177,166 391,490
John P. Dorrier 71,000 10.9% $18.75 11/26/2001 367,800 812,741
80,000 12.3% $7.125 07/23/2001 157,480 347,990
David F. DeCort 54,000 8.3% $18.75 11/26/2001 279,735 618,141
70,000 10.7% $7.125 07/23/2001 137,795 304,492
</TABLE>
- ----------------
(1) The assumed rates of annual appreciation are calculated from the date of
grant through the assumed expiration date. Actual gains, if any, on stock
option exercises and Common Share holdings are dependent on the future
performance of the Common Shares and overall stock market conditions.
There can be no assurance that the value reflected in the table will be
achieved.
- 30 -
<PAGE>
OPTION EXERCISES DURING 1996 AND FISCAL YEAR END OPTION VALUES
The following table provides information related to Options exercised by
the Named Officers during 1996 and the number and value of unexercised Options
held by the Named Officers at year-end. The Company does not have any
outstanding stock appreciation rights.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS, WARRANTS/SARS AT OPTIONS, WARRANTS/SARS
FISCAL YEAR-END (#)(1) AT FISCAL YEAR-END ($)(3)
SHARES ACQUIRED VALUE REALIZED ------------------------- --------------------------
NAME ON EXERCISE (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Albert E. Whitehead 200,000 $2,312,500 185,000 -0- $1,100,000 -0-
Timothy T. Stephens 228,333 $3,767,951 193,667 -0- $1,192,714 -0-
John P. Dorrier 50,000 $328,750 226,000 -0- $2,183,125 -0-
David F. DeCort 30,000 $502,500 194,000 -0- $1,986,250 -0-
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of exercisable and unexercisable Options set forth in the
above table may differ from the number reflected in the table on page 27
because the information in the above table is as of December 31, 1996.
(2) Represents the difference between the exercise price of the option and
the closing price on the date of exercise.
(3) Based on a closing price on December 31, 1996 of $18.125 per share.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company and each of Messrs. Stephens, Dorrier and DeCort have entered
into three year employment contracts which provide that they will receive annual
base salaries of $175,000, $150,000 and $112,500, respectively, and, in the sole
discretion of the Compensation Committee of the Board, may receive annual merit
increases, annual bonuses and stock option awards. The contracts may be
terminated for "cause" which includes death or serious incapacity and the
executive officers may resign upon three months' prior written notice.
The Company and each of Messrs. Stephens, Dorrier and DeCort have also
entered into agreements which provide for payments to the executive in the event
there is a Change of Control of the Company and the executive's employment is
terminated (i) by the Company within twelve months thereafter, (ii) by the
executive within six months thereafter, or (iii) by the executive between six
and twelve months after a Change of Control if a Triggering Event has occurred.
In any such event, the executive shall be entitled to a payment equal to the
aggregate salary payable for the remaining term of his employment agreement and
the Company shall pay the executive's health insurance premium for a period of
one year unless the executive has secured comparable health insurance prior
thereto. If bonuses are paid by the Company for the year in which the
executive's employment terminated, the executive shall be entitled to a bonus
equal to the most recent annual bonus paid to him. In addition, all stock
options held by the executive shall be extended until the earlier to occur of
the expiration date of the option or eighteen months after the date of the
termination of his employment by the Company or the date of his notice of intent
to
- 31 -
<PAGE>
terminate his employment if he elected to resign. The agreements also provide
that in the event the exercise price of any option granted simultaneously with
the option issued to the executive is reduced, the exercise price of the
executive's option shall also be reduced. For purposes of the agreement, the
term "Change of Control" is defined to include the acquisition by any person or
combination of persons of a sufficient number of securities of the Company to
materially affect the control of the Company which, for purposes of the
agreement, shall be deemed to occur if 20% or more of the votes which may be
cast in the election of directors have been acquired by any person or
combination of persons; a merger, consolidation, or amalgamation with or into
any other person if all or part of the outstanding voting securities of the
Company shall be changed, reclassified, converted, exchanged or otherwise
acquired for shares or other securities of the Company or any other person or
for cash or any other property, unless such transaction has been approved by a
majority of the directors in office on April 28, 1997; a majority of the
directors in office on April 28, 1997 shall cease to serve as directors of the
Company for any reason including resignation; the sale or other transfer of
assets which constitute more than 50% of the consolidated assets of the Company
(measured by either book value or fair market value) or which generated more
than 50% of the consolidated operating income or cash flow of the Company. The
term "Triggering Event" shall include any adverse change in the duties, powers
or compensation of the executive in effect prior to the Change in Control or a
change in the person to whom the executive reports, other than as a result of a
promotion in the normal course of business.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE GHK TRANSACTION
In April 1996, the Company and GHK Company Colombia, an Oklahoma
corporation controlled by Robert A. Hefner III, entered into a non-binding
letter of intent governing a proposed acquisition by the Company of an
additional 35% participating interest in the Association Contracts in
consideration of the issuance of up to 16,000,000 Common Shares by the Company
to three entities holding such interests or to their respective shareholders
(collectively, the "GHK Transaction"). Effective July 26, 1996, pursuant to the
terms of three separate share purchase agreements, the Company agreed to issue
an aggregate of 16,777,143 Common Shares to nineteen unrelated parties, in
consideration of the Company's acquisition of (a) 100% of the issued and
outstanding shares of GHK Company Colombia which serves as the operator under
the Association Contracts and holds a 10.944% interest in such contracts, (b)
100% of the membership interests of Esmeralda Limited Liability Company
("Esmeralda") which holds a 9.776% interest in the Association Contracts, and
(c) 62.963% membership interest in Cimarrona Limited Liability Company
("Cimarrona") which holds a 25.38% interest in the Association Contracts. As a
result of the transaction, the Company acquired an additional 36.7% indirect
interest in the Association Contracts. As a condition to the GHK Transaction,
the Company also entered into the Registration Rights Agreement, the Escrow
Agreement and the Management Agreement, each of which is more particularly
described below, and the Voting Support Agreement which is more particularly
described above under "Principal Stockholders."
Pursuant to the terms of the share purchase agreement between the Company
and Robert A. Hefner III, the Company purchased 100% of the issued and
outstanding shares of GHK Company Colombia from Mr. Hefner in consideration for
the issuance of 5,002,972 Class A Preferred Shares Series 1 of the Company to
him. Pursuant to the terms of the share purchase agreement between the Company
and the members of Esmeralda, the Company purchased 100% of the membership
interests of Esmeralda from such members in consideration for the issuance of
- 32 -
<PAGE>
an aggregate of 4,469,028 B Special Warrants (the "B Warrants") to such members.
Pursuant to the terms of the share purchase agreement between the Company and
the members of Cimarrona, the Company purchased a 62.963% membership interest in
Cimarrona from such members in consideration for the issuance of an aggregate of
7,305,143 B Warrants to such members. The Preferred Shares and the B Warrants
were issued at a deemed price per share of $9.125 which was based upon the
closing price of the Company's Common Shares on the Canadian Dealer Network on
July 26, 1996. As a condition to each purchase agreement, the Company agreed
that two representatives of the sellers under such agreements would be appointed
to the Board of Directors of the Company and Messrs. Robert A. Hefner, III and
Brian Egolf are serving on the Board of Directors as their representatives. In
addition, Mr. Hefner and Breene M. Kerr entered into the Voting Support
Agreement, more particularly described above under "Principal Stockholders."
Each B Warrant was exercisable into one Common Share without payment of
additional consideration and was automatically converted into a Common Share, in
accordance with the terms of the Company's Articles of Continuance, in February
1997. Each Preferred Share was entitled to one vote per share, was exercisable
into one Common Share without payment of additional consideration and was also
automatically converted into a Common Share, in accordance with the terms of the
Company's Articles of Continuance, in February 1997. As the Preferred Shares
were issued to Mr. Hefner in lieu of B Warrants to enable him to effect the sale
of the shares of GHK Company Colombia on a tax-free basis, Mr. Hefner agreed to
indemnify the Company from any tax liability to which the Company became subject
as a result of the transaction.
The shares of GHK Company Colombia and the 62.963% interest in Cimarrona
were transferred to Seven Seas Petroleum Colombia Inc.; 50% of the membership
interest in Esmeralda was transferred to Seven Seas Petroleum Colombia Inc.; and
50% of such membership interest was transferred to Seven Seas Petroleum
Holdings, Inc. as a limited liability company is required to have a minimum of
two members.
As a condition of completing the GHK Transaction, the Company also entered
into a Registration Rights Agreement with the holders of the B Warrants and the
Preferred Shares which currently entitles such holders to notice of proposed
public offerings or private placements by the Company under the Securities Act
(Ontario) and to include Common Shares held by such holders in such offerings
subject to limitations which may be imposed by the managing underwriter of any
such offering. The Registration Rights Agreement will terminate on the earlier
to occur of July 26, 1998 or the termination of the Voting Support Agreement.
As a condition of the Company obtaining the consent of the Ontario
Securities Commission to the GHK Transaction, the Company, the holders of
Preferred Shares and B Warrants and the Montreal Trust Company of Canada, as
trustee, entered into an escrow agreement dated July 26, 1996 (the "GHK Escrow
Agreement") pursuant to which 70% of the securities issued by the Company in the
GHK Transaction, or upon conversion or the securities issued therein, are held
in escrow. An aggregate of 11,744,000 Common Shares are currently held in escrow
and such Common Shares may not be sold, assigned, pledged, or transferred until
released from escrow in accordance with the terms of the GHK Escrow Agreement.
Shares held in escrow may be voted by the registered holders thereof. Pursuant
to the terms of the Escrow Agreement, the securities held in escrow shall be
released as follows: (i) one-third of the securities deposited in escrow shall
be released on each of July 26, 1997, 1998 and 1999 or (ii) the securities may
be released in full if the Company or the owner of such securities provides the
Ontario Securities Commission with technical reports acceptable to the director
thereof that establish a determinate value as of April 26, 1996 for the
interests in the Association Contracts transferred to the Company or its
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subsidiaries, of $118,908,000 or more. If interim technical reports establish a
determinate value of less than $118,908,000 for such interests, proportionate
releases from escrow may be permitted.
Prior to the GHK Transaction, GHK Company L.L.C. ("GHK L.L.C."), an
Oklahoma limited liability company, the principal owner of which is Robert A.
Hefner, III, provided administrative and management services to GHK Company
Colombia in connection with its obligations as operator of the Dindal and Rio
Seco blocks. As a condition of completing the GHK Transaction, the Company, GHK
Company Colombia and GHK L.L.C. entered into a Management Agreement pursuant to
which GHK L.L.C. was retained by GHK Company Colombia to perform the duties and
obligations of GHK Company Colombia under the Association Contracts and as
operator of the Dindal blocks under the joint operating agreement dated August
1, 1996 (the "JOA"). GHK Company Colombia agreed to pay GHK L.L.C. a monthly sum
equal to 100% of the overhead charges authorized under the JOA relating to such
blocks (which costs are estimated to be approximately $15,000 per month) plus an
additional $15,000 per month and to reimburse GHK L.L.C. for all expenses
incurred in the performance of its duties under the Management Agreement. The
costs and expenses under the JOA are paid by the interest holders under the
Association Contracts proportionately to their percentage interests therein.
From July 26, 1996 to December 31, 1996, GHK Company Colombia paid an aggregate
of $144,305 to GHK L.L.C. for services provided under this agreement. The
Management Agreement may be terminated by either party upon 180 days prior
written notice and will terminate upon the earlier to occur of (i) the drilling
and completion of both the second year well under the Rio Seco Association
Contract and the fourth year well under the Dindal Association Contract, or (b)
the declaration of a commercial field under either of the Association Contracts,
by Ecopetrol.
Prior to the GHK Transaction, neither Mr. Hefner, Mr. Egolf nor Mr. Kerr
were affiliated with the Company. As a result of the GHK Transaction, Messrs.
Hefner and Egolf were elected directors of the Company and Mr. Hefner and Mr.
Kerr became substantial shareholders of the Company. In addition, as a result of
an agreement between Mr. Hefner, in his capacity as the selling shareholder of
GHK Company Colombia, the members of Esmeralda and Cimarrona and Mr. Egolf
(collectively, the Sellers"), the Sellers paid Mr. Egolf an aggregate of 83,886
B Warrants, which were subsequently converted into 83,886 Common Shares, as
consideration for his services to the Sellers in connection with the GHK
Transaction.
TRANSACTIONS WITH PROMOTER. Mr. Albert E. Whitehead, Chairman and Chief
Executive Officer of the Company and a director, may be deemed a promotor of the
Company. In connection with the formation of the Predecessor of the Company in
February 1995, Mr. Whitehead received 1,000,000 Common Shares for a total
consideration of $1.00. As of condition of the Common Shares being listed on the
Toronto Stock Exchange ("TSE"), the TSE required Mr. Whitehead to place 500,000
Common Shares held by him in escrow in accordance with the TSE's founder stock
policy. Under the terms of the escrow agreement (the "Founder's Escrow
Agreement") between Mr. Whitehead, the Company and Montreal Trust Company of
Canada as escrow agent dated January 21, 1997, one-third of the shares subject
thereto were to be released from escrow on each of June 29, 1996, 1997 and 1998
and, accordingly, 333,333 Common Shares are currently subject to the Founder's
Escrow Agreement. For a description of the Common Shares and options held by Mr.
Whitehead, see "Principal Stockholders" and "Executive Compensation."
ITEM 8. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
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<PAGE>
ITEM 9. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION.
The Company's Common Shares have been listed on the Toronto Stock Exchange
("TSE") in Toronto, Ontario, Canada, since February 10, 1997 and currently trade
under the symbol "SVS.U". From June 30, 1995 through February 7, 1997 the
Company's Common Shares traded on the Canadian Dealer Network under the symbol
"SVSE.U". The following table summarizes the high and low closing prices as
reported on the Canadian Dealer Network for each quarterly period since the
commencement of trading through February 7, 1997 and the high and low sales
prices as reported on the TSE from February 10, 1997 through March 31, 1997. The
prices listed below are stated in U.S. dollars, which is the currency in which
they were quoted:
HIGH LOW
----- -----
(US $)
1995
- ----
Third Quarter 2.15 0.90
Fourth Quarter 1.15 0.60
1996
- ----
First Quarter 6.75 0.55
Second Quarter 10.50 5.25
Third Quarter 20.00 7.00
Fourth Quarter 25.75 14.75
1997
- ----
First Quarter (through February 7, 19.00 15.00
1997)
First Quarter (since February 10, 17.40 9.00
1997)
(B) HOLDERS.
As of April 29, 1997, the Common Shares of Seven Seas were held of record
by approximately 6,727 holders, including several holders who are nominees for
an undetermined number of beneficial owners.
(C) DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Shares since its inception nor does the Company intend to do so in the immediate
future. It is currently the policy of the Company's Board of Directors to retain
earnings to finance the Company's exploration and development activities and
operations and the expansion of the Company's business.
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<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Within the last three years, the Company issued the following securities
which were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
On June 30, 1995, upon the Amalgamation, 11,999,999 Common Shares of the
Company were issued to the holders of the common shares of the Predecessor and
680,464 Common Shares of the Company were issued to the holders of shares of
Rusty Lake. The Amalgamation was conducted in Canada, was effected in accordance
with the laws of British Columbia and approved by the Supreme Court of British
Columbia.
In March 1996, 2,000,000 Special Warrants were issued at a purchase price
of $2.75 per Unit pursuant to a brokered private offering of units conducted in
Canada pursuant to the British Columbia securities laws. The Units were
convertible into one common share and one half of one Class A share purchase
warrant (the "Class A Warrants"). Each whole Class A Warrant entitled the holder
thereof to acquire one additional Common Share at a price of $3.50 per share at
any time on or before March 14, 1997. Yorkton Securities Inc., First Marathon
Securities Limited and Griffiths McBurney & Partners Inc. served as agents for
the private placement and received a 7% commission on the gross proceeds
thereof. To the extent U.S. residents were involved in this transaction, the
Company believes that the issuance of securities was exempt from registration
under the Securities Act by virtue of the provision of Section 4(2) thereof.
In July 1996, the Company issued the following securities in the GHK
Transaction: (i) an aggregate of 7,305,143 B Special Warrants to certain members
of Cimarrona Limited Liability Company as consideration for the transfer of a
62.963% membership interest in Cimarrona Limited Liability Company by such
members to a subsidiary of the Company,; (ii) 4,469,028 B Special Warrants to
the members of Esmeralda Limited Liability Company as consideration for the
transfer of a 100% membership interest in Esmeralda by such members to a
subsidiary of the Company, and (iii) 5,002,972 Class A Preferred Shares to
Robert A. Hefner III as consideration for the transfer of all of the issued and
outstanding shares of GHK Company Colombia to a subsidiary of the Company. The B
Special Warrants and the Class A Preferred Shares were each issued at a deemed
purchase price of $9.125 per Special Warrant and per Preferred Share. Each B
Special Warrant and each Class A Preferred Share was convertible in each case
into one Common Share of the Company. To the extent U.S. residents were involved
in this transaction, the Company believes that the issuance of securities was
exempt from registration under the Securities Act by virtue of the provision of
Section 4(2) thereof.
In October 1996, 500,000 C Special Warrants were issued at a purchase
price of $15.00 per Unit pursuant to a brokered private offering of Units
conducted in Canada pursuant to the British Columbia securities laws. The Units
were convertible into one common share and one half of one Class B share
purchase warrant (the "Class B Warrants"). Each whole Class B Warrant entitles
the holder thereof to acquire one additional Common Share at a price of $18.50
per share at any time on or before October 15, 1997. Yorkton Securities and
Tuscarora Capital, Inc. jointly served as the agent for the private placement
and jointly received a 6% commission on the gross proceeds thereof. To the
extent U.S. residents were involved in this transaction, the Company believes
that the issuance of securities was exempt from registration under the
Securities Act by virtue of the provisions of Section 4(2) thereof.
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<PAGE>
In February 1997, 19,277,143 Common Shares were issued upon the automatic
conversion of (i) the Special Warrants issued in March 1996, (ii) the B Special
Warrants and the Class A Preferred Shares issued in July 1996, and (iii) the C
Special Warrants issued in October 1996. As the conversion of such securities
was automatic, to the extent U.S. residents were involved in such transaction,
the Company relied on the exemption from registration under the Securities Act
by virtue of the provisions of Section 3(a)(9) thereof, since the securities
issued were exchanged by the Company with existing security holders exclusively
and no commission or other remuneration was paid or given directly or indirectly
for soliciting such exchange.
In February 1997, 1,000,000 Common Shares were issued in a private
transaction to Hazel Ventures Ltd., a British Virgin Islands company, in
consideration of the transfer of 100% of the capital stock of Petrolinson S.A.
to a subsidiary of the Company in a transaction conducted outside of the United
States.
From February 1996 through March 1997, an aggregate of 690,333 Common
Shares were issued to directors and employees of the Company upon the exercise
of employee stock options at purchase prices of $0.75 to $7.125 per share. To
the extent U.S. residents were involved in these transactions, the Company
believes that the issuance of securities was exempt from registration under the
Securities Act by virtue of the provisions of Section 4(2) thereof.
In March 1997, 1,000,000 Common Shares were issued upon exercise of the
Class A Warrants at an exercise price of $3.50 per share. To the extent U.S.
residents were involved in this transaction, the Company believes that the
issuance of securities was exempt from registration under the Securities Act by
virtue of the provisions of Section 4(2) thereof.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The following statements are subject to the detailed provisions of the
Company's Articles of Continuance and By-Laws, do not purport to be complete,
and are qualified in their entirety by reference thereto.
The Company's Articles of Continuance authorizes the issuance of an
unlimited number of Common Shares without par value and an unlimited number of
Class A Preferred Shares, without par value. As of April 24, 1997, 34,699,575
Common Shares, are issued and outstanding. As of April 29, 1997, the Company had
6,727 shareholders of record.
COMMON SHARES
No holder of Common Shares has any preemptive right to subscribe for any of
the Company's securities. All outstanding shares are fully paid and
nonassessable. Holders of Common Shares are not entitled to cumulative voting
and are entitled to one vote per share with respect to all matters that are
required by law to be submitted to shareholders, including the election of
directors.
Subject to the prior rights of the holders of any Preferred Shares that may
be outstanding, holders of Common Shares are entitled to share pro rata in such
dividends as may be declared by the Board of Directors out of funds legally
available for that purpose. In the event of liquidation of the Company, all
assets available for distribution (after satisfaction of the prior rights of the
holders of any outstanding Preferred Shares) are distributable among the holders
of the Common Shares according to their respective holdings.
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<PAGE>
Montreal Trust Company of Canada, Suite 600, 530-8th Avenue, S.W., Calgary,
Alberta T2P 3S8, is the transfer agent and the registrar for the Company's
Common Shares.
The authorized but unissued Common Shares and Preferred Shares could be used
to dilute the share ownership of persons seeking to obtain control of the
Company, and thereby defeat a possible takeover attempt which, if shareholders
were offered a premium over the market value of their shares, might be viewed as
being beneficial to the Company's shareholders. In addition, the Preferred
Shares could be issued with voting, conversion rights and preferences which
would adversely affect the voting power and other rights of holders of Common
Shares.
PREFERRED SHARES
The Company's Articles of Continuance provide that the Board of Directors,
without shareholder approval, has the authority to issue Preferred Shares from
time to time in series and to fix the designation, powers (including voting
powers, if any), preferences and relative, participating, optional, conversion
and other special rights, and the qualifications, limitations, and restrictions
of each series, except that with respect to the payment of dividends and the
distribution of assets upon liquidation, each series shall rank equally with any
other series of Preferred Shares outstanding.
In the event of issuance, the Preferred Shares could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Such actions could have the effect of
discouraging bids for the Company, thereby preventing shareholders from
receiving the maximum value for their shares. Although the Company has no
present intention to issue any additional Preferred Shares, there can be no
assurance that the Company will not do so in the future.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS.
The following is a summary of the principal Canadian income tax
considerations generally applicable to nonresidents of Canada who hold the
Common Shares as capital property, deal at arm's length with the Company and do
not use or hold and are deemed not to use or hold their Common Shares in the
course of carrying on a business in Canada and do not carry on insurance
business in Canada. This summary has been prepared by reference to the existing
provisions of the Income Tax Act (Canada) (the "Act"), the Income Tax
Regulations (the "Regulations"), all published proposals for the amendment of
the Act and the Regulations to the date hereof and the published administrative
practices of Revenue Canada, the agency that administers the Act. Although this
summary does not specifically address the provincial income tax consequences of
an investment in Common Shares, generally speaking, provincial taxation does not
apply to persons who are not resident in Canada and who do not own or hold
property in the course of carrying on a business in Canada. Apart from changes
to the Act and the Regulations which have been publicly announced to the date
hereof, this summary does not consider the potential for any future alterations
to Canadian income tax legislation.
DISPOSITIONS OF COMMON SHARES A nonresident of Canada will only be subject
to taxation in Canada under the Act in respect of a disposition of Common Shares
if such shares constitute "taxable Canadian property" to such nonresident.
Provided that the Common Shares are listed on a recognized stock exchange in
Canada at the time of a disposition, they will only constitute "taxable Canadian
property" to a holder if the holder, either alone or together with persons with
whom the holder does not deal at arm's length, owns or at any time in the five
years prior to the date of
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<PAGE>
dispositions, has owned in excess of 25% of the issued and outstanding shares of
a class or series of the capital of the Company. Persons who are related by
blood or marriage, or are subject to common control are deemed to deal otherwise
than at arm's length; other persons may also be considered to be dealing
otherwise than at arm's length in certain circumstances. For the purposes of
determining the 25% threshold, rights or options to acquire Common Shares will
be treated as ownership thereof. Subject to the comments set out below in
respect of the application of the U.S. -- Canada Income Tax Convention to U.S.
resident holders, nonresidents whose shares constitute "taxable Canadian
property" will be subject to taxation thereon on the same basis as Canadian
residents. Generally speaking, three-quarters of the excess of the holder's
proceeds of disposition, over the adjusted cost base of the Common Shares, must
be included in income as a taxable capital gain, to be taxed at prevailing
federal Canadian rates, which range from approximately 26% to 39%.
Nonresidents whose shares are repurchased by the Company, except in respect
of certain purchases made by the Company in the open market, will give rise to
the deemed payment of a dividend by the Company to the former holder of Common
Shares in an amount equal to the excess paid over the paid-up capital of the
Common Shares so repurchased. Such deemed dividend will be excluded from the
former holders' proceeds of disposition of his Common Shares for the purposes of
computing any capital gain but will be subject to Canadian nonresident
withholding tax in the manner described below under "Dividends." In certain
limited circumstances, a sale by a holder of the Common Shares to a corporation
resident in Canada with which the holder does not deal at arm's length may give
rise to the deemed payment of a dividend, to the extent the amount received in
consideration therefor exceeds the paid-up capital of the Common Shares disposed
of.
Pursuant to the U.S. -- Canada Income Tax Convention (the "Convention"),
shareholders of the Company who are resident in the U.S. for the purposes of the
Convention and whose shares might otherwise be "taxable Canadian property" may
be exempt from Canadian taxation in respect of any gains on the Common Shares
provided the principal value of the Company is not derived from real property
located in Canada at the time of the disposition.
The Company owns no Canadian real property and the Company has no present
intention to acquire Canadian real property.
DIVIDENDS Under the Act, withholding tax is imposed at the rate of 25% on
the amount of any dividends paid or credited on the Common Shares to a person
not resident in Canada. Pursuant to the Canada U.S. -- Canada Income Tax
Convention, the rate of tax on such dividends is reduced to 6% for dividends
received in 1996 and 5% thereafter by any U.S. resident corporation who owns in
excess of 10% of the voting shares of the corporation, and to 15% in all other
instances.
INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the acquisition of control
of a Canadian business by non-Canadians without review and approval of the
Investment Review Division of Industry Canada, the agency that administers the
ICA, unless such acquisition is exempt from review under the provisions of the
ICA. Investment Review Division of Industry Canada must be notified of such
exempt acquisitions. The ICA covers acquisitions of control of corporate
enterprises, whether by purchase of assets, shares of "voting interests" of an
entity that controls, directly or indirectly, another entity carrying on a
Canadian business. The ICA will have no effect on the acquisition of shares
covered by this Prospectus.
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<PAGE>
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Certificate of Continuance of the Company. There are no other decrees or
regulations in Canada which restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends, interest
or other payments to nonresident holders of the Company's Common Shares except
as discussed above.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Yukon BUSINESS CORPORATIONS ACT and the Company's Bylaws provide the
following authority to indemnify directors or officers or former directors or
officers of the Company or of a company of which the Company is or was a
shareholder:
(1) Except in respect of an action by or on behalf of the corporation or a body
corporate to procure a judgment in its favor, a corporation may indemnify a
director or officer of the corporation, a former director or officer of the
corporation or a person who acts or acted at the corporation's request as a
director or officer of a body corporate of which the corporation is or was a
shareholder or creditor, and his heirs and legal representatives, against
all costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgment, reasonably incurred by him in respect of any
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a director or officer of that
corporation or body corporate, if (a) he acted honestly and in good faith
with a view to the best interests of the corporation, and (b) in the case of
a criminal or administrative action or proceeding that is enforced by a
monetary penalty, he had reasonable grounds for believing that his conduct
was lawful.
(2) A corporation may, with the approval of the Supreme Court, indemnify a
person referred to in subsection (1) in respect of an action by or on behalf
of the corporation or body corporate to procure a judgment in its favor, to
which he is made a party by reason by being or having been a director or an
officer of the corporation or body corporate, against all costs, charges and
expenses reasonably incurred by him in connection with the action if he
fulfills the conditions set out in paragraphs (1)(a) and (b).
The Yukon BUSINESS CORPORATIONS ACT also provides that:
(3) Notwithstanding anything in subsections (1) through (6), a person referred
to in subsection (1) is entitled to indemnity from the corporation in
respect of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any civil, criminal or administrative action
or proceeding to which he is made a party by reason of being or having been
a director or officer of the corporation or body corporate, if the person
seeking indemnity (A) was substantially successful on the merits of his
defense of the action or proceeding, (B) fulfills the conditions set out in
paragraphs (1)(a) and (b), and (C) is fairly and reasonably entitled to
indemnity.
(4) A corporation may purchase and maintain insurance for the benefit of any
person referred to in subsection (1) against any liability incurred by him
(a) in his capacity as a director or officer of the corporation, except when
the liability relates to his failure to act honestly and in good faith with
a view to the best interests of the corporation, or (b) in his capacity as a
director or officer of another body corporate if he acts or acted in that
capacity at the corporation's
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<PAGE>
request, except when the liability relates to his failure to act honestly
and in good faith with a view to the best interests of the body corporate.
(5) A corporation or a person referred to in subsection (1) may apply to the
Supreme Court for an order approving an indemnity under this section and the
Supreme Court may so order and make any further order it thinks fit.
(6) On an application under subsection (5), the Supreme Court may order notice
to be given to any interested person and that person is entitled to appear
and be heard in person or by counsel.
The Bylaws of the Company also provide that the provisions for
indemnification contained in the Bylaws (outlined in subsections (1) and (2)
above) shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under any Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise both as to an action in his
official capacity and as to an action in any other capacity while holding such
office and shall continue as to a person who has ceased to be a director of
officer and shall enure to the benefit of the heirs and legal representatives of
such person. The Company maintains director's and officer's insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Financial Statement and Financial Statement Schedules included
separately herein.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements and financial statement schedules - see the
accompanying Index to Financial Statements
(b) Exhibits - see the accompanying Index of Exhibits
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registrant statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
SEVEN SEAS PETROLEUM INC.
By /s/ ALBERT E. WHITEHEAD
Albert E. Whitehead
Chairman and Chief
Executive Officer
Date: April 30, 1997
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<PAGE>
APPENDIX A
GLOSSARY OF TECHNICAL TERMS
ANTICLINAL TRAP means a subsurface, geological structure in the form of a sine
curve (i.e., the information rises to a rounded peak) as a result of which any
oil in the deposit will normally rise to the highest point in the structure.
APPRAISAL WELL means a well drilled subsequent to a discovery well in order to
confirm potential recoverable reserve quantities prior to development drilling
of the field.
AQUIFER means water bearing rock structure.
BOPD means barrels of oil per day.
COMMISSION means the U.S. Securities and Exchange Commission.
COMPLETION means the installation of permanent equipment for the production of
crude oil or gas, or in the case of a dry hole, the reporting of abandonment to
the appropriate agency.
DEVELOPMENT WELL means a well drilled within the proved area of a oil or gas
reservoir to the depth of a strategraphic horizon known to be productive.
DRILL STEM TEST means a method of determining the presence of oil and gas in a
formation. When the depth to be tested has been reached in a well being drilled,
a special tool is lowered into the hole. The drilling mud is removed and the
contents of the formation allowed to flow into the tool while an instrument
measures the pressure.
ECOPETROL means Empresa Colombiana de Petroleos, the Colombian national oil
company.
EXPLORATORY WELL means a well drilled to find and purchase oil and gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil and gas in another reservoir or to extend a known
reservoir.
FARMOUT means an agreement whereby the owner of a lease agrees to assign or
transfer the lease (or some portion of it), retaining some interest (such as an
overriding royalty or right to share in production), subject to the drilling of
one or more wells as a prerequisite to completion of the transfer by him.
MMBO means one million barrels of crude oil.
OPERATOR means any person, partnership, corporation or other entity engaged in
the business of exercising direct supervision over the drilling or completion of
or production from a well.
PRODUCTIVE WELL means a well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
PROVEN DEVELOPED PRODUCING RESERVES means those proved reserves that are
actually on production or, if not producing, that could be recovered from
existing wells or facilities and where the reasons for the current non-producing
status is the choice of the owner rather than the lack of markets or some other
reasons. An illustration of such a situation is where a well or zone is capable
but is shut-in because its deliverability is not required to meet contract
commitments.
<PAGE>
PROVEN RESERVES means those reserves estimated as recoverable under current
technology and existing economic conditions, from that portion of a reservoir
which can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data, including
the reserves to be obtained by enhanced recovery processes demonstrated to be
economic and technically successful in the subject reservoir.
PROVEN UNDEVELOPED RESERVES means those proved reserves that are not currently
producing either due to lack of facilities and/or markets.
RESERVOIR means a porous permeable sedimentary rock containing commercial
quantities of oil or gas.
<PAGE>
INDEX OF EXHIBITS
NO. EXHIBIT DOCUMENT EXHIBIT NO.
(2) Not Applicable
(3) Articles of Incorporation and By-laws
(A) The Amalgamation Agreement effective June
29, 1995 by and between Seven Seas
Petroleum Inc., a British Colombia
corporation; and Rusty Lake Resources Ltd.
(B) Certificate of Continuance and Articles
of Continuance into the Yukon Territory
(C) By-Laws
(4) Instruments defining the rights of
security holders, including indentures
(A) Excerpts from the Articles of Continuance
(B) Excerpts from the By-laws
(C) Specimen stock certificate
(D) Form of Class B Warrant
(E) Class B Warrant Indenture dated as of
October 15, 1996 by and between the
Company of Canada and Montreal Trust
Company
(9) Not Applicable
(10) Material Contracts
(a) Agreement dated August 14, 1995 by and
between the Company and GHK Company
Colombia, as amended by letter agreement
dated November 30, 1995
(b) The Association Contract by and
between Ecopetrol, GHK Company
Colombia and Petrolinson, S.A. relating
to the Dindal block, as amended
<PAGE>
NO. EXHIBIT DOCUMENT EXHIBIT NO.
(c) The Association Contract by and
between Ecopetrol and GHK Company
Colombia relating to the Rio Seco block
(d) Joint Operating Agreement dated as of
August 1, 1994 by and between GHK Company
Colombia and the holders of interests in
the Dindal block
(e) The GHK Company Colombia Share
Purchase Agreement dated as of July 26,
1996 by and between Robert A. Hefner,
III, Seven Seas Petroleum Colombia Inc.
and the Company
(f) The Cimarrona Purchase Agreement
dated as of July 26, 1996 by and
between the members of Cimarrona
Limited Liability Company, the
Company, Seven Seas Petroleum
Colombia Inc., and Robert A. Hefner, III
(g) The Esmeralda Purchase Agreement
dated as of July 26, 1996 by and
between the members of Esmeralda
Limited Liability Company, Robert A
Hefner, III, the Company, Seven Seas
Petroleum Holdings, Inc. and Seven Seas
Petroleum Colombia Inc.
(h) The Registration Rights Agreement dated
as of July 26, 1996 by and between the
Company and certain individuals
(i) Shareholders' Voting Support Agreement
dated as of July 26, 1996 by and
between Seven Seas Petroleum Inc. and
Messrs. Hefner, Kerr, Whitehead, Plewes
and Stephens
(j) Management Services Agreement by and
among GHK Company Colombia, the
Company and The GHK Company LLC
<PAGE>
NO. EXHIBIT DOCUMENT EXHIBIT NO.
(k) The Escrow Agreement for a Natural
Resources Company by and among
Montreal Trust Company as trustee, the
Company and certain individuals and
entities
(l) The Escrow Agreement for a Natural
Resources Company by and among
Montreal Trust Company, as trustee, the
Company and Albert E. Whitehead
(m) Amended 1996 Stock Option Plan
(n) Form of Incentive Stock Option Agreement
(o) Form of Directors' Stock Option Agreement
(p) Form of Employment Agreement
between the Company and each of
Messrs. Stephens, Dorrier and DeCort
(q) Form of Agreement between the
Company and each of Messrs. Stephens,
Dorrier and DeCort relating to a change
of control
(11.1) Not Applicable
(12) Not Applicable
(13) Not Applicable
(16) Not Applicable
(18) Not Applicable
(21) Not Applicable
(22) Subsidiaries of the Registrant 22
(23) Not Applicable
(24) Not Applicable
(27) Financial Data Schedule 27
(28) Not Applicable
(99) Not Applicable
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Seven Seas Petroleum Inc. and Subsidiaries
Consolidated Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets, December 31, 1996 and 1995 F-2
Consolidated Statements of Operations and Accumulated F-3
Deficit for the year ended December 31, 1996, and for
the period from inception (February 3, 1995) through
December 31, 1995
Consolidated Statements of Stockholders' Equity for the F-4
year ended December 31, 1996, and for the period from
inception (February 3, 1995) through December 31, 1995
Consolidated Statements of Cash Flows for the year F-5
ended December 31, 1996, and for the period from
inception (February 3, 1995) through December 31, 1995
Notes to Consolidated Financial Statements F-6
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Seven Seas Petroleum Inc.:
We have audited the accompanying consolidated balance sheets of Seven Seas
Petroleum Inc. (a Yukon Territory, Canada, corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations and accumulated deficit, stockholders' equity and cash flows for the
year ended December 31, 1996, and for the period from inception (February 3,
1995) through December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Seven Seas Petroleum
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the year ended December 31, 1996, and for
the period from inception (February 3, 1995) through December 31, 1995, in
conformity with generally accepted accounting principles (Note 3).
Houston, Texas
February 22, 1997
F-1
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
(In U.S. Dollars)
1996 1995
------------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 4) .......... $ 10,620,477 $ 3,365,603
Marketable securities ....................... 43,795 43,795
Accounts receivable ......................... 1,241,430 43,642
Prepaids and other .......................... -- 482
------------- -----------
11,905,702 3,453,522
OIL AND GAS INTERESTS, full-cost method:
Evaluated, net .............................. 1,611,665 --
Unevaluated, net ............................ 157,916,351 574,137
FIXED ASSETS, net of accumulated depreciation .. 74,219 63,707
ORGANIZATION COSTS, net ........................ 25,270 79,071
------------- -----------
Total assets ............. $ 171,533,207 $ 4,170,437
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .... $ 2,805,665 $ 120,305
MINORITY INTEREST .............................. 1,060,433 --
STOCKHOLDERS' EQUITY:
Share capital (Note 7)-
Authorized unlimited common shares without
par value and unlimited Class A
preferred shares without par value;
13,315,796 issued and outstanding
common shares at December 31, 1996,
12,680,463 issued and outstanding
common shares at December 31, 1995 ...... 6,781,616 6,170,117
Preferred stock subscriptions, 5,002,972
shares at December 31, 1996 ............. 45,652,120 --
Special warrant subscriptions, 14,274,171
warrants at December 31, 1996 ........... 119,548,227 --
Accumulated deficit ......................... (4,314,622) (2,119,985)
Treasury stock, 29 shares held .......... (232) --
------------- -----------
Total stockholders' equity ........... 167,667,109 4,050,132
------------- -----------
Total liabilities and
stockholders' equity ............ $ 171,533,207 $ 4,170,437
============= ===========
Approved by the Board
- ------------------------------- ---------------------------------
Director Director
Albert E. Whitehead Timothy T. Stephens
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996, AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1995
(In U.S. Dollars)
1996 1995
----------- -----------
REVENUES:
Crude oil sales ........................... $ 233,682 $ --
Interest income ........................... 341,599 152,383
----------- -----------
575,281 152,383
----------- -----------
EXPENSES:
Lease operating expenses .................. 252,504 --
General and administrative ................ 2,452,546 1,070,765
Depreciation and amortization ............. 111,334 37,671
Exploration expense (Note 5) .............. 4,910 1,122,806
Geological and geophysical ................ 10,521 9,769
Loss on sale of resource properties ....... -- 31,357
----------- -----------
2,831,815 2,272,368
----------- -----------
LOSS BEFORE INCOME TAXES ..................... (2,256,534) (2,119,985)
INCOME TAX EXPENSE (Note 6) .................. 2,338 --
----------- -----------
NET LOSS BEFORE MINORITY INTEREST ............ (2,258,872) (2,119,985)
MINORITY INTEREST ............................ 64,235 --
NET LOSS ..................................... (2,194,637) (2,119,985)
ACCUMULATED DEFICIT, beginning of period ..... (2,119,985) --
ACCUMULATED DEFICIT, end of period ........... $(4,314,622) $(2,119,985)
=========== ===========
NET LOSS PER COMMON SHARE .................... $ (0.17) $ (0.23)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996, AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1995
(In U.S. Dollars)
<TABLE>
<CAPTION>
Common Preferred Special Accumulated Treasury
Stock Stock Warrants Deficit Stock Total
---------- ----------- ------------ ----------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 3, 1995 ..................... $ -- $ -- $ -- $ -- $-- $ --
ISSUANCE OF COMMON STOCK ...................... 6,170,117 -- -- -- -- 6,170,117
NET LOSS ...................................... -- -- -- (2,119,985) -- (2,119,985)
---------- ----------- ------------ ----------- ----- -------------
BALANCE AT DECEMBER 31, 1995 .................. 6,170,117 -- -- (2,119,985) -- 4,050,132
ISSUANCE OF COMMON STOCK ...................... 611,499 -- -- -- -- 611,499
SECURITIES ISSUED IN ACQUISITION (Note 2) ..... -- 45,652,120 107,439,309 -- -- 153,091,429
ISSUANCE OF SPECIAL WARRANTS (Note 7) ......... -- -- 12,108,918 -- -- 12,108,918
PURCHASE OF TREASURY STOCK .................... -- -- -- -- (232) (232)
NET LOSS ...................................... -- -- -- (2,194,637) -- (2,194,637)
---------- ----------- ------------ ----------- ----- -------------
BALANCE AT DECEMBER 31, 1996 .................. $6,781,616 $45,652,120 $119,548,227 $(4,314,622) $(232) $ 167,667,109
========== =========== ============ =========== ===== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1995
(In U.S. Dollars)
1996 1995
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................... $ (2,194,637) $(2,119,985)
Minority interest ........................... 64,235 --
Common stock contribution to 401(k)
retirement plan ........................... 78,750 --
Exploration expense ......................... -- 1,122,806
Loss on sale of resource properties ......... -- 31,357
Depreciation and amortization ............... 111,334 37,671
Changes in assets and liabilities-
(Increase) in accounts receivable ......... (316,431) (43,642)
Decrease (increase) in prepaids and other . 482 (482)
Increase in accounts payable .............. 1,754,348 120,305
------------- -----------
(501,919) (851,970)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration of oil and gas properties ....... (5,836,266) (1,696,943)
Proceeds from acquisition ................... 630,226 --
Proceeds from sale of property .............. -- 84,336
Other asset additions ....................... (64,135) (169,821)
(5,270,175) (1,782,428)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from special warrants issued ....... 12,108,917 --
Proceeds from share capital issued .......... 532,750 6,000,001
Proceeds from additional paid-in capital
contributed ............................... 999 --
Contributions by minority interest .......... 384,534 --
Purchase of treasury stock .................. (232) --
------------- -----------
13,026,968 6,000,001
------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...... 7,254,874 3,365,603
CASH AND CASH EQUIVALENTS, beginning of period . 3,365,603 --
------------- -----------
CASH AND CASH EQUIVALENTS, end of period ....... $ 10,620,477 $ 3,365,603
============= ===========
SUPPLEMENTAL DISCLOSURES:
Common stock issued pursuant to an agency
agreement for a private placement ......... $ -- $ 250,000
Common stock issued pursuant to the
amalgamation .............................. -- 170,116
Common stock issued pursuant to the
acquisition ............................... 153,091,430 --
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
1. NATURE OF OPERATIONS:
Seven Seas Petroleum Inc. (a Yukon Territory, Canada, corporation) was formed on
February 3, 1995. Seven Seas Petroleum Inc. and its subsidiaries, Seven Seas
Petroleum Holdings Inc., Seven Seas Petroleum Argentina Inc., Seven Seas
Petroleum Australia Inc., Seven Seas Petroleum Colombia Inc., Seven Seas
Petroleum Mediterranean Inc., Seven Seas Petroleum Turkey Inc., Seven Seas
Petroleum PNG Inc., Seven Seas Petroleum U.S.A. Inc., GHK Company Colombia,
Esmeralda LLC and Cimarrona LLC, are collectively referred to herein as "Seven
Seas" or "the Company." The Company's business is to acquire, explore and
develop interests in oil and gas projects worldwide.
At December 31, 1996, the Company's unevaluated oil and gas interests were
recently acquired and are in the initial stages of evaluation and development.
Accordingly, the recoverability of such amounts is dependent upon the completion
of exploration work, the discovery of oil and gas reserves in commercial
quantities and the subsequent development, production and sales of these
reserves. Recoverability is also dependent on the Company's ability to finance
the exploration and development activities through operations or outside
financing.
2. BUSINESS COMBINATION:
On June 29, 1995, the Supreme Court of British Columbia approved an amalgamation
of Seven Seas and Rusty Lake Resources Ltd. Stockholders of Rusty Lake Resources
Ltd. were issued one common share in Seven Seas, the new company after the
amalgamation, for each 35 common shares held in Rusty Lake Resources Ltd.
Additional shares of Seven Seas were issued in settlement of certain
indebtedness of Rusty Lake Resources Ltd. This transaction has been reflected as
an acquisition by Seven Seas using the purchase method of accounting. The net
assets of Rusty Lake Resources Ltd. were recorded on the books of Seven Seas as
follows:
Marketable securities $ 3,370
Goods and services tax receivable 3,099
Resource properties 115,693
Other assets (organization costs) 87,481
Accounts payable (39,527)
Share capital (680,464 shares) (170,116)
On July 26, 1996, the Company acquired 100 percent of the outstanding stock
which represented 100 percent of the voting shares held in GHK Company Colombia
and Esmeralda LLC. Additionally, on the same date, the Company acquired 62.963
percent of the outstanding shares and voting stock in Cimarrona LLC. This
transaction has been reflected as an acquisition by Seven Seas using the
purchase method of accounting. Seven Seas issued to the stockholders in GHK
Company Colombia, Esmeralda LLC and Cimarrona LLC a combination of preferred
shares and special warrants which are exchangeable into a total of 16,777,143
common shares upon the earlier of the receipting of a prospectus qualifying the
exchange, or one year from the closing of the transaction. Of the 16,777,143
preferred shares and special warrants, 5,002,972 preferred shares were issued
for all of the common shares in GHK Company Colombia, 4,469,028 special warrants
were issued for all of the common shares in Esmeralda LLC and 7,305,143 special
warrants were issued for 62.963 percent of the common shares in Cimarrona LLC.
The remaining 37.037 percent interest in Cimarrona represents a minority
interest which is reflected as such on the balance sheet. The 16,777,143
preferred shares and special warrants were recorded based on the closing stock
price of Seven Seas on July 26, 1996, at $9.125, totaling $153,091,430. Net
assets acquired include $153,122,523 assigned to oil and
F-6
<PAGE>
-2-
gas properties (which are subject to future evaluation based on further
appraisal drilling) and other nominal net working capital, less amounts
attributable to the minority interest in Cimarrona LLC. Any income and
expenditures incurred by these three entities after July 26, 1996, are included
in the current year's statement of operations and accumulated deficit.
Of the 16,777,143 preferred shares and special warrants issued, 11,744,000 are
held subject to an escrow agreement, whereby one-third of the Securities are
released each year for three years. The Securities may be released earlier based
upon a valuation of the Seven Seas interests in the contract areas.
Collectively, the acquisition of these three companies resulted in the purchase
of an additional 36.7 percent participating interest in the Dindal and Rio Seco
Blocks in Colombia in which the Company previously held a 15 percent
participating interest. All three entities were oil and gas exploration
companies whose only material asset was the participating interest they held in
the Dindal and Rio Seco Association contracts in Colombia.
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
The Company follows accounting principles generally accepted in Canada. A
summary of the Company's significant policies is set out below.
CONSOLIDATION
These consolidated financial statements include the accounts of Seven Seas
Petroleum Inc. and its wholly owned subsidiaries named in Note 1.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include bank deposits and short-term investments
which, upon acquisition, have a maturity of three months or less.
MARKETABLE SECURITIES
Marketable securities are recorded at the lower of cost or market value.
Declines in market value below carrying value are written down through earnings.
Marketable securities include $14,700 which is restricted until June 4, 1997.
OIL AND GAS INTERESTS
The Company follows the full-cost method of accounting for oil and natural gas
operations, whereby all costs incurred for exploration and development of oil
and natural gas properties are capitalized in country-by-country cost centers.
Such costs include land acquisition costs, geological and geophysical costs,
costs of drilling both productive and nonproductive wells, related plant and
production equipment costs, carrying costs of nonproductive properties and that
portion of administration costs applicable to exploration and development
activities. Proceeds received from the disposal of properties are normally
credited against accumulated costs. No gains or losses are recognized upon the
disposition of oil and natural gas properties except under circumstances which
result in a major disposal of reserves.
The costs of acquiring and evaluating properties are initially excluded from
depletion calculations. These properties are assessed periodically to ascertain
whether impairment has occurred. When evaluated reserves are assigned or when
the property is considered impaired, the cost of the property is added to the
costs subject to depletion. Depletion is recorded on the unit-of-production
basis. If the net capitalized costs of oil and gas properties (net of recorded
deferred taxes and accumulated provision for site restoration and abandonment
costs) in a cost center exceed an amount equal to the sum of the undiscounted
estimated future
<PAGE>
-3-
net revenues from evaluated oil and gas reserves in the cost center (net of site
restoration and abandonment costs, interest, production-related general and
administrative costs) and the costs of properties not being amortized, both
adjusted for income tax effects, such excess is charged to expense.
Substantially all the Company's exploration and production activities are
conducted jointly with others, and the accounts reflect only the Company's
proportionate interest in such activities.
FOREIGN CURRENCY TRANSLATION
The Company's reporting and functional currency is U.S. dollars. Foreign
operations which generally are financially and operationally interdependent with
the parent company are accounted for using the temporal method. Monetary items
are translated using the exchange rate in effect at the balance sheet date;
nonmonetary items are translated at historical exchange rates. Revenues and
expenses are translated at the average rates in effect on the dates they occur.
No material translation gains or losses were recorded during the period.
INCOME TAXES
The deferral method of tax allocation is followed under which the income tax
provision is based on the results of operations reported in the accounts. The
difference between the income tax provision and taxes currently payable would be
reflected as deferred income taxes. For the year ended December 31, 1996, the
Company has recorded tax expense of $2,338. No deferred tax benefits have been
recognized for 1996 or 1995 because the realization of these tax benefits cannot
be reasonably assured.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided on a straight-line
basis over three to five years.
ORGANIZATION COSTS
Organization costs represent the normal cost of incorporating the Company. In
association with the amalgamation agreement with Rusty Lake Resources Ltd.,
organization costs of $87,481 were recorded to reflect the excess purchase price
of Seven Seas common shares provided to Rusty Lake Resources Ltd. stockholders
over and above the net asset value of Rusty Lake Resources Ltd. as of June 29,
1995. Organization costs are being amortized on a straight-line basis over two
years.
EARNINGS PER SHARE
Basic earnings (loss) per common share are calculated using the weighted average
number of shares outstanding during the period. Fully diluted loss per share has
not been presented as it is antidilutive.
4. CASH AND CASH EQUIVALENTS:
DECEMBER 31
------------------------
1996 1995
----------- ----------
Cash $ 170,684 $ 53,103
Short-term investments 10,449,793 3,312,500
----------- ----------
Total cash and cash equivalents $10,620,477 $3,365,603
=========== ==========
The carrying value of short-term investments approximates fair value.
<PAGE>
-4-
5. INVESTMENT IN OIL AND GAS INTERESTS:
Inception
Year Ended Through
December 31, December 31,
1996 1995
------------- -----------
Costs incurred-
Evaluated producing properties $ 802,737 $ --
Evaluated nonproducing properties 808,928 --
Unevaluated nonproducing properties 151,568,482 --
Exploration costs 5,778,642 1,696,943
------------- -----------
Total oil and gas costs incurred 158,958,789 1,696,943
Less- Exploration expense (4,910) (1,122,806)
------------- -----------
Capitalized costs $ 158,953,879 $ 574,137
============= ===========
EXPLORATION COSTS
The Company has been involved in exploration activities in Colombia, Australia,
Argentina, Turkey and Papua New Guinea and, also, the Company purchased an
option for the right to participate in future exploration activities in North
Africa, but the option was never exercised. Additionally, the Company acquired
oil and gas properties in Columbia during 1996 totaling $153,122,523 and $57,624
of exploration costs were incurred also in 1996 which were reclassified as
evaluated oil and gas interests. In the third and fourth quarters of 1996, the
Company had oil and gas sales of $233,682 which pertained solely to production
testing of two wells located in Colombia. During the period ending December 31,
1995, exploration costs incurred of $622,006 in Argentina and $500,800 for the
option in North Africa were expensed.
On May 16, 1995, the Company entered into an agreement whereby Seven Seas
purchased an option for $500,000 to acquire a 5 percent participating interest
in three exploration blocks in North Africa upon completion of the first
exploration well drilled. The first exploration well was completed as a dry hole
in July of 1995. After careful review, Seven Seas decided not to exercise its
option. The cost of the well and the option, $500,000, plus additional costs of
$800 incurred toward purchasing this option, were originally recorded as
unevaluated oil and gas interests and were subsequently expensed.
The El Catamarqueno X-1 test well on the Sur Rio Deseado Block in the San Jorge
Basin, Argentina, was determined to be unsuccessful during January of 1996. The
Company determined that further drilling on the block was not justified and,
therefore, expensed exploration interests in Argentina of $622,006.
Empresa Colombiana de Petroleos, the Colombian national oil company (Ecopetrol),
has the right to back into Seven Seas Dindal and Rio Seco Association contracts
in Colombia upon declaration of commerciality at an initial 50 percent
participating interest. Ecopetrol's interest can increase based upon accumulated
production levels. Ecopetrol will at the time of commerciality bear 50 percent
of the future costs in the field and reimburse the other parties in these two
blocks for 50 percent of previously incurred costs associated with successful
exploratory and appraisal wells.
<PAGE>
-5-
The Company had capitalized exploration costs as follows, which included
capitalized general and administrative costs of $140,628 as of December 31,
1996, and $130,866 as of December 31, 1995:
1996 1995
---------- --------
Colombia $5,876,960 $369,723
Australia 454,565 193,280
Turkey -- 4,552
Papua New Guinea 16,344 6,582
---------- --------
Total exploration costs $6,347,869 $574,137
========== ========
6. INCOME TAXES:
The income tax benefit for the year ended December 31, 1996 and 1995, is
calculated by applying Canadian federal and provincial statutory tax rates to
pretax income with adjustments as set out in the following table:
Inception
Year Ended Through
December 31, December 31,
1996 1995
----------- ---------
Expected income tax benefit at 45% $(1,015,440) $(953,993)
Benefits of losses not recognized 1,015,440 953,993
Canadian income tax expense 2,338 --
----------- ---------
Income tax expense $ 2,338 $ --
=========== =========
7. SHARE CAPITAL:
Number of
Outstanding
Common
Shares Value
---------- -----------
Shares issued to founder for cash 1,000,000 $ 1
Private placement of common shares for cash 10,666,666 6,000,000
Shares issued in settlement of agents' fees 333,333 250,000
Shares issued on conversion of notes payable 403,350 100,838
Shares issued on conversion of common shares 277,114 69,278
Less- Share issue cost -- (250,000)
---------- -----------
Balance at December 31, 1995 12,680,463 6,170,117
Shares issued to Company's 401(k) plan 10,000 78,750
Shares issued on exercise of options 625,333 532,749
---------- -----------
Balance at December 31, 1996 13,315,796 $ 6,781,616
========== ===========
The Company periodically issues incentive stock options to officers, directors
and employees of the Company, exercisable at the approximate prevailing market
prices at the time of issue. As of December 31, 1995, there were 990,000 options
for common shares outstanding to directors, officers and employees of the
Company under the 1995 stock option plan and, as of December 31, 1996, there
were 1,164,667 options for common
<PAGE>
-6-
shares outstanding. Of the outstanding options at December 31, 1996, a total of
374,667 options have an exercise price of $.75 and 390,000 options have an
exercise price of $7.125, while the remaining 400,000 options have an exercise
price of $18.75. All options vest immediately and expire between March 2000 and
November 2001.
A brokered private placement involving the issuance of 2,000,000 special
warrants at $2.75 per warrant for a net offering after commissions and expenses
of $5,095,548 was completed in Canada on March 15, 1996. Each special warrant is
convertible into one unit. Each unit consists of one share of common stock and a
one-half common share purchase warrant at $3.50 per full share. The warrants are
convertible at the earlier of (a) one year from date of issuance or (b) the date
a receipt is issued for a prospectus qualifying the conversion in the
appropriate jurisdictions (see Subsequent Events).
A brokered private placement involving the issuance of 500,000 special warrants
at $15.00 per warrant for a net offering after commissions and expenses of
$7,013,370 was completed in Canada on October 16, 1996. Each special warrant is
convertible into one unit. Each unit consists of one share of common stock and a
one-half common share purchase warrant at $18.50 per full share. The warrants
are convertible at the earlier of (a) one year from date of issuance or (b) the
date a receipt is issued for a prospectus qualifying the conversion in the
appropriate jurisdictions (see Subsequent Events).
The proceeds of the March 15 and October 16, 1996, private placements will be
used for additional drilling, seismic and production facilities on the Company's
51.7 percent participating interest in the Emerald Mountain, Colombia, oil
discovery and for further exploration activities.
See Note 2 for discussion of other securities issued.
8. COMMITMENTS AND CONTINGENCIES:
The Company is committed to make minimum payments under contracts for certain
office facilities and equipment. Amounts due under these contracts as of
December 31, 1996, are as follows: $63,799 for 1997, $54,902 for 1998, $25,138
for 1999 and none thereafter.
Two wells estimated at a total cost of $7,600,000 are required to be drilled on
the Company's Rio Seco and Dindal Blocks in Colombia by August and September
1997, respectively, to fulfill the Company's 1997 work commitment on these two
blocks. The Company will be required to pay its proportionate share of the total
cost of these two wells.
9. SUBSEQUENT EVENTS:
On March 5, 1997, the Company acquired 100 percent of the outstanding stock
which represented 100 percent of the voting shares held in Petrolinson, S.A. The
terms of the transaction were agreed to in a letter of intent dated November 22,
1996. The principal asset owned by Petrolinson, S.A., is a 6 percent
participating interest in the Dindal and Rio Seco Association contracts. As
consideration for the 6 percent interest in the Dindal and Rio Seco Association
contracts, Seven Seas issued to the sole stockholder in Petrolinson, S.A.,
1,000,000 common shares of Seven Seas Petroleum Inc. common stock. The common
shares issued to Petrolinson, S.A., will be subject to an escrow agreement, the
terms of which provide for a 120-day escrow of shares commencing from March 5,
1997. This 6 percent interest will be carried through exploration by the other
94 percent participating interest parties. This transaction will be reflected in
1997 as an acquisition by Seven Seas using the purchase method of accounting.
The 1,000,000 shares will be recorded based on the average
<PAGE>
-7-
closing stock price of Seven Seas for the period beginning 30 days prior to and
30 days subsequent to November 22, 1996, or $18.55. This represents a
transaction cost of $18,550,000. Net assets acquired include $18,537,321
assigned to oil and gas properties (which are subject to future evaluation based
on further appraisal drilling) and other nominal net working capital.
On February 6, 1997, approvals were granted by the Ontario Securities
Commission, British Columbia Securities Commission and the Alberta Securities
Commission receipting a prospectus filed to qualify 2,500,000 special warrants
as common stock pertaining to the March and October 1996 financings.
Additionally, the prospectus qualified 11,774,171 special warrants and 5,002,972
preferred shares as common stock which was issued in connection with the
acquisition of a 36.7 percent participating interest in the Dindal and Rio Seco
Association contracts in Colombia by the Company on July 26, 1996.
10. DIFFERENCES IN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES BETWEEN
CANADA AND THE UNITED STATES:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in Canada. No material
modifications would be necessary to the financial statements to comply with
generally accepted accounting principles in the United States.
11. SUPPLEMENTAL OIL AND GAS
INFORMATION (UNAUDITED):
PRODUCING PROPERTIES
Proved reserves represent estimated quantities of crude oil which geological and
engineering data demonstrate to be reasonably recoverable in the future from
known reservoirs under existing economic and operating conditions. Estimates of
proved developed oil reserves are subject to numerous uncertainties inherent in
the process of developing the estimates including the estimation of the reserve
quantities and estimated future rates of production and timing of development
expenditures. The accuracy of any reserve estimate is a function of the quantity
and quality of available data and of engineering and geological interpretation
and judgment. Results of drilling, testing and production subsequent to the date
of the estimate may justify revision of such estimate. Additionally, the
estimated volumes to be commercially recoverable may fluctuate with changes in
prices of oil. The proved reserves at December 31, 1996, are based only upon the
results of the drilling of the El Segundo No. 1 well on the Dindal Block in
Colombia.
Estimates of future recoverable oil reserves and projected future net revenues
were provided by Sproule International Limited. The Company's proved reserves
were comprised entirely of crude oil in Colombia and are stated in barrels.
Proved developed and undeveloped reserves (number of barrels at December 31,
1996):
Beginning of year --
Additions 818,000
-------
End of year 818,000
=======
Proved developed reserves at end of year 408,000
=======
The following table presents the standardized measure of discounted future net
cash flows relating to proved oil reserves. Future cash inflows and costs were
computed using prices and costs in effect at the end of the applicable year
without escalation. Crude oil prices at December 31, 1996, were $25.93 per
barrel for West Texas Intermediate as compared to the average for the year of
$22.13. Therefore, a crude price of $22.13
<PAGE>
-8-
unescalated, less a $3.00 gravity adjustment, was used in calculating the
standardized measure of discounted future net cash flows, as the December 1996
year-end price of $25.93 was not representative of current or future pricing.
Future income taxes were computed by applying the appropriate statutory income
tax rate to the pretax future net cash flows reduced by future tax deductions
and net operating loss carryforwards.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
Future cash inflows $12,520,000
Future costs-
Production 2,112,000
Development 1,939,000
-----------
Future net cash flows before income taxes 8,469,000
Future income taxes 4,027,000
-----------
Future net cash flows 4,442,000
10% discount factor 641,000
-----------
Standardized measure of discounted future net cash flows $ 3,801,000
===========
The standardized measure of discounted future net cash flows does not purport to
present the fair market value of the Company's proved reserves. An estimate of
fair value would also take into account, among other things, the recovery of
reserves in excess of evaluated reserves, anticipated future changes in prices
and costs and a discount factor more representative of the time value of money
and the risks inherent in reserve estimates.
EXHIBIT 3(A)
AMALGAMATION AGREEMENT
THIS AMALGAMATION AGREEMENT dated as of May 5, 1995.
BETWEEN:
RUSTY LAKE RESOURCES LTD., a
corporation incorporated under the laws of
Ontario
("Rusty Lake")
-and-
SEVEN SEAS PETROLEUM INC., a
corporation incorporated under the laws of
British Columbia
("Seven Seas")
WHEREAS Rusty Lake and Seven Seas have agreed to complete an amalgamation
under the British Columbia Company Act whereby they will amalgamate and continue
under the name "Seven Seas Petroleum Inc.";
AND WHEREAS upon the amalgamation being effective, shares of each of the
Amalgamating Corporations (as defined below) will be exchanged for shares of
Amalco;
NOW THEREFORE THIS AGREEMENT WITNESSETH AS FOLLOWS: ARTICLE ONE
Definitions
1.1 In this Agreement:
"Affiliate" has the meaning ascribed thereto in the Securities Act
(Ontario);
<PAGE>
"Agreement" means this Amalgamation Agreement;
"Amalco" means the continuing corporation constituted upon the Amalgamation
becoming effective;
"Amalco Shares" means the common shares without nominal or par value in the
capital of Amalco;
"Amalgamating Corporations" means Rusty Lake and Seven Seas;
"Amalgamation" means the amalgamation of Rusty Lake and Seven Seas pursuant
to the British Columbia Act as contemplated by this Agreement;
"British Columbia Act" means the Company Act (British Columbia);
"Business Day" means a day on which securities may be traded on the
Canadian Dealing Network;
"Continuance" means the continuance of Rusty Lake pursuant to the British
Columbia Act, as contemplated by this Agreement;
"Dissenting Shareholders" means holders of Rusty Lake Shares or Seven Seas
Shares who exercise rights of dissent under the Ontario Act or the British
Columbia Act, respectively, with respect to the Continuance or
Amalgamation, as the case may be;
"Effective Date" means the effective date set forth in the Certificate of
Amalgamation issued pursuant to the British Colombia Act with respect to
the Amalgamation;
"Joint Special Meeting of Shareholders" means the joint special meeting of
the shareholders of Rusty Lake and Seven Seas to be held for the purpose of
considering a special resolution relating to the Amalgamation and related
matters, including the Continuance in the case of the shareholders of Rusty
Lake;
"Ontario Act" means the Business Corporations Act (Ontario);
"Proxy Statement" means a joint management information circular which will
accompany the notices of shareholders meetings of Rusty Lake and Seven Seas
called, among other things, to approve and adopt this Agreement;
"Rusty Lake Shares" means the common shares without nominal or par value in
the capital of Rusty Lake as constituted on the date hereof;
-2-
<PAGE>
"Seven Seas Shares" means the common shares without nominal or par value in
the capital of Seven Seas as constituted on the date hereof;
"Transfer Agent" means the transfer agent for the Amalco Shares.
1.2 Unless the context otherwise requires, words and phrases used herein that
are defined in the Ontario Act and the British Columbia Act shall have the same
respective meaning herein as in such Act, and in the event of a conflict, the
British Columbia shall govern.
ARTICLE TWO
Representations and Warranties
2.1 Rusty Lake represents and warrants to and agrees with Seven Seas that:
(a) Rusty Lake is a corporation duly incorporated and organized and
validly subsisting and in good standing under the Ontario Act and has
the corporate power and authority to own or lease its assets as now
owned or leased and to carry on its business as now carried on and
holds all necessary federal, provincial and municipal governmental
licenses, permits and authorizations in connections therewith;
(b) the authorized capital of Rusty Lake consists of an unlimited number
of common shares of which 9,698,984 Rusty Lake Shares are validly
issued and outstanding at the date hereof as fully paid and
non-assessable shares;
(c) Rusty Lake has the corporate power and authority to enter into this
Agreement;
(d) no person, firm or corporation has any agreement, warrant or option,
or any right capable of becoming an agreement, warrant or option, for
the purchase of any unissued shares in the capital of Rusty Lake;
(e) the audited financial statements of Rusty Lake for the twelve months
ended December 31, 1994 and 1993 and the unaudited financial
statements for the three months ended March 31, 1995, together with
the notes thereto (collectively, the Rusty Lake Statements), present
fairly the financial position of Rusty Lake and have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis;
(f) there have been no changes since March 31, 1995 in the condition,
financial or otherwise, or in the results of operations of Rusty Lake
as shown on or
-3-
<PAGE>
reflected in the Rusty Lake Statements which have had or may
reasonably be expected to have a materially adverse effect on the
business, prospects, property, financial condition or results of
operations of Rusty Lake taken as a whole, except as disclosed in the
Proxy Statement;
(g) none of the execution and delivery of this Agreement, the consummation
of the Amalgamation and the fulfillment of and compliance with the
terms and provisions hereof will (i) result in or constitute a default
under, the articles or by-laws of Rusty Lake or any agreement to which
Rusty Lake is a party or any Rusty Lake assets are bound, (ii)
constitute an event which would permit any party to any agreement with
Rusty Lake to terminate such agreement or to accelerate the maturity
of any indebtedness of Rusty Lake or other obligation of Rusty Lake,
or (iii) result in the creation of imposition of any encumbrance upon
the Rusty Lake Shares or any assets of Rusty Lake;
(h) there is no legal, arbitrable, governmental or other action,
proceeding or investigation pending or threatened against or otherwise
affecting Rusty Lake or any of its assets and, to the best of its
knowledge, Rusty Lake is not aware of any event or events which have
occurred that could give rise to any such action, proceeding or
investigation, except as disclosed in the Proxy Statement;
(i) Rusty Lake has not declared or paid any dividend or otherwise made any
distribution of any kind to shareholders and Rusty Lake has not
disposed of or entered into any agreement to dispose of any of its
assets or incurred indebtedness;
(j) Rusty Lake is in compliance with all applicable governmental laws,
by-laws, regulations and orders relevant to Rusty Lake's corporate
existence, operations or properties;
(k) Rusty Lake is a "reporting issuer" as defined in the securities
legislation of Ontario, and is not in default of any filings required
to be made pursuant thereto or the regulations made thereunder;
(l) the Rusty Lake Shares are quoted for trading on the Canadian Dealing
Network;
(m) the information in the Proxy Statement relating to Rusty Lake will be
true, correct and complete in all material respects and will not
contain any untrue statement of any material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading in light of the
circumstances in which they were made;
-4-
<PAGE>
(n) there is no indebtedness of Rusty Lake which is not disclosed or
reflected in the Rusty Lake Statements;
(o) Rusty Lake has no employment, consulting or management contracts or
commitments with any party which cannot be terminated without cause
upon giving 30 days written notice;
(p) Rusty Lake has not guaranteed or agreed to guarantee any indebtedness
or other obligation of any third party; and
(q) all tax returns and reports of Rusty Lake required by law to be filed
to the date hereof have been filed and are true, complete and correct
and all taxes required to be paid have been paid.
2.2 Seven Seas represents and warrants to and agrees with Rusty Lake that:
(a) Seven Seas is a corporation duly incorporated and organized and
validly subsisting under the British Columbia Act and has the
corporate power and authority to own or lease its assets as now owned
or leased and to carry on its business as now carried on and holds all
necessary federal, provincial and municipal governmental licenses,
permits and authorizations in connection therewith;
(b) the authorized capital of Seven Seas consists of an authorized capital
of 100,000,000 Seven Seas Shares and 10,000,000 preferred shares
issuable in series of which 5,000,000 Seven Seas Shares are validly
issued and outstanding at the date hereof as fully paid and
non-assessable shares, no preferred shares are issued and outstanding
and a total of 8,288,349 Seven Seas Shares subject to issuance
pursuant to a pending private placement (6,999,999 Seven Seas Shares),
a pending settlement of Rusty Lake debt and outstanding management
incentive options (885,000 Seven Seas Shares);
(c) Seven Seas has the corporate power and authority to enter into this
Agreement;
(d) no persons, firm or corporation has any agreement warrant or option,
or any right capable of becoming an agreement, warrant or option, for
the purchase of any unissued shares in the capital of Seven Seas
except as disclosed herein;
(e) the audited financial statements for the period ended March 31, 1995,
together with the notes thereto (collectively the "Seven Seas
Statements"), present fairly the financial position of Seven Seas and
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis;
-5-
<PAGE>
(f) there have been no changes since March 31, 1995 in the condition,
financial or otherwise, or int he results of the operations of Seven
Seas as shown on or reflected in the Seven Seas Statements which have
had or may reasonably be expected to have a materially adverse effect
on the business, prospects, property, financial condition or results
of operations of Seven Seas taken as a whole, except as disclosed in
the Proxy Statement;
(g) none of the execution and delivery of this Agreement, the consummation
of the Amalgamation and the fulfillment of or compliance with the
terms and provisions hereof will (i) result in or constitute a breach
of any term or provision of, or constitute a default under, the
articles or by-laws of Seven Seas or any agreement to which Seven Seas
is a party or any of Seven Seas's assets are bound, (ii) constitute an
event which would permit any party to any agreement with Seven Seas to
terminate such agreement or to accelerate the maturity of any
indebtedness of Seven Seas or other obligation of Seven Seas, or (iii)
result in the creation or imposition of any encumbrance upon Seven
Seas's Shares or any assets of Seven Seas.
(h) there is no legal, arbitrable, governmental or other action,
proceeding or investigation pending or threatened against or otherwise
affecting Seven Seas or any of its assets and to the best of its
knowledge, Seven Seas is not aware of any event or events which have
occurred that could give rise to any such action, proceeding or
investigation, except as disclosed in the Proxy Statement;
(i) except as disclosed in the Proxy Statement, Seven Seas has not
declared or paid any dividends or otherwise made any distribution of
any kind or nature to any of its shareholders and Seven Seas has not
disposed of or entered in any agreement to dispose of any of its
assets or incur indebtedness;
(j) Seven Seas is in compliance with all applicable governmental laws,
by-laws, regulations and order relevant to Seven Seas's corporate
existence, operations or properties;
(k) the information in the Proxy Statement relating to Seven Seas will be
true, correct and complete in all material respects and will not
contain any untrue statement of any material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading in light of the
circumstances in which they were made.
-6-
<PAGE>
ARTICLE THREE
Conditions Precedent
3.1 Subject to section 3.2 hereof, this Agreement shall have no force and
effect whatsoever and shall be null and void unless:
(a) the shareholders of Rusty Lake shall have approved the Continuance of
Rusty Lake to the British Columbia Act and Rusty Lake shall have
effected the Continuance;
(b) the shareholders of each of Rusty Lake and Seven Seas shall have
approved this Agreement as required by the British Columbia Act;
(c) the Agreement shall have been approved by order of the Supreme Court
of British Columbia;
(d) the shares of Amalco shall be accepted for quotation on the Canadian
Dealing Network;
(e) the private placement of Seven Seas Shares and the settlement of Rusty
Lake debt in exchange for Seven Seas Shares shall have been completed
on the terms as described in the Proxy Statement;
(f) Rusty Lake or Seven Seas shall not have received prior to the
Effective Date written objections to the Continuance or Amalgamation,
as the case may be pursuant to the dissent rights provided in the
Ontario Act or British Columbia Act from the holders of that number of
Rusty Lake Shares or Seven Seas Shares (excluding objections which
have been withdrawn) which in the opinion of the directors of Rusty
Lake or Seven Seas is material to the transactions; and
(g) all representations and warranties of Rusty Lake and Seven Seas
contained herein are true and correct on the Effective Date.
3.2 If any condition set out in section 3.1 (other than 3.1(a) or (b)) shall
not be fulfilled or performed, the party entitled to the benefit of such
condition shall be entitled to terminate this Agreement or to waive the
condition.
-7-
<PAGE>
ARTICLE FOUR
Covenants
4.1 Each party hereto agrees with the other that it will not prior to or on the
Effective Date; (i) allot or issue any shares of its capital or enter into any
agreement except this Agreement providing for either certainly or contingently
or contemplating the issue of shares of its capital, except the issue of shares
pursuant to options or other rights disclosed herein; (ii) declare dividends;
(iii) sell all or any part of its assets, or otherwise enter into any
transactions or negotiations which could reasonably be expected to interfere
with or be inconsistent with the consummation of the Amalgamation; (iv) amend
its constating documents; or (v) incur any further liabilities out of the
ordinary course of business.
ARTICLE FIVE
Amalgamation
5.1 The Amalgamating Corporations hereby agree to amalgamate pursuant to the
provisions of the British Columbia Act and to continue as one corporation on the
terms and conditions set for in this Agreement.
5.2 Each of Rusty Lake and Seven Seas shall call and hold a meeting of
shareholders in accordance with the Ontario Act and the British Columbia Act,
respectively, and applicable securities laws for the purpose of approving this
Agreement and the Continuance as required by the Ontario Act and the British
Columbia Act.
5.3 On the Effective Date, the amalgamation of the Amalgamating Corporations
and their continuance as one corporation shall become effective; the property of
each Amalgamating Corporation shall continue to be the property of Amalco;
Amalco shall continue to be liable for the obligations of each Amalgamating
Corporation; any existing cause of action, claim or liability to prosecution
shall be unaffected; any civil, criminal or administrative action or proceeding
pending by or against an Amalgamating Corporation may be continued to be
prosecuted by or against Amalco; any conviction against, or ruling under a
judgment in favor of or against, an Amalgamating Corporation may be enforced by
or against Amalco; and the Articles of Amendment with respect to the
Amalgamation shall be deemed to be the Articles of Incorporation of Amalco.
ARTICLE SIX
Amalco
6.1 The name of Amalco shall be SEVEN SEAS PETROLEUM INC.
-8-
<PAGE>
6.2 There shall be no restriction on the business which Amalco is authorized to
carry on.
6.3 The registered office of Amalco shall be in the City of Vancouver in the
Province of British Columbia. Until changed by the board of directors, the
address of the registered office of Amalco in the City of Vancouver shall be 885
West Georgia Street, Suite 800, Vancouver, British Columbia, V6C 3H1.
6.4 Amalco shall be authorized to issue 100,000,000 common shares without par
value, herein defined as "Amalco Shares", and 10,000,000 preferred shares
without par value, issuable in one or more series.
6.5 The rights, privileges, restrictions and conditions attaching to the Amalco
Shares as a class are as follows:
(a) one vote for each Amalco Share held at all meetings of shareholders of
Amalco, other than meetings at which the holders of another specified
class or series of shares are entitled to vote separately as a class
or series;
(b) receive any dividend declared by the board of directors of Amalco in
respect of the Amalco Shares; and
(c) subject to the prior rights of the holders of any class of shares
ranking senior to the Amalco Shares, to receive the remaining property
of Amalco in the event of the liquidation, dissolution or winding-up
of Amalco, whether voluntarily or involuntarily, or any other
distribution of the assets of Amalco among its shareholders for the
purpose of winding-up its affairs.
6.6 The rights, privileges, restrictions and conditions attacking to a
particular series of the preferred shares of Amalco shall be as specified by the
directors of Amalco in the resolution authorized the creation of such series of
shares.
6.7 There shall be no restrictions on the issue, transfer or ownership of
shares in the capital of Amalco.
6.8 The board of directors of Amalco shall, until otherwise changed in
accordance with the Act, consist of a minimum of three and a maximum of twenty
directors, the number of which shall be fixed from time to time by the
directors.
-9-
<PAGE>
6.9 On the Effective Date, the number of directors shall be seven. The first
directors of Amalco shall be the persons whose names and addresses appear below:
NAME AND ADDRESS RESIDENCY
PROPOSED OFFICE (IF ANY) ------- ---------
- ------------------------
Albert E. Whitehead 9 E. 4th Street United States
Suite 305
Tulsa, OK
74103-5109
George H. Plewes 1650-701 West Georgia St. Canada
Vancouver, B.C.
V7Y 1C6
William G. McIntosh 38 - 5880 Hampton Place Canada
Vancouver, B.C.
V6T 2E9
Harvey S. Robinson 361 Poplar Ave. Canada
Qualicum Beach, B.C.
V9K 1J7
James A. Millard 700 Gulf Canada Square Canada
401-9th Ave. S.W.
Calgary, Alberta
T2P 2M2
John B. Zaozirny, Q.C. 1906-1200 6th St. S.W. Canada
Calgary, Alberta
T2R 1H3
Timothy T. Stephens 3067 Reba Drive United States
Houston, Texas
77109
6.10 The memorandum and articles of Amalco shall be as set out in Schedules I
and II respectively and approved in writing under the provisions of the British
Columbia Act.
6.11 Without limiting the borrowing powers of Amalco as set forth in the Act,
as amended from time to time, Amalco may, from time to time, with or without the
authority of any articles or the authorization of the shareholders:
(a) borrow money upon the credit of Amalco including by way of overdraft;
(b) issue, reissue, sell or pledge bonds, debentures, notes or other
evidences of indebtedness or guarantees of Amalco whether secured or
unsecured;
(c) charge, mortgage, hypothecate, pledge or otherwise create a security
interest in the undertaking or in all or any currently owned or
subsequently acquired real or personal, movable or immovable property
of Amalco, including book
-10-
<PAGE>
debts, rights, powers and franchises, to secure any such bonds,
debentures, notes or other evidences of indebtedness or guarantees or
any other present or future indebtedness or liability of Amalco.
6.12 The Auditors of Amalco shall be Arthur Andersen, 2300 - 1055 W. Hastings
Street, Vancouver, British Columbia, V6E 2J2 and the directors of Amalco may
from time to time fix the renumeration of the auditors.
6.13 The Registrar and Transfer Agent of Amalco shall be Montreal Trust Company
of Canada at either its offices in Vancouver (510 Burrard Street, Vancouver,
British Columbia, V6C 2O9) or Toronto (151 Front Street West, 8th Floor,
Toronto, Ontario, M5J 2N1).
6.14 The fiscal year end of Amalco will be December 31.
6.15 The first annual general meeting of Amalco will be conducted in the month
of June, 1996.
ARTICLE SEVEN
Exchange of Shares
7.1 Subject to section 8.1, the shares in the capital of Rusty Lake and Seven
Seas which are issued and outstanding immediately prior to the Effective Date
shall, on and from the Effective Date, be converted into issued and outstanding
shares in the capital of Amalco as follows:
(a) each thirty-five issued and outstanding Rusty Lake Shares shall be
converted into one issued and fully paid Amalco Share; and
(b) each and outstanding Seven Seas shall be converted into one issued and
fully-paid Amalco Share.
In accordance with the terms of the management incentive options be issued
by Rusty Lake, upon the Amalgamation becoming effective such management
incentive options will become options to purchase Amalco Shares upon the same
terms and subject to appropriate adjustments.
-11-
<PAGE>
ARTICLE EIGHT
Fractional Shares
8.1 Fractional Amalco Shares will not be issued. A holder of Rusty Lake Shares,
or Seven Seas Shares who would otherwise be entitled to receive a fraction of an
Amalco Share shall be issued a whole Amalco Share.
ARTICLE NINE
Dissenting Shareholders
9.1 Dissenting Shareholders who:
(a) ultimately are entitled to be paid fair value for their Rusty Lake
Shares or Seven Seas shall be deemed to have had their Rusty Lake
Shares or Seven Seas Shares, as the case may be, cancelled on the
Effective Date and Amalco shall not be required to recognize such
holders as shareholders of Amalco from and after the Effective Date
and the names of such holders shall be deleted from the register of
holders of Amalco Shares from and after the Effective Date; and
(b) ultimately are not entitled to be paid fair value, for any reason, for
their Rusty Lake Shares or Seven Seas Shares, shall be deemed to have
had their Rusty Lake Shares or Seven Seas Shares cancelled on the
Effective Date, shall be deemed to have been issued Amalco Shares for
their shares on the Effective Date as provided in section 7.1 hereof;
ARTICLE TEN
Special Meetings of Shareholders of Rusty Lake and Seven Seas
10.1 Rusty Lake and Seven Seas agree to use their best efforts to cause the
Rusty Lake shareholders and Seven Seas shareholders, respectively, to vote in
favor of the special resolution pertaining to the Amalgamation at the Joint
Special Meeting of Shareholders.
-12-
<PAGE>
ARTICLE ELEVEN
Court Approval
11.1 After this Agreement has been approved in accordance with the Ontario Act
and British Columbia Act, and all other terms and conditions contained in
section 3.1 hereof have been fulfilled or waived pursuant to section 3.2 hereof,
the Amalgamating Corporations shall, within the time prescribed under the
British Columbia Act, jointly apply to the Supreme Court of British Columbia for
an order approving the Amalgamation.
ARTICLE TWELVE
General
12.1 This Agreement shall be governed by and construed in accordance with the
laws of the province of British Columbia and the federal laws of Canada
applicable herein.
12.2 Rusty Lake shall be responsible for all reasonable costs and expenses
incurred in connection with the preparation of this Agreement and the
consummation of the transactions contemplated hereby.
IN WITNESS WHEREOF this Agreement has been executed by the parties
hereto.
Rusty Lake Resources Ltd.
by:
by:
Seven Seas Petroleum Inc.
by:
by:
-13-
EXHIBIT 3(B)
CERTIFICATE OF CONTINUANCE
SEVEN SEAS PETROLEUM INC.
I hereby certify that the above-mentioned corporation was continued
into Yukon, as set out in the attached Articles of Continuance,
under section 190 of the Business Corporation Act.
Corporate Access Number:25327 M. Richard Roberts
Date of Continuance:1996-08-12 Registrar of Corporations
<PAGE>
YUKON
JUSTICE
BUSINESS CORPORATIONS ACT
(Section 190)
Form 3-01
ARTICLES OF CONTINUANCE
- --------------------------------------------------------------------------------
1. Name of Corporation:
SEVEN SEAS PETROLEUM INC.
- --------------------------------------------------------------------------------
2. The classes and any maximum number of shares that the Corporation is
authorized to issue:
See attached Schedule A
- --------------------------------------------------------------------------------
3. Restrictions, if any, on share transfers:
N/A
- --------------------------------------------------------------------------------
4. Number (or minimum or maximum number) of Directors:
Minimum three and maximum of fifteen. The number of directors shall be
determined by resolution of the board of directors and set out in the
notice calling the meeting of shareholders provided that the number of
directors may not be less than the minimum number nore more than the
maximum number of directors set out in the articles.
- --------------------------------------------------------------------------------
5. Restrictions if any on businesses the Corporation may carry on:
The Corporation is restricted from carrying on the business of a railway,
steamship, air transport, canal, telegraph, telephone or irrigation
company.
- --------------------------------------------------------------------------------
6. If change of name effected, previous name:
N/A
- --------------------------------------------------------------------------------
7. Details of Incorporation:
British Columbia, June 29, 1995, Incorporation No. 499793
- --------------------------------------------------------------------------------
8. Other provisions if any:
(a) Shareholders meetings may be held in Vancouver, British Columbia;
Calgary, Alberta; Toronto, Ontario; or Houston, Texas
(b) The directors may, between annual general meetings, appoint one or
more additional directors of the Corporation, to serve until the
next annual general meeting, but the number of additional directors
shall not at any time exceed one-third of the number of directors
who held office at the expiration of the last annual general meeting
of the Corporation.
- --------------------------------------------------------------------------------
9. Date Signature Title
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE "A"
TO THE ARTICLES OF AMENDMENT OF
SEVEN SEAS PETROLEUM, INC.
The Corporation is authorized to issue an unlimited number of shares and the
authorized capital of the Corporation is to be divided into common shares and
Class A Preferred shares which shall have the following rights and conditions:
COMMON SHARES
The holders of the common shares shall be entitled:
(a) To vote at all meetings of shareholders of the Corporation except meetings
at which only holders of a specified class of shares are entitled to vote;
(b) To receive, subject to the rights of the holders of another class of shares,
any dividend declared by the Corporation; and
(c) To receive, subject to the rights of the holders of another class of shares,
the remaining property of the Corporation on the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
CLASS A PREFERRED SHARES ISSUABLE IN SERIES
The Class A Preferred Shares of the Corporation shall have the rights and
shall be subject to the restrictions, conditions and limitations as follows:
(a) The Corporation may issue Class A Preferred Shares in one or more series;
(b) The directors may by resolution authorize Articles of Amendment of the
Corporation fixing the number of shares in, and determining the designation of
the shares of, each series of Class A Preferred Shares;
(c) The directors may by resolution authorize Articles of Amendment of the
Corporation creating, defining and attaching special rights and restrictions to
the shares of each series.
CLASS A PREFERRED SHARES - SERIES 1
The first series of Class A Preferred shares of the Corporation shall
consist of an unlimited number of shares and shall be designated as the Class A
Preferred Shares - Series 1
<PAGE>
(the "Class A Preferred Shares - Series 1"). The rights, privileges,
restrictions and conditions attaching to the Class A Preferred Shares - Series 1
are as follows:
(a) each Class A Preferred Share Series 1 shall entitled the holder thereof
to receive notice of, to attend and to vote at general meetings of the
members of the Company on the basis of one vote per share held;
(b) subject to Article 23.2(e) below, each Class A Preferred Share Series 1
shall be convertible, at the option of the holder thereof, into common
shares of the Company (the "Common Shares") on the basis of one Common
Share for each Class A Preferred Share Series 1 held at any time and
from time to time after the date of issuance of such share and up to
5:00 o'clock in the afternoon, Vancouver time, on the earlier of:
(i) the fifth business day after the day on which a receipt is issued
for a final prospectus qualifying the conversion of Class A
Preferred Shares Series 1 into Common Shares by the last of the
securities commissions of British Colombia, Ontario and Alberta to
issue such a receipt; or
(ii) one year from the date of issuance of such Class A Preferred Shares
Series 1;
(the "Deemed Conversion Date");
(c) subject to Article 23.2(e) below, each outstanding Class A Preferred
Share Series 1 shall be automatically converted into one Common
Share immediately prior to 5:00 o'clock in the afternoon, Vancouver
time, on the Deemed Conversation Date;
(d) Before any holder of Class "A" Preferred Shares Series 1 shall be
entitled to convert the same into Common Shares, such holder shall
surrender the certificate or certificates therefor, duly endorsed,
at the Registered Office of the Company and shall give written
notice to the Company at its Registered Office of the election to
convert the same and shall state therein the name or names in which
the certificate or certificates for Common Shares are to be issued.
The Company shall, as soon as practicable thereafter, issue and
deliver to such holder of Class A Preferred Shares Series 1, or to
the nominee or nominees or such holder, a certificate or
certificates for the number of Common Shares to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to 5:00 o'clock in the afternoon,
Vancouver time, on the date of such surrender of Class A Preferred
Shares Series 1 to be converted, and the person or persons entitled
to receive Common Shares issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such
Common Shares as of such date;
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(e) The number of Common Shares into which the Class A Preferred Shares
Series 1 shall convert shall be subject to adjustment from time to
time as follows:
(i) if and whenever at any time from the date hereof and prior to
5:00 o'clock in the afternoon, Vancouver time, on the Deemed
Conversion Date, the Company shall:
A. subdivide, redivide or change its outstanding Common Shares
into a greater number of shares;
B. reduce, combine or consolidate its outstanding Common Shares
into a smaller number of shares, or
C. issue Common Shares or securities exchangeable or
convertible to Common Shares ("Convertible Securities") to
the holders of all or substantially all of the outstanding
Common Shares by way of a stock dividend or other
distribution;
the number of Common Shares into which a Class A Preferred Share
Series 1 shall convert shall each be adjusted immediately after
the effective date of the events referred to in A. and B. above
or the record date for the issue of the Common Shares or the
Convertible Securities referred to in C. above by multiplying
the number of Common Shares theretofore obtainable on the
conversion of the Class A Preferred Shares Series 1 by a
fraction of which the numerator shall be the total number of
Common Shares outstanding immediately after such date or, in the
case of the issue of convertible securities the total number of
Common Shares outstanding immediately after such date plus the
total number of Common Shares issuable upon conversion or
exchange of such convertible securities and the denominator
shall be the total number of Common Shares outstanding
immediately prior to such date. Such adjustment shall be made
successively whenever any event referred to in this subsection
shall occur and any issue of Common Shares or convertible
securities by way of a stock dividend is deemed to have occurred
on the record date for such dividend for the purpose of
calculating the number of outstanding Common Shares under this
subsection;
(ii) if and whenever at any time from the date hereof and prior to
5:00 o'clock in the afternoon, Vancouver time, on the Deemed
Conversion Date, there is a reclassification or redesignation of
the Common Shares or a capital reorganization of the Company
other than as described in Article 23.2(e)(i) or a
consolidation, arrangement, amalgamation or merger of the
Company with or into any other body corporate, trust,
partnership or other entity, or a sale or conveyance of the
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<PAGE>
property and assets of the Company as an entirety or
substantially as an entirety to any other body corporate, trust,
partnership or other entity, any holder of Class A Preferred
Shares Series 1 who has not exercised his right of conversion
prior to the effective date of such reclassification,
redesignation, capital reorganization, consolidation,
arrangement, amalgamation, merger, sale or conveyance, upon the
exercise of such right thereafter, shall be entitled to receive
and shall accept, in lieu of the number of Common Shares then
sought to be acquired by him, the number of shares or other
securities or property of the Company or of the body corporate,
trust, partnership or other entity resulting from such merger,
amalgamation, arrangement, or consolidation, or to which such
sale or conveyance may be made, as the case may be, that such
shareholder would have been entitled to receive on such
reclassification, redesignation, capital reorganization,
consolidation, arrangement, amalgamation, merger, sale or
conveyance, if, on the record date or the effective date
thereof, as the case may be, such holder of the Class A
Preferred Shares Series 1 had been the registered holder of the
number of Common Shares receivable upon the conversion of Class
A Preferred Shares Series 1 then held. If determined appropriate
by the Company to give effect to or to evidence the provisions
of this subsection, the Company, its successor, or such
purchasing body corporate, partnership, trust or other entity,
as the case may be, shall, prior to or contemporaneously with
any such reclassification, redesignation, capital
reorganization, consolidation, amalgamation, arrangement,
merger, sale or conveyance, enter into an agreement which shall
provide, to the extent possible, for the application of the
provisions set forth in these Articles with respect to the
rights and interests thereafter of the holders of the Class A
Preferred Shares Series 1 to the end that the provisions set
forth in these Articles shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, with respect to any
shares, other securities or property to which a holder of the
Class A Preferred Series 1 is entitled on the exercise of his
conversion rights thereafter. Any agreement entered into between
the Company, any successor to the Company or such purchasing
body corporate, partnership, trust or other entity and the
holders of the Class A Preferred Shares Series 1 shall provide
for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Article 23.2 and
which shall apply to successive reclassifications,
redesignations, capital reorganizations, consolidations,
arrangements, amalgamations, mergers, sales or conveyances;
(iii) in any case in which this Article 23.2 shall require that an
adjustment shall become effective immediately after a record
date for an event referred to herein, the Company may defer,
until the occurrence of such
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<PAGE>
event, issuing to the holder of any Class A Preferred Share
Series 1 converted after such record date and before the
occurrence of such event the additional Common Shares issuable
upon such conversion by reason of the adjustment required by
such event before giving effect to such adjustment; provided,
however, that the Company shall deliver to such shareholder an
appropriate instrument evidencing such shareholder's right to
receive such additional Common Shares upon the occurrence of the
event requiring such adjustment and the right to receive any
distributions made on such additional Common Shares which may be
acquired upon the conversion of Class A Preferred Shares Series
1 declared in favor of holders of record of Common Shares on and
after the date of conversion or such later date as such
shareholder would, but for the provisions of this subsection
(iii), have become the holder of record of such additional
Common Shares pursuant to this Article 23.2;
(iv) the adjustments provided for in this Article 23.2(e) in the
number of Common Shares and classes of securities which are to
be received on the conversion of Class A Preferred Shares Series
1, are cumulative. After any adjustment pursuant to this Article
23.2(e), the term "Common Shares" where used in this Article
23.2 shall be interpreted to mean securities of any class or
classes which, as a result of such adjustment and all prior
adjustments pursuant to this Article 23.2(e), a holder of Class
A Preferred Shares Series 1 is entitled to receive upon the
exercise of his Class A Preferred Shares Series 1, and the
number of Common Shares indicated by any conversion made
pursuant to a Class A Preferred Share Series 1 shall be
interpreted to mean the number of Common Shares or other
property or securities a holder of Class A Preferred Shares
Series 1 is entitled to receive, as a result of such adjustment
and all prior adjustments pursuant to this Article 23.2(e), upon
the full exercise of a Class A Preferred Share Series 1;
(v) in the event of any question arising with respect to the
adjustments provided for in this Article 23.2(e) such question
shall be conclusively determined by the Company's auditors who
shall have access to all necessary records of the Company, and
such determination shall be binding upon the Company, all
holders of Class A Preferred Shares Series 1 and all other
persons interested therein;
(vi) as a condition precedent to the taking of any action which
would require an adjustment in the conversion right attaching to
the Class A Preferred Shares Series 1, the Company shall take
any corporate action which may, in the opinion of counsel, be
necessary in order that the Company has unissued and reserved in
its authorized capital and may validly and legally issue as
fully paid and non-assessable all the shares which the holders
of
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<PAGE>
such Class A Preferred Shares Series 1 are entitled to receive
on the full conversion thereof in accordance with the provisions
hereof;
(vii) if and whenever at anytime prior to 5:00 o'clock in the
afternoon, Vancouver time, on the Demand Conversion Date, the
Company shall take any action affecting or relating to the
Common Shares, other than any action described in this Article,
which in the opinion of the directors would prejudicially affect
the rights of any holders of Class A Preferred Shares Series 1,
the conversion rights in effect on any date attaching to the
Class A Preferred Shares Series 1 will be adjusted by the
directors in such manner, if any, and at such time, as the
directors may, in their sole discretion, determine to be
equitable in the circumstances to such holders of Class A
Preferred Shares Series 1;
(viii) all shares of any class, other securities which a holder of
Class A Preferred Shares Series 1 is at the time in question
entitled to receive on the conversion of Class A Preferred
Shares Series 1, whether or not as a result of adjustments made
pursuant to this Article 23.2(e), shall for the interpretation
of this Article 23.2, be deemed to be shares and other
securities which such holder of Class A Preferred Shares Series
1 is entitled to acquire pursuant to the Class A Preferred
Shares Series 1;
(ix) the Company shall from time to time immediately after the
occurrence of an event which requires an adjustment or
readjustment as provided in this Article 23.2(e) deliver a
certificate of the Company to the holders of the Class A
Preferred Shares Series 1 specifying the nature of the event
requiring the same and the amount of the adjustment necessitated
thereby and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based,
which certificate and the amount of adjustment specified therein
shall be verified by the holders of the Class A Preferred Shares
Series 1;
(f) no dividends shall be declared or payable on the Class A Preferred
Shares Series 1;
(g) the Class A Preferred Shares Series 1 shall not, in the event of
liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, entitle the holders thereof to participate
in the distribution of the assets of the Company pursuant to the
liquidation, dissolution or winding up; and
(h) in the event that any Class A Preferred Shares Series 1 are
converted pursuant to this Article 23.2, the shares so converted
shall be cancelled and may not be reissued by the Company.
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EXHIBIT (3)(C)
BY-LAWS NO. 1
A By-Law relating generally to the transaction of the business
and affairs of
SEVEN SEAS PETROLEUM INC.
CONTENTS
ONE INTERPRETATION
TWO BUSINESS OF THE CORPORATION
THREE BORROWING AND SECURITY
FOUR DIRECTORS
FIVE COMMITTEES
SIX OFFICERS
SEVEN CONFLICT OF INTEREST AND PROTECTION OF
DIRECTORS, OFFICERS AND OTHERS
EIGHT SHARES
NINE DIVIDENDS AND RIGHTS
TEN MEETINGS OF SHAREHOLDERS
ELEVEN DIVISIONS AND DEPARTMENTS
TWELVE INFORMATION AVAILABLE TO SHAREHOLDERS
THIRTEEN NOTICES
FOURTEEN EFFECTIVE DATE AND REPEAL
<PAGE>
BE IT ENACTED AND IT IS HEREBY ENACTED as a by-law of
SEVEN SEAS PETROLEUM INC.
(hereinafter called the "Corporation") as follows:
1.01 DEFINITIONS
In the by-laws of the Corporation, unless the context otherwise
requires:
"Act" means the BUSINESS CORPORATIONS ACT of the Yukon Territory and
any statute that may be substituted therefor, as from time to time
amended;
"appoint" includes "elect" and visa versa;
"articles" means the articles attached to the certificate of
Incorporation of the Corporation as from time to time amended or
restated;
"board" means the board of Directors of the Corporation;
"by-laws" means this by-law and all other by-laws of the Corporation
from time to time in force and effect;
"meeting of the shareholders" includes an annual meeting of
shareholders and a special meeting of shareholders;
"special meeting of the shareholders" includes a meeting of any
class or classes of shareholders and a special meeting of all
shareholders entitled to vote at an annual meeting of shareholders;
"non-business day" means Saturday, Sunday and any other day that is
a holiday as defined in the INTERPRETATION ACT Yukon Territory;
"ordinary resolution" means a resolution passed by a majority of the
votes cast by the shareholders who voted, either in person or by
proxy, in respect to the resolution;
"recorded address" means in the case of a shareholder his address as
recorded in the securities register; and in the case of joint
shareholders the address appearing in the securities register in
respect of such joint holding or the first address so appearing if
there is more than one; and in the case of a director, officer,
auditor or member of a committee of the board, his
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latest address as recorded in the records of the Corporation;
"signing officer" means, in relation to any instrument, any person
authorized to sign the same on behalf of the Corporation by Clause
2.03 or by a resolution passed pursuant thereto.
Save as aforesaid, words and expressions defined in the Act have the same
meaning when used herein; and words importing the singular number include the
plural and vice versa; words importing gender include the masculine, feminine
and neuter genders, and words importing persons include individuals, bodies
corporate, partnerships, trust and unincorporated organizations.
SECTION TWO
BUSINESS OF THE CORPORATION
2.01 REGISTERED OFFICE, RECORDS OFFICE AND ADDRESS FOR
SERVICE
Until changed in accordance with the Act, the registered office of
the Corporation, the designated records office (if separate from the registered
office) of the Corporation and the post office box (if any) designated as the
address for service upon the Corporation by mail shall initially be at the
address or addresses in the Yukon Territory specified in the notice thereof
filed with the articles and thereafter as the board may from time to time
determine.
2.02 FINANCIAL YEAR
The financial year of the Corporation shall end on such date in each
year as the board may from time to time by resolution determine.
2.03 EXECUTION OF INSTRUMENTS
Deeds, transfers, assignments, contracts, obligations, certificates
and other instruments may be signed on behalf of the Corporation by at least one
person holding the office of chairman, chief financial officer, director,
secretary, treasurer, assistant secretary or assistant treasurer or any other
office created by by-laws or by resolution of the board. In addition, the board
may from time to time direct the manner in which and the person or persons by
whom any particular instrument or class of instrument may or shall be signed.
Any signing officer may affix the corporate seal to any instrument requiring the
same.
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2.04 BANKING ARRANGEMENTS
The banking business of the Corporation including, without
limitation, the borrowing of money and the giving of security therefor, shall be
transacted with such banks, trust companies or other bodies corporate or
organizations as may from time to time be designated by or under the authority
of the board. Such banking business or any part thereof shall be transacted
under such agreements, instructions and delegations of powers as the board may
from time to time prescribe or authorize.
2.05 VOTING RIGHTS IN OTHER BODIES CORPORATE
The signing officers of the Corporation may execute and deliver
proxies and arrange for the issuance of voting certificates or other evidence of
the right to exercise the voting rights attaching to any securities held by the
Corporation. Such instruments, certificates or other evidence shall be in favor
of such person or persons as may be determined by the officers executing such
proxies or arranging for the issuance of voting certificates or such other
evidence of the right to exercise such voting rights. In addition, the board, or
failing the board, the signing officers of the Corporation, may from time to
time direct the manner in which and the person or persons buy whom any
particular voting rights or class of voting rights may or shall be exercised.
SECTION THREE
BORROWING AND SECURITY
3.01 BORROWING POWER
Without limiting the borrowing powers of the Corporation as set
forth in the Act, but subject to the articles the board may from time to time on
behalf of the Corporation, without authorization of the shareholders:
(a) borrow money upon the credit of the Corporation in such
amounts and on such terms as may be deemed expedient by
obtaining loans or advances or by way of overdraft or
otherwise;
(b) issue, reissue, sell or pledge bonds, debentures, notes or
other evidences of indebtedness or guarantee of the
Corporation, whether secured or unsecured, for such sums and
at such prices as may be deemed expedient;
(c) to the extent permitted by the Act, give a guarantee on behalf
of the Corporation to secure performance of any past, present
or future
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indebtedness, liability or obligation of the Corporation,
present or future; and
(d) delegate to a committee of the board, a director or an officer
of the Corporation all or any of the powers conferred
aforesaid or by the Act to such extent and in such manner as
the directors may determine.
Nothing in this section limits or restricts the borrowing of money by the
Corporation on bills of exchange or promissory notes made, drawn, accepted or
endorsed by or on behalf of the Corporation.
SECTION FOUR
DIRECTORS
4.01 NUMBER OF DIRECTORS AND QUORUM
Until changed in accordance with the Act, the board shall consist of
not fewer than the minimum and not more than the maximum number of directors
provided in the articles. Subject to Clause 4.09, the quorum for the transaction
of business at any meeting of the board shall consist of a majority of the
directors.
4.02 QUALIFICATION
No person shall be qualified for election as a director if he is
less than nineteen years of age; if he is a minor as defined in the AGE OF
MAJORITY ACT (Yukon Territory); if he is a mentally disordered person as defined
in the MENTAL HEALTH ACT (Yukon Territory); if he has been found to be a person
of unsound mind by a court elsewhere than in the Yukon Territory; if he is not
an individual; or if he has the status of a bankrupt. A director need not be a
shareholder.
4.03 CONSENT TO ACT
A person who is elected or appointed a director is not a director
unless:
(a) he was present at the meeting when he was elected or appointed
and did not refuse to act as a director, or
(b) if he was not present at the meeting when he was elected or
appointed, he consented to act as director in writing before
his election or appointment or within 10 days after it, or he
has acted as a director pursuant to the election or
appointment.
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4.04 ELECTION AND TERM
Shareholders of the Corporation shall, by ordinary resolution at the
first meeting of shareholders and at each succeeding annual meeting at which an
election of directors is required, elect directors to hold office for a term
expiring not later than the close of the third annual meeting of shareholders
following the election. At each annual meeting of shareholders, all directors
whose term of office has expired or then expires shall retire but, if qualified,
shall be eligible for re-election. A director not elected for an expressly
stated term ceases to hold office at the close of the first annual meeting of
shareholders following his election. Notwithstanding the foregoing, if directors
are not elected at a meeting of shareholders, the incumbent directors continue
in office until their successors are elected. The number of directors to be
elected at any such meeting shall be the number of directors whose term of
office has expired or expires unless the directors or the shareholders otherwise
determine. It is not necessary that all the directors elected at a meeting of
shareholders hold office for the same term. If the articles so provide, the
directors may, between annual meetings of shareholders, appoint one or more
additional directors of the Corporation to serve until the next annual meeting
of shareholders, but the number of additional directors shall not at any time
exceed one-third of the number of directors who held office at the expiration of
the last annual meeting of the Corporation.
4.05 REMOVAL OF DIRECTORS
Subject to the provisions of the Act, the shareholders may by
ordinary resolution passed at a special meeting remove any director or directors
from office and the vacancy created by such removal may be filled at the same
meeting failing which it may be filled by the directors.
4.06 VACATION OF OFFICE
A director ceases to hold office when: he dies; he is removed from
office by the shareholders; he ceases to be qualified for election as a
director; or his written resignation is sent or delivered to the Corporation; or
if a time is specified in such resignation, at the time so specified, whichever
is later.
4.07 VACANCIES
Subject to the Act, a quorum of the board may fill a vacancy in the
board. In the absence of a quorum of the board, the directors then in office
shall forthwith call a special meeting of shareholders to fill the vacancy and
if they fail to
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call such meeting or if they are no directors then in office, any shareholder
may call the meeting.
4.08 ACTION BY THE BOARD
The board shall manage the business and affairs of the Corporation.
Subject to the articles, the powers of the board may be exercised by resolution
passed at a meeting at which a quorum is present or by resolution in writing
signed by all the directors who would be entitled to vote on the resolution at a
meeting of the board. Where there is a vacancy in the board, a quorum of
directors may exercise all the powers of the board.
4.09 MEETING BY TELEPHONE
A director may participate in a meeting of the board or of a
committee of the board by means of telephone or other communications facilities
that permit all persons participating in the meeting to hear each other, and a
director participating in a meeting by those means is deemed to be present at
the meeting.
4.10 CALLING OF MEETINGS
Meetings of the board shall be held at such time and at such place
as the board, the chairman of the board, the managing director, the president or
any two directors, may determine.
4.11 NOTICE OF MEETING
Notice of the time and place of each meeting of the board shall be
given in the manner provided in Clause 13.01 to each director not less than 48
hours before the time when the meeting is to be held. A Notice of a meeting of
directors need not specify the purpose of or the business to be transacted at
the meeting, except where the Act requires such purpose or business to be
specified including any proposal to:
(a) submit to the shareholders any question or matter requiring
approval of the shareholders;
(b) fill a vacancy among the directors or in the office of
auditor;
(c) issue securities;
(d) declare dividends;
(e) purchase, redeem or otherwise acquire shares of the
corporation;
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(f) pay a commission for the sale of shares of the Corporation;
(g) approve a management proxy circular;
(h) approve any annual financial statements; or
(i) adopt, amend or repeal by-laws.
A director may in any manner waiver notice of or otherwise consent to the
meeting of the board; and attendance of a director at a meeting of directors is
a waiver of notice of the meeting, except when a director attends a meeting for
the express purpose of objecting to the transaction of business on the grounds
that the meeting is not lawfully called.
4.12 FIRST MEETING OF NEW BOARD
Provided a quorum of directors is present, the board may without
notice hold a meeting immediately following an annual meeting of shareholders.
4.13 ADJOURNED MEETING
Notice of an adjourned meeting of the board is not required if the
time and place of the adjourned meeting is announced at the original meeting.
4.14 REGULAR MEETING
The board may from time to time appoint a day or days in any month
or months for regular meetings of the board at a place and hour to be named. A
copy of any resolution of the board fixing the place and time of such regular
meetings shall be sent to each director forthwith after being passed, or
forthwith after such director's appointment, whichever is later, but no other
notice shall be required for any such regular meeting except where the Act or
this by-law requires the purpose thereof or the business to be transacted
thereat to be specified.
4.15 CHAIRMAN
The Chairman of any meeting of the board shall be the first
mentioned of such of the following officers as have been appointed and who is a
director and is present at the meeting: chairman of the board, managing
director, president or vice-president (in order of seniority). If no such
officer is present, the directors present shall choose one of their number to be
chairman.
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4.16 VOTES TO GOVERN
At all meetings of the board every question shall be decided by a
majority of the votes cast on the question. In case of an equality of votes the
chairman of the meeting shall be entitled to a second or casting vote.
4.17 REMUNERATION AND EXPENSES
The directors shall be paid such remuneration for their services as
the board may from time to time determine. The directors shall also be entitled
to be reimbursed for traveling and other expenses properly incurred by them in
attending meetings of the board or any committee thereof. Nothing herein
contained shall preclude any director from serving the Corporation in any other
capacity and receiving remuneration therefor.
SECTION FIVE
COMMITTEES
5.01 COMMITTEE OF DIRECTORS
The board may appoint a committee of directors, however designated,
and delegate to such committee any of the powers of the board except those
which, under the Act, a committee of directors has no authority to exercise.
5.02 TRANSACTION OF BUSINESS
The powers of a committee of directors may be exercised by meeting
at which a quorum is present or by resolution in writing signed by all members
of such committee who would have been entitled to vote on the resolution at a
meeting of the committee. Meetings of such committee may be held at any place in
or outside Canada.
5.03 PROCEDURE
Unless otherwise determined by the board, each committee shall have
the power to fix its quorum, to elect its chairman and to regulate it procedure.
SECTION SIX
OFFICERS
6.01 APPOINTMENT
Subject to the articles the board may from time to time appoint a
president, one or more vice-presidents (to which title may be added words
indicating seniority or function), a secretary, a treasurer and such other
officers as the board may
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determine, including one or more assistants to any of the officers so appointed.
One person may hold more than one office. The board may specify the duties of,
and, in accordance with this by-law and subject to the Act, delegate powers to
manage the business and affairs of the Corporation to such officers.
6.02 CHAIRMAN OF THE BOARD
The chairman of the board, if any, or in his absence, the president,
shall preside as chairman at every meeting of the directors, or if there is no
chairman of the board or neither the chairman of the board nor the president is
present within fifteen minutes of the time appointed for holding the meeting or
is willing to act as chairman or, if the chairman of the board if any, and the
president have advised the secretary that they will not be present at the
meeting, the directors present shall choose one of their number to be chairman
of the meeting.
6.03 MANAGING DIRECTOR
The board may from time to time appoint a managing director who
shall be a director. If appointed, he shall be the chief executive officer and,
subject to the authority of the board, shall have general supervision of the
business and affairs of the Corporation; and he shall, subject to the Act, have
such other powers and duties as the board may specify. During the absence or
disability of the president, or if no president has been appointed, the managing
director shall also have the powers and duties of that office.
6.04 PRESIDENT
If appointed, the president shall be the chief operating officer
and, subject to the authority of the board, shall have general supervision of
the business of the Corporation; and he shall, subject to the Act have such
other powers and duties as the board may specify. During the absence or
disability of the managing director, or if no managing director has been
appointed, the president shall also have the powers and duties of that office.
6.05 VICE-PRESIDENT
A vice-president shall, subject to the Act, have such powers and
duties as the board or the chief executive officer may specify.
6.06 SECRETARY
The Secretary shall attend and be the secretary of all meetings of
the board, shareholders and committees of the board and shall enter or cause to
be entered in records kept for that
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purpose in minutes of all proceedings thereat; he shall give or cause to be
given, as and when instructed, all notices to shareholders, directors, officers,
auditors and members of committees of the board; he shall be the custodian of
the stamp or mechanical device generally used for affixing the corporate seal of
the Corporation and of all books, papers, records, documents and instruments
belonging to the Corporation, except when some other officer or agent has been
appointed for that purpose; and he shall, subject to the Act, have such other
powers and duties as the board or the chief executive officer may specify.
6.07 TREASURER
The treasurer shall keep proper accounting records in compliance
with the Act and shall be responsible for the deposit of money, the safekeeping
of securities and the disbursement of the funds of the Corporation; he shall
render to the board whenever required an account of all his transactions as
treasurer and of the financial position of the Corporation; and he shall subject
to the Act, have such other powers and duties as the board or the chief
executive officer may specify.
6.08 POWERS AND DUTIES OF OTHER OFFICERS
The powers and duties of all other officers shall, subject to the
Act, be such as the terms of their engagement shall for or as the board or
(except for those powers and duties are specified only by the board) the chief
executive officer may specify. Any of the powers and duties of an officer to
whom an assistant has been appointed may be exercised and performed by such
assistant, unless the board or the chief executive officer otherwise directs.
6.09 VARIATION OF POWERS AND DUTIES
The board and (except as aforesaid) the chief executive officer may
from time to time and subject to the provisions of the Act, vary, add to or
limit the powers and duties of any officer.
6.10 TERM OF OFFICE
The board, in its discretion, may remove any officer of the
Corporation, without prejudice to such officer's rights under any employment
contract. Otherwise each officer appointed by the board shall hold office until
his successor is appointed or until his earlier resignation.
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6.11 TERMS OF EMPLOYMENT AND REMUNERATION
The terms of employment and the remuneration of officers appointed
by the board shall be settled by the board from time to time.
6.12 AGENTS AND ATTORNEYS
The board shall have power from time to time to appoint agents or
attorneys for the Corporation in or outside Canada with such powers of
management or otherwise (including the power to subdelegate) as may be thought
fit.
6.13 FIDELITY BONDS
The board may require such officers, employees and agents of the
Corporation as the board deems advisable to furnish bonds for the faithful
discharge of their powers and duties, in such form and with such surety as the
board may from time to time determine.
SECTION SEVEN
CONFLICT OF INTEREST AND PROTECTION
OF DIRECTORS, OFFICERS AND OTHERS
7.01 CONFLICT OF INTEREST
A director or officer who is a party to, or who is a director or
officer of or has a material interest in any person who is a party to, a
material contract or proposed material contract with the Corporation shall
disclose the nature and extent of his interest at the time and in the manner
provided by the Act. Any such contract or proposed contract shall be referred to
the board or shareholders for approval even if such contract is one that in the
ordinary course of the Corporation's business would not require approval by the
board or shareholders, and a director whose interest in a contract is so
referred to the board shall not vote on any resolution to approve the same
except as provided by the Act.
7.02 LIMITATION OF LIABILITY
Subject to the Act, no director or officer for the time being of the
Corporation shall be liable for the acts, receipts, neglects or defaults of any
other director or officer or employee, or for the joining in any receipt or act
for conformity, or for any loss or damage or expense happening to the
Corporation through the insufficiency or deficiency of title to any property
acquired by the Corporation or for or on behalf of the Corporation or for the
insufficiency or deficiency of any security in or upon which any of the money of
or belonging to the Corporation shall be placed or invested, or for any loss or
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damage arising from the bankruptcy, insolvency or tortious act of any person,
firm or corporation including any person, firm or corporation with whom or with
which any moneys, securities or effects shall be lodged or deposited, or for any
loss, conversion, misapplication or misappropriation of or any damage resulting
from any dealing with any moneys, securities or other assets of or belonging to
the Corporation or for any other loss, damage or misfortune whatsoever which may
happen in the execution of the duties of his respective office or trust or in
relation thereto unless the same shall happen by or through his failure to
exercise the powers and to discharge the duties of his office honestly and in
good faith with a view to the best interest of the Corporation and to exercise
the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
7.03 INDEMNITY
Subject to the Act, the Corporation shall indemnify a director or
officer, a former director or officer, and a person who acts or acted at the
Corporation's request as a director or officer of a body corporate of which the
Corporation is or was a shareholder or creditor, and his heirs and legal
representatives, against all costs, charges and expenses, including any amount
paid to settle an action or satisfy a judgement, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of being or having been a director or officer of
the Corporation or such body corporate, if:
(a) he acted honestly and in good faith with a view to the best
interests of the Corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had
reasonable grounds for believing his conduct was lawful.
7.04 INSURANCE
The Corporation may, subject to and in accordance with the Act,
purchase and maintain insurance for the benefit of any director or officer as
such against any liability incurred by him.
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SECTION EIGHT
SHARES
8.01 ALLOTMENT
Subject to the articles the board may from time to time allot, or
grant options to purchase, and issue the whole or any part of the authorized and
unissued shares of the Corporation at such time and to such persons and for such
consideration as the board shall determine, provided that no share shall be
issued until it is fully paid as provided by the Act.
8.02 COMMISSIONS
The board may from time to time authorize the Corporation to pay a
reasonable commission to any person in consideration of his purchasing or
agreeing to purchase shares of the Corporation, whether from the Corporation or
from any other person, or procuring or agreeing to procure purchaser(s) for such
shares.
8.03 SECURITIES REGISTER
The Corporation shall maintain a securities register in which it
records the securities issued by it in registered form, showing with respect to
each class or series of securities:
(a) the names, alphabetically arranged, and the latest known
address of each person who is or has been a security holder,
(b) the number of securities held by each security holder, and
(c) the date and particulars of the issue and transfer of each
security.
8.04 TRANSFER AGENTS AND REGISTRARS
The board may from time to time appoint one or more trust companies
as its agent or agents to maintain the central securities register or registers,
and an agent or agents to maintain branch securities registers. Such a person
may be designated as transfer agent or registrar according to his functions and
one person may be appointed both registrar and transfer agent. The board may at
any time terminate any such appointment.
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8.05 REGISTRATION OF TRANSFER
Subject to the provisions of the Act, no transfer of shares shall be
registered in a securities register except upon presentation of the certificate
representing such shares with a transfer endorsed thereon or delivered therewith
duly executed by the registered holder or by his attorney or successor duly
appointed, together with such reasonable assurances or evidence of signature,
identification and authority to transfer as the board may from time to time
prescribe, upon payment of all applicable taxes and any fees prescribed by the
board, upon compliance with such restrictions on transfer as are authorized by
the articles and upon satisfaction of any lien referred to in Clause 8.11.
8.06 NON-RECOGNITION OF TRUSTS
Subject to the provision of the Act, the Corporation may treat as
the absolute owner of a share the person in whose name the share is registered
in the securities register as if that person had full legal capacity and
authority to exercise all rights of ownership, irrespective of any indication to
the contrary through knowledge or notice or description in the Corporation's
records or on the share certificate.
8.07 SHARE CERTIFICATES
Every holder of one or more shares of the Corporation shall be
entitled, at his option, to a share certificate, or to a non-transferable
written acknowledgement of his right to obtain a share certificate, stating the
name of the person to whom the certificate or acknowledgement was issued, and
the number and class or series of shares held by him as shown on the securities
register. Share certificates and acknowledgments of a shareholder's right to a
share certificate, shall subject to the Act, be in such form as the board shall
from time to time approve. Any share certificate shall be signed in accordance
with Clause 2.03 and need not be under the corporate seal; provided that, unless
the board otherwise determines, certificates representing shares in respect of
which a transfer agent and/or registrar has been appointed shall not be valid
unless countersigned by or on behalf of such transfer agent and/or registrar.
The signature of one other signing officers or, in the case of share
certificates which are not valid unless countersigned by or on behalf of a
transfer agent and/or registrar, the signatures of both signing officers, may be
printed or mechanically reproduced in facsimile upon share certificates and
every such facsimile signature shall for all purposes be deemed to be the
signature of the officer whose signature it reproduces and shall be binding upon
the corporation. A share certificate executed as aforesaid shall be valid
notwithstanding that one or both of the officers whose
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facsimile signatures appears thereon no longer holds office at the date of issue
of the certificate.
8.08 REPLACEMENT OF SHARE CERTIFICATE
The board or any officer or agent designated by the board may in its
or his discretion direct the issue of a new share certificate in lieu of and
upon cancellation of a share certificate that has been mutilated or in
substitution for a share certificate claimed to have been lost, destroyed or
wrongfully taken on payment of a reasonable fee, and on such terms as to
indemnity, reimbursement of expenses and evidence of loss and of title as the
board may from time to time prescribe, whether generally or in any particular
case.
8.09 JOINT SHAREHOLDERS
If two or more persons are registered as joint holders of any share,
the Corporation shall not be bound to issue more than one certificate in respect
thereof, and delivery of such certificate to one of such persons shall be
sufficient delivery to all of them. Any one of such person may give effectual
receipts for the certificate issued in respect thereof or for any dividend,
bonus, return of capital or other money payable or warrant issuable in respect
of such share.
8.10 DECEASED SHAREHOLDER
In the event of the death of a holder, or of one of the joint
holders, of any share, the Corporation shall not be required to make any entry
in the securities register in respect thereof or to make payment of any
dividends thereon except upon production of all such documents as may be
required by law and upon compliance with the reasonable requirements of the
Corporation and its transfer agents.
8.11 LIEN FOR INDEBTEDNESS
If the articles provide that the Corporation has a lien on shares
registered in the name of a shareholder or his legal representative for a debt
of that shareholder to the Corporation, such lien may be enforced, subject to
the Act and to any other provision of the articles by the sale of the shares
thereby affected or by any other action, suit, remedy or proceeding authorized
or permitted by law or by equity and, pending such enforcement, the Corporation
may refuse to register a transfer of the whole or any part of such shares.
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SECTION NINE
DIVIDENDS AND RIGHTS
9.01 DIVIDENDS
Subject to the provisions of the Act, the board may from time to
time declare dividends payable to the shareholders according to their respective
rights and interest in the Corporation. Dividends may be paid in money or
property or by issuing fully paid shares of the Corporation.
9.02 DIVIDEND CHEQUES
A dividend payable in cash shall be paid by cheque drawn on the
Corporation's banks or one of them to the order of each registered holder of
shares of the class or series in respect of which it has been declared and
mailed by prepaid ordinary mail to such registered holder at his recorded
address, unless such holder otherwise directs. In the case of joint holders the
cheque shall, unless such joint holders otherwise direct, be made payable to the
order of all such joint holders and mailed to them at their recorded address.
The mailing of such cheque as aforesaid, unless the same is not paid on due
presentation, shall satisfy and discharge the liability for the dividend to the
extent of the sum represented thereby plus the amount of any tax which the
Corporation is required to and does withhold.
9.03 NON-RECEIPT OF CHEQUES
In the event of non-receipt of any dividend cheque by the person to
whom it is sent as aforesaid, the Corporation shall issue to such person a
replacement check for a like amount on such terms as to indemnity, reimbursement
or expenses and evidence of non-receipt and of title as the board may from time
to time prescribe, whether generally or any particular case.
9.04 RECORD DATE FOR DIVIDENDS AND RIGHTS
The board may fix in advance a date, preceding by not more than 50
days the date for the payment of any dividend or the date for the issue of any
warrant or other evidence of right to subscribe for securities of the
Corporation, as a record date for the determination of the persons entitled to
receive payment of such dividend or to receive the right to subscribe for such
securities, provided that if the Corporation is a distributing corporation,
notice of any such record date is given, not less than seven days before such
record date, in the manner provided in the Act. Where no record date is fixed in
advance as aforesaid, the record date for the determination of the persons
entitled to receive payment of any dividend or to receive the right to subscribe
for securities of the Corporation shall be at
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the close of business on the day on which the resolution relating to such
dividend or right to subscribe is passed by the board.
9.05 UNCLAIMED DIVIDENDS
Any dividend unclaimed after a period of six years from the date on
which the same has been declared to be payable shall be forfeited and shall
revert to the Corporation.
SECTION TEN
MEETING OF SHAREHOLDERS
10.01 ANNUAL MEETINGS
Subject to the Act, the annual meeting of the Shareholders shall be
held at such time in each year and, subject to Clause 10.03, at such place as
the board, the chairman of the board, the managing director or the president may
from time to time determine, for the purpose of consideration of the financial
statements and reports required by the Act to be placed before the annual
meeting, electing directors if required, appointing auditors if required and
transacting such other business as may properly be brought before the meeting.
10.02 SPECIAL MEETINGS
The board, the chairman of the board, the managing director or the
president shall have power to call a special meeting of the shareholders at any
time.
10.03 PLACE OF MEETINGS
Subject to the articles of the Corporation, meetings of the
shareholders shall be held at that place determined by the directors.
10.04 NOTICE OF MEETINGS
Notice of the time and place of each meeting of shareholders shall
be given in the manner provided in clause 13.01 not less than 21 nor more than
50 days before the date of the meeting to each director, to the auditor and to
each shareholder who at the close of business on the record date for notice is
entered in the securities register as the holder of one or more shares carrying
the right to vote at the meeting. Notice of a meeting of the shareholders called
for any purpose other than consideration of the financial statements and
auditor's report, election of directors and re-appointment of incumbent auditor
shall state the nature of such business in sufficient detail to permit the
shareholder to form a reasoned judgment thereon and shall state the text of any
special resolution to be
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submitted to the meeting. A shareholder may in any manner waive notice of or
otherwise consent to a meeting of shareholders.
10.05 RECORD DATE FOR NOTICE
The board may fix in advance a date, preceding the date of any
meeting of shareholders by not more than 50 days and not less than 21 days, a
record date for the determination of the shareholders entitled to notice of
meeting, provided that if the Corporation is a distributing corporation notice
of any such record date shall be given not less than seven days before such
record date in the manner provided in the Act. If no such record date is so
fixed, the record date for the determination of the shareholders entitled to
receive notice of the meeting shall be at the close of business on the day
immediately preceding the day on which the notice is sent or, if no notice is
sent, shall be the day on which the meeting is held.
10.06 LIST OF SHAREHOLDERS ENTITLED TO NOTICE
(1) The Corporation shall prepare a list of shareholders entitled to
receive notice of a meeting, arranged in alphabetical order and showing the
number and class of shares held by each shareholder,
(a) if a record date with respect to such meeting is fixed under
Section 10.05, not later than ten days after that date; or
(b) if no record date with respect to such meeting is so fixed,
(i) at the close of business on that day immediately
preceding the day on which notice is given, or,
(ii) where no notice is given, the day on which such meeting
is held.
(2) A shareholder may examine any list of shareholders
prepared under subsection (1) of this Section
(a) during usual business hours at the registered office of the
Corporation or at the place where its central securities
register is maintained; and
(b) at the meeting of shareholders to which the list relates.
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10.07 MEETINGS WITHOUT NOTICE
A meeting of shareholders may be held without notice at any time and
place permitted by the Act:
(a) if all shareholders entitled to vote thereat are present in
person or represented or if those not present or represented
waive notice of or otherwise consent to such meeting being
held, and
(b) if the auditors and the directors are present or waive notice
of or otherwise consent to such meeting being held;
so long as such shareholders, auditors or directors present are not attending
for the express purpose of objecting to the transaction of any business on the
grounds that the meeting is not lawfully called. At such a meeting any business
may be transacted which the Corporation at a meeting of Shareholders may
transact. If the meeting is held at a place outside the Yukon Territory,
shareholders not present or represented by proxy, but who have waived notice of
or otherwise consented to such meeting, shall also be deemed to have consented
to the meeting being held at such place.
10.08 CHAIRMAN AND SECRETARY
The chairman of any meeting of shareholders shall be the president,
or in his absence, a vice-president who is a shareholder. If no such officer is
present within 15 minutes from the time fixed for holding the meeting, the
chairman shall be any other director appointed by the board. If the secretary of
the Corporation is absent, the chairman shall appoint some person, who need not
be a shareholder, to act as secretary of the meeting.
10.09 PERSONS ENTITLED TO BE PRESENT
The only persons entitled to be present at a meeting of shareholders
shall be those entitled to vote thereat, the directors and auditors of the
Corporation and others who, although not entitled to vote, are entitled or
required under any provision of the Act or the articles or by-laws to be present
at the meeting. Any other person may be admitted only on the invitation of the
Chairman of the meeting or with consent of the meeting.
10.10 QUORUM
A quorum for the transaction of business at any meeting of
shareholders shall be at least two persons present in person, each being a
shareholder entitled to vote thereat or a duly
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appointed proxy or representative for an absent shareholder so entitled, and
representing in the aggregate not less than 5% of the outstanding shares of the
Corporation carrying voting rights at the meeting. If a quorum is present at the
opening of any meeting of shareholders, the shareholders present or represented
may proceed with the business of the meeting notwithstanding that a quorum is
not present throughout the meeting. If a quorum is not present at the opening of
any meeting of shareholders, the shareholders present or represented may adjourn
the meeting to a fixed time and place but may not transact any other business
until a quorum is present.
10.11 RIGHT TO VOTE
Every person named in the list referred to in Clause 10.06 shall be
entitled to vote the shares shown thereon opposite his name at the meeting to
which such list relates, except to the extent that:
(a) where the Corporation has fixed a record date in respect of
such meeting, such person has transferred any of his shares
after such record date or, where the Corporation has not fixed
a record date in respect of such meeting, such person has
transferred any of his shares after the date on which such
list is prepared, and
(b) the transferee, having produced properly endorsed certificates
evidencing such shares or having otherwise established that he
owns such shares, has demanded not later than 10 days before
the meeting that his name be included in such list.
In any such excepted case the transferee shall be entitled to vote the
transferred shares at such meeting. If the Corporation is not required to
prepare a list under Clause 10.06, subject to the provisions of the Act and this
by-law as to proxies and representative, at any meeting of shareholders every
person shall be entitled to vote at the meeting who at the time is entered in
the securities register as the holder of one or more shares carrying the right
to vote at such meeting.
10.12 PROXIES AND REPRESENTATIVES
Every shareholder entitled to vote at a meeting of shareholders may
appoint a proxyholder, or one or more alternate proxyholders, who need not be
shareholders, to attend and act at the meeting in the manner and to the extent
authorized and with the authority conferred by the proxy. A proxy shall be in
writing executed by the shareholder or his attorney and shall conform with the
requirements of the Act. Alternately, every such shareholder which is a body
corporate or association may
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authorize by resolution of its directors or governing body an individual, who
need not be a shareholder, to represent it at a meeting of shareholders and such
individual may exercise on the shareholders behalf all the powers it could
exercise if it were an individual shareholder. The authority of such an
individual shall be established by depositing with the Corporation a certified
copy of such resolution, or in such other manner as may be satisfactory to the
secretary of the Corporation or the chairman of the meeting.
10.13 TIME FOR DEPOSIT OF PROXIES
The board may specify in a notice calling a meeting of the
shareholders a time, preceding, the time of such meeting or an adjournment
thereof by not more than 48 hours exclusive of non-business days, before which
proxies to be used at such meeting must be deposited. A proxy shall be acted
upon only if, prior to the time so specified, it shall have been deposited with
the Corporation or an agent thereof specified in such notice or, if no such time
is specified in such notice, it has been received by the secretary of the
Corporation or by the chairman of the meeting or any adjournment thereof prior
to the time of voting.
10.14 JOINT SHAREHOLDERS
If two or more persons hold shares jointly, any one of them present
in person or represented at a meeting of shareholders may, in the absence of the
other or others, vote the shares; but if two or more of those persons are
present in person or represented and vote, they shall vote as one on the shares
jointly held by them.
10.15 VOTES TO GOVERN
At any meeting of shareholders every question shall, unless
otherwise required by the articles or by-laws, be determined by the majority of
the votes cast on the question. In the case of an equality of votes either upon
show of hands or upon a poll, the chairman of the meeting shall not be entitled
to a second or casting vote.
10.16 SHOW OF HANDS
Subject to the provisions of the Act, any question at a meeting of
shareholders shall be decided by a show of hands unless a ballot thereon is
required or demanded as hereinafter provided. Upon a show of hands every person
who is present and entitled to vote shall have one vote. Whenever a vote by show
of hands shall have been taken upon a question, unless a ballot thereon is so
required or demanded, a declaration by the chairman of the meeting that the vote
upon the question has been carried or carried by a particular majority or not
carried and an entry
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to that effect in the minutes of the meeting shall be prima faci evidence of the
fact without proof of the number or proportion of the votes recorded in favour
of or against any resolution or other proceeding in respect of the said
question, and the result of the vote so taken shall be the decision of the
shareholders upon the said question.
10.17 BALLOTS
On any question proposed for consideration at a meeting of
shareholders, any shareholder or proxyholder entitled to vote at the meeting may
require or demand a ballot, either before or on the declaration of the result of
any vote by show of hands. A ballot so required or demanded shall be taken in
such manner as the chairman shall direct. A requirement or demand for a ballot
may be withdrawn at any time prior to the taking of the ballot. If a ballot is
taken each person present shall be entitled, in respect of the shares which he
is entitled to vote at a meeting upon the question, to that number of votes
provided by the Act or the articles, and the result of the ballot so taken shall
be the decision of the shareholders upon the said question.
10.18 ADMISSION OR REJECTION OF A VOTE
In case of any dispute as to the admission or rejection of a vote,
the chairman shall determine the same and such determination made in good faith
shall be final and conclusive.
10.19 ADJOURNMENT
If a meeting of the shareholders is adjourned by one or more
adjournments for an aggregate of less than 30 days, it shall not be necessary to
give notice of the adjourned meeting, other than by announcement at the time of
an adjournment. If a meeting of shareholders is adjourned by one or more
adjournments for an aggregate of 30 days or more, notice of the adjourned
meeting shall be given as for an original meeting.
10.20 RESOLUTION IN WRITING
A resolution in writing signed by all the shareholders entitled to
vote on that resolution at a meeting of shareholders is as valid as if it had
been passed at a meeting of the shareholders.
10.21 ONLY ONE SHAREHOLDER
Where the Corporation has only one shareholder, or only one holder
of any class or series of shares, the shareholder present in person or by proxy
constitutes a meeting.
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SECTION ELEVEN
DIVISION AND DEPARTMENTS
11.01 CREATION AND CONSOLIDATION OF DIVISIONS
The board may cause the business and operations of the Corporation
or any part thereof to be divided or to be segregated into one or more divisions
upon such basis, including without limitation, character or type of operation,
geographical territory, product manufactured or service rendered, as the board
may consider appropriate in each case. The board may also cause the business and
operations of any such division to be further divided into sub-units to be
consolidated upon such basis as the board may consider appropriate in each case.
11.02 NAME OF DIVISION
Subject to law, any division or its sub-units may be designated by
such name as the board may from time to time determine and may transact
business, enter into contracts, sign cheques and other documents of any kind and
do all acts and things under such name. Any such contract, cheque or document
shall be binding upon the Corporation as if it has been entered into or signed
in the name of the Corporation.
11.03 OFFICERS OF DIVISION
From time to time the board or, if authorized by the board, the
chief executive officer, may appoint one or more officers for any division,
prescribe their powers and duties and settle their terms of employment and
remuneration. The board or, if authorized by the board, the chief executive
officer, may remove at its or his pleasure any officer so appointed without
prejudice to such officer's rights under any employment contract. Officers of
divisions or their sub-units shall not, as such, be officers of the Corporation.
SECTION TWELVE
INFORMATION AVAILABLE TO SHAREHOLDERS
12.01 Except as provided by the Act, no shareholder shall be entitled to
discovery of any information respecting any details or conduct of the
Corporation's business which in the opinion of the directors would be
inexpedient in the interests of the Corporation to communicate to the public.
12.02 The Directors, may, from time to time, subject to the rights conferred by
the Act, determine whether and to what extent and at what time and place and
under what circumstances or regulations the documents, books and registers and
accounting records of the Corporation or any of them shall be open to
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inspection of shareholders and no shareholder shall have any right to inspect
any document or book or register or accounting records of the Corporation except
as conferred by statute or authorized by the board of Directors or by a
resolution of the shareholders.
SECTION THIRTEEN
NOTICES
13.01 METHOD OF GIVING NOTICES
Any notice (which term includes any communication or document) to be
given (which term includes sent, delivered or served) pursuant to the Act, the
regulations thereunder, the articles, the by-laws or otherwise to a shareholder,
director, officer, auditor or member of a committee of the board shall be
sufficiently given if delivered personally to the person to whom it is to be
given or if delivered to his recorded address or if mailed to him at his
recorded address by prepaid ordinary or air mail or if sent to him at his
recorded address by any means of prepaid transmitted or recorded communication
including facsimile transmission. A notice so delivered shall be deemed to have
been given when it is delivered personally or to the recorded address as
aforesaid; a notice so mailed shall be deemed to have been given when dispatched
or delivered to the appropriate communication company or agency or its
representative for dispatch. The secretary may change or cause to be changed the
recorded address of any shareholder, director, officer, auditor or member of a
committee of the board in accordance with any information believed by him to be
reliable.
13.02 NOTICE TO JOINT SHAREHOLDERS
If two or more persons are registered as joint holders of any share,
any notice shall be addressed to all of such joint holders but notice to one of
such persons shall be sufficient notice to all of them.
13.03 COMPUTATION OF TIME
In computing the date when notice must be given under any provision
requiring a specified number of days' notice of any meeting or other event, the
date of giving the notice shall be excluded and the date of the meeting or other
event shall be included.
13.04 UNDELIVERED NOTICES
If notices given to a shareholder pursuant to Clause 13.01 are
returned on three consecutive occasions because he cannot be found, the
Corporation shall not be required to give
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any further notices to such shareholder until he informs the Corporation in
writing of his new address.
13.05 OMISSIONS AND ERRORS
The accidental omission to give any notice to any shareholder,
director, officer, auditor or member of a committee of the board or the
non-receipt of any notice by any such person or any error in any notice not
affecting the substance thereof shall not invalidate any action taken at the
meeting held pursuant to such notice or otherwise founded thereon.
13.06 PERSONS ENTITLED BY DEATH OR OPERATION OF LAW
Every person who, by operation of law, transfer, death of a
shareholder or any other means whatsoever shall become entitled to any share,
shall be bound by every notice in respect of such share which shall have been
duly given to the shareholder from whom he derives his title to such share prior
to his name and address being entered on the securities register (whether such
notice was given before or after happening of the event upon which he became so
entitled) and prior to his furnishing to the Corporation the proof of authority
or evidence of his entitlement prescribed by the Act.
13.07 WAIVER OF NOTICE
Any shareholder (or his duly appointed proxyholder), director,
officer, auditor or member of a committee of the board may at any time waive any
notice, or waive or abridge the time for any notice, required to be given to him
under any provision of the Act, the regulations thereunder, the articles, the
by-laws or otherwise and such waiver or abridgement shall cure any default in
the giving or in the time of such notice, as the case may be. Any such waiver or
abridgement shall be in writing except a waiver or notice of a meeting of
shareholders or of the board which may be given in any manner.
SECTION FOURTEEN
EFFECTIVE DATE AND REPEAL
14.01 EFFECTIVE DATE
This by-law shall come into force when made by the board in
accordance with the Act.
14.02 REPEAL
All previous by-laws of the Corporation are repealed as of the
coming into force of this by-law. Such repeal shall not affect the previous
operation of any by-law so repealed or affect
26
<PAGE>
the validity of any act done or right, privilege, obligation or liability
acquired or incurred under, or the validity of any contract or agreement made
pursuant to, or the validity of any articles (as defined in the Act) or
predecessor charter documents of the Corporation obtained pursuant to, any such
by-law prior to its repeal. All officers and persons acting under any such
by-law so repealed shall continue to act as if appointed under the provisions of
this by-law and all resolutions of the shareholders or the board or a committee
of the board with continuing effect passed under any repealed by-law shall
continue to be good and valid except to the extent inconsistent with this by-law
and until amended or repealed.
MADE BY the board the day of , 1996.
PRESIDENT
CONFIRMED by the shareholders in accordance with the Act the day of
, 1996.
SECRETARY
27
Exhibit 4(A)
EXCERPTS FROM THE ARTICLES OF CONTINUANCE
OF SEVEN SEAS PETROLEUM INC.
The Corporation is authorized to issue an unlimited number of shares and the
authorized capital of the Corporation is to be divided into common shares and
Class A Preferred shares which shall have the following rights and conditions:
COMMON SHARES
The holders of the common shares shall be entitled:
(a) To vote at all meetings of shareholders of the Corporation except
meetings at which only holders of a specified class of shares are entitled to
vote;
(b) To receive, subject to the rights of the holders of another class of
shares, any dividend declared by the Corporation; and
(c) To receive, subject to the rights of the holders of another class of
shares, the remaining property of the Corporation on the liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
CLASS A PREFERRED SHARES ISSUABLE IN SERIES
The Class A Preferred Shares of the Corporation shall have the
rights and shall be subject to the restrictions, conditions and limitations as
follows:
(a) The Corporation may issue Class A Preferred Shares in one or more
series;
(b) The directors may by resolution authorize Articles of Amendment of
the Corporation fixing the number of shares in, and determining the designation
of the shares of, each series of Class A Preferred Shares;
(c) The directors may by resolution authorize Articles of Amendment of
the Corporation creating, defining and attaching special rights and restrictions
to the shares of each series.
***
EXHIBIT 4(B)
EXCERPTS FROM THE BY-LAWS OF SEVEN SEAS PETROLEUM INC.:
SECTION EIGHT
SHARES
8. ALLOTMENT
Subject to the articles the board may from time to time allot, or
grant options to purchase, and issue the whole or any part of the authorized and
unissued shares of the Corporation at such time and to such persons and for such
consideration as the board shall determine, provided that no share shall be
issued until it is fully paid as provided by the Act.
8. COMMISSIONS
The board may from time to time authorize the Corporation to pay a
reasonable commission to any person in consideration of his purchasing or
agreeing to purchase shares of the Corporation, whether from the Corporation or
from any other person, or procuring or agreeing to procure purchaser(s) for such
shares.
8. SECURITIES REGISTER
The Corporation shall maintain a securities register in which it
records the securities issued by it in registered form, showing with respect to
each class or series of securities:
(a) the names, alphabetically arranged, and the latest
known address of each person who is or has been a
security holder,
(b) the number of securities held by each security
holder, and
(c) the date and particulars of the issue and transfer
of each security.
8. TRANSFER AGENTS AND REGISTRARS
The board may from time to time appoint one or more trust companies
as its agent or agents to maintain the central securities register or registers,
and an agent or agents to maintain branch securities registers. Such a person
may be designated as transfer agent or registrar according to his functions and
one person may be appointed both registrar and
<PAGE>
transfer agent. The board may at any time terminate any such appointment.
8. REGISTRATION OF TRANSFER
Subject to the provisions of the Act, no transfer of shares shall be
registered in a securities register except upon presentation of the certificate
representing such shares with a transfer endorsed thereon or delivered therewith
duly executed by the registered holder or by his attorney or successor duly
appointed, together with such reasonable assurances or evidence of signature,
identification and authority to transfer as the board may from time to time
prescribe, upon payment of all applicable taxes and any fees prescribed by the
board, upon compliance with such restrictions on transfer as are authorized by
the articles and upon satisfaction of any lien referred to in Clause 8.11.
8. NON-RECOGNITION OF TRUSTS
Subject to the provision of the Act, the Corporation may treat as
the absolute owner of a share the person in whose name the share is registered
in the securities register as if that person had full legal capacity and
authority to exercise all rights of ownership, irrespective of any indication to
the contrary through knowledge or notice or description in the Corporation's
records or on the share certificate.
8. SHARE CERTIFICATES
Every holder of one or more shares of the Corporation shall be
entitled, at his option, to a share certificate, or to a non-transferable
written acknowledgement of his right to obtain a share certificate, stating the
name of the person to whom the certificate or acknowledgement was issued, and
the number and class or series of shares held by him as shown on the securities
register. Share certificates and acknowledgments of a shareholder's right to a
share certificate, shall subject to the Act, be in such form as the board shall
from time to time approve. Any share certificate shall be signed in accordance
with Clause 2.03 and need not be under the corporate seal; provided that, unless
the board otherwise determines, certificates representing shares in respect of
which a transfer agent and/or registrar has been appointed shall not be valid
unless countersigned by or on behalf of such transfer agent and/or registrar.
The signature of one other signing officers or, in the case of share
certificates which are not valid unless countersigned by or on behalf of a
transfer agent and/or registrar, the signatures of both signing officers, may be
printed or mechanically reproduced in facsimile upon share certificates and
every such facsimile signature shall for all purposes be deemed to be the
signature of the officer whose
<PAGE>
signature it reproduces and shall be binding upon the corporation. A share
certificate executed as aforesaid shall be valid notwithstanding that one or
both of the officers whose facsimile signatures appears thereon no longer holds
office at the date of issue of the certificate.
8. REPLACEMENT OF SHARE CERTIFICATE
The board or any officer or agent designated by the board may in its
or his discretion direct the issue of a new share certificate in lieu of and
upon cancellation of a share certificate that has been mutilated or in
substitution for a share certificate claimed to have been lost, destroyed or
wrongfully taken on payment of a reasonable fee, and on such terms as to
indemnity, reimbursement of expenses and evidence of loss and of title as the
board may from time to time prescribe, whether generally or in any particular
case.
8. JOINT SHAREHOLDERS
If two or more persons are registered as joint holders of any share,
the Corporation shall not be bound to issue more than one certificate in respect
thereof, and delivery of such certificate to one of such persons shall be
sufficient delivery to all of them. Any one of such person may give effectual
receipts for the certificate issued in respect thereof or for any dividend,
bonus, return of capital or other money payable or warrant issuable in respect
of such share.
8.10 DECEASED SHAREHOLDER
In the event of the death of a holder, or of one of the joint
holders, of any share, the Corporation shall not be required to make any entry
in the securities register in respect thereof or to make payment of any
dividends thereon except upon production of all such documents as may be
required by law and upon compliance with the reasonable requirements of the
Corporation and its transfer agents.
8.11 LIEN FOR INDEBTEDNESS
If the articles provide that the Corporation has a lien on shares
registered in the name of a shareholder or his legal representative for a debt
of that shareholder to the Corporation, such lien may be enforced, subject to
the Act and to any other provision of the articles by the sale of the shares
thereby affected or by any other action, suit, remedy or proceeding authorized
or permitted by law or by equity and, pending such enforcement, the Corporation
may refuse to register a transfer of the whole or any part of such shares.
<PAGE>
SECTION NINE
DIVIDENDS AND RIGHTS
9.01 DIVIDENDS
Subject to the provisions of the Act, the board may from time to
time declare dividends payable to the shareholders according to their respective
rights and interest in the Corporation. Dividends may be paid in money or
property or by issuing fully paid shares of the Corporation.
9.02 DIVIDEND CHEQUES
A dividend payable in cash shall be paid by cheque drawn on the
Corporation's banks or one of them to the order of each registered holder of
shares of the class or series in respect of which it has been declared and
mailed by prepaid ordinary mail to such registered holder at his recorded
address, unless such holder otherwise directs. In the case of joint holders the
cheque shall, unless such joint holders otherwise direct, be made payable to the
order of all such joint holders and mailed to them at their recorded address.
The mailing of such cheque as aforesaid, unless the same is not paid on due
presentation, shall satisfy and discharge the liability for the dividend to the
extent of the sum represented thereby plus the amount of any tax which the
Corporation is required to and does withhold.
9.03 NON-RECEIPT OF CHEQUES
In the event of non-receipt of any dividend cheque by the person to
whom it is sent as aforesaid, the Corporation shall issue to such person a
replacement check for a like amount on such terms as to indemnity, reimbursement
or expenses and evidence of non-receipt and of title as the board may from time
to time prescribe, whether generally or any particular case.
9.04 RECORD DATE FOR DIVIDENDS AND RIGHTS
The board may fix in advance a date, preceding by not more than 50
days the date for the payment of any dividend or the date for the issue of any
warrant or other evidence of right to subscribe for securities of the
Corporation, as a record date for the determination of the persons entitled to
receive payment of such dividend or to receive the right to subscribe for such
securities, provided that if the Corporation is a distributing corporation,
notice of any such record date is given, not less than seven days before such
record date, in the manner provided in the Act. Where no record date is fixed in
advance as aforesaid, the record date for the determination of the persons
entitled to receive payment of any dividend or to receive the right to subscribe
for securities of the Corporation shall be at
<PAGE>
the close of business on the day on which the resolution relating to such
dividend or right to subscribe is passed by the board.
9.05 UNCLAIMED DIVIDENDS
Any dividend unclaimed after a period of six years from the date on
which the same has been declared to be payable shall be forfeited and shall
revert to the Corporation.
SECTION TEN
MEETING OF SHAREHOLDERS
10.01 ANNUAL MEETINGS
Subject to the Act, the annual meeting of the Shareholders shall be
held at such time in each year and, subject to Clause 10.03, at such place as
the board, the chairman of the board, the managing director or the president may
from time to time determine, for the purpose of consideration of the financial
statements and reports required by the Act to be placed before the annual
meeting, electing directors if required, appointing auditors if required and
transacting such other business as may properly be brought before the meeting.
10.02 SPECIAL MEETINGS
The board, the chairman of the board, the managing director or the
president shall have power to call a special meeting of the shareholders at any
time.
10.03 PLACE OF MEETINGS
Subject to the articles of the Corporation, meetings of the
shareholders shall be held at that place determined by the directors.
10.04 NOTICE OF MEETINGS
Notice of the time and place of each meeting of shareholders shall
be given in the manner provided in clause 13.01 not less than 21 nor more than
50 days before the date of the meeting to each director, to the auditor and to
each shareholder who at the close of business on the record date for notice is
entered in the securities register as the holder of one or more shares carrying
the right to vote at the meeting. Notice of a meeting of the shareholders called
for any purpose other than consideration of the financial statements and
auditor's report, election of directors and re-appointment of incumbent auditor
shall state the nature of such business in sufficient detail to permit the
shareholder to form a reasoned judgment thereon and shall state the text of any
special resolution to be
<PAGE>
submitted to the meeting. A shareholder may in any manner waive notice of or
otherwise consent to a meeting of shareholders.
10.05 RECORD DATE FOR NOTICE
The board may fix in advance a date, preceding the date of any
meeting of shareholders by not more than 50 days and not less than 21 days, a
record date for the determination of the shareholders entitled to notice of
meeting, provided that if the Corporation is a distributing corporation notice
of any such record date shall be given not less than seven days before such
record date in the manner provided in the Act. If no such record date is so
fixed, the record date for the determination of the shareholders entitled to
receive notice of the meeting shall be at the close of business on the day
immediately preceding the day on which the notice is sent or, if no notice is
sent, shall be the day on which the meeting is held.
10.06 LIST OF SHAREHOLDERS ENTITLED TO NOTICE
(1) The Corporation shall prepare a list of shareholders entitled to
receive notice of a meeting, arranged in alphabetical order and showing the
number and class of shares held by each shareholder,
(a) if a record date with respect to such meeting is fixed under
Section 10.05, not later than ten days after that date; or
(b) if no record date with respect to such meeting is so fixed,
(i) at the close of business on that day immediately
preceding the day on which notice is given, or,
(ii) where no notice is given, the day on which such meeting
is held.
(2) A shareholder may examine any list of shareholders prepared
under subsection (1) of this Section
(a) during usual business hours at the registered office of the
Corporation or at the place where its central securities
register is maintained; and
(b) at the meeting of shareholders to which the list relates.
<PAGE>
10.07 MEETINGS WITHOUT NOTICE
A meeting of shareholders may be held without notice at any time and
place permitted by the Act:
(a) if all shareholders entitled to vote thereat are present in
person or represented or if those not present or represented
waive notice of or otherwise consent to such meeting being
held, and
(b) if the auditors and the directors are present or waive notice
of or otherwise consent to such meeting being held;
so long as such shareholders, auditors or directors present are not attending
for the express purpose of objecting to the transaction of any business on the
grounds that the meeting is not lawfully called. At such a meeting any business
may be transacted which the Corporation at a meeting of Shareholders may
transact. If the meeting is held at a place outside the Yukon Territory,
shareholders not present or represented by proxy, but who have waived notice of
or otherwise consented to such meeting, shall also be deemed to have consented
to the meeting being held at such place.
10.08 CHAIRMAN AND SECRETARY
The chairman of any meeting of shareholders shall be the president,
or in his absence, a vice-president who is a shareholder. If no such officer is
present within 15 minutes from the time fixed for holding the meeting, the
chairman shall be any other director appointed by the board. If the secretary of
the Corporation is absent, the chairman shall appoint some person, who need not
be a shareholder, to act as secretary of the meeting.
10.09 PERSONS ENTITLED TO BE PRESENT
The only persons entitled to be present at a meeting of shareholders
shall be those entitled to vote thereat, the directors and auditors of the
Corporation and others who, although not entitled to vote, are entitled or
required under any provision of the Act or the articles or by-laws to be present
at the meeting. Any other person may be admitted only on the invitation of the
Chairman of the meeting or with consent of the meeting.
10.10 QUORUM
A quorum for the transaction of business at any meeting of
shareholders shall be at least two persons present in person, each being a
shareholder entitled to vote thereat or a duly
<PAGE>
appointed proxy or representative for an absent shareholder so entitled, and
representing in the aggregate not less than 5% of the outstanding shares of the
Corporation carrying voting rights at the meeting. If a quorum is present at the
opening of any meeting of shareholders, the shareholders present or represented
may proceed with the business of the meeting notwithstanding that a quorum is
not present throughout the meeting. If a quorum is not present at the opening of
any meeting of shareholders, the shareholders present or represented may adjourn
the meeting to a fixed time and place but may not transact any other business
until a quorum is present.
10.11 RIGHT TO VOTE
Every person named in the list referred to in Clause 10.06 shall be
entitled to vote the shares shown thereon opposite his name at the meeting to
which such list relates, except to the extent that:
(a) where the Corporation has fixed a record date in respect of
such meeting, such person has transferred any of his shares
after such record date or, where the Corporation has not fixed
a record date in respect of such meeting, such person has
transferred any of his shares after the date on which such
list is prepared, and
(b) the transferee, having produced properly endorsed certificates
evidencing such shares or having otherwise established that he
owns such shares, has demanded not later than 10 days before
the meeting that his name be included in such list.
In any such excepted case the transferee shall be entitled to vote the
transferred shares at such meeting. If the Corporation is not required to
prepare a list under Clause 10.06, subject to the provisions of the Act and this
by-law as to proxies and representative, at any meeting of shareholders every
person shall be entitled to vote at the meeting who at the time is entered in
the securities register as the holder of one or more shares carrying the right
to vote at such meeting.
10.12 PROXIES AND REPRESENTATIVES
Every shareholder entitled to vote at a meeting of shareholders may
appoint a proxyholder, or one or more alternate proxyholders, who need not be
shareholders, to attend and act at the meeting in the manner and to the extent
authorized and with the authority conferred by the proxy. A proxy shall be in
writing executed by the shareholder or his attorney and shall conform with the
requirements of the Act. Alternately, every such shareholder which is a body
corporate or association may
<PAGE>
authorize by resolution of its directors or governing body an individual, who
need not be a shareholder, to represent it at a meeting of shareholders and such
individual may exercise on the shareholders behalf all the powers it could
exercise if it were an individual shareholder. The authority of such an
individual shall be established by depositing with the Corporation a certified
copy of such resolution, or in such other manner as may be satisfactory to the
secretary of the Corporation or the chairman of the meeting.
10.13 TIME FOR DEPOSIT OF PROXIES
The board may specify in a notice calling a meeting of the
shareholders a time, preceding, the time of such meeting or an adjournment
thereof by not more than 48 hours exclusive of non-business days, before which
proxies to be used at such meeting must be deposited. A proxy shall be acted
upon only if, prior to the time so specified, it shall have been deposited with
the Corporation or an agent thereof specified in such notice or, if no such time
is specified in such notice, it has been received by the secretary of the
Corporation or by the chairman of the meeting or any adjournment thereof prior
to the time of voting.
10.14 JOINT SHAREHOLDERS
It two or more persons hold shares jointly, any one of them present
in person or represented at a meeting of shareholders may, in the absence of the
other or others, vote the shares; but if two or more of those persons are
present in person or represented and vote, they shall vote as one on the shares
jointly held by them.
10.15 VOTES TO GOVERN
At any meeting of shareholders every question shall, unless
otherwise required by the articles or by-laws, be determined by the majority of
the votes cast on the question. In the case of an equality of votes either upon
show of hands or upon a poll, the chairman of the meeting shall not be entitled
to a second or casting vote.
10.16 SHOW OF HANDS
Subject to the provisions of the Act, any question at a meeting of
shareholders shall be decided by a show of hands unless a ballot thereon is
required or demanded as hereinafter provided. Upon a show of hands every person
who is present and entitled to vote shall have one vote. Whenever a vote by show
of hands shall have been taken upon a question, unless a ballot thereon is so
required or demanded, a declaration by the chairman of the meeting that the vote
upon the question has been carried or carried by a particular majority or not
carried and an entry
<PAGE>
to that effect in the minutes of the meeting shall be prima faci evidence of the
fact without proof of the number or proportion of the votes recorded in favour
of or against any resolution or other proceeding in respect of the said
question, and the result of the vote so taken shall be the decision of the
shareholders upon the said question.
10.17 BALLOTS
On any question proposed for consideration at a meeting of
shareholders, any shareholder or proxyholder entitled to vote at the meeting may
require or demand a ballot, either before or on the declaration of the result of
any vote by show of hands. A ballot so required or demanded shall be taken in
such manner as the chairman shall direct. A requirement or demand for a ballot
may be withdrawn at any time prior to the taking of the ballot. If a ballot is
taken each person present shall be entitled, in respect of the shares which he
is entitled to vote at a meeting upon the question, to that number of votes
provided by the Act or the articles, and the result of the ballot so taken shall
be the decision of the shareholders upon the said question.
10.18 ADMISSION OR REJECTION OF A VOTE
In case of any dispute as to the admission or rejection of a vote,
the chairman shall determine the same and such determination made in good faith
shall be final and conclusive.
10.19 ADJOURNMENT
If a meeting of the shareholders is adjourned by one or more
adjournments for an aggregate of less than 30 days, it shall not be necessary to
give notice of the adjourned meeting, other than by announcement at the time of
an adjournment. If a meeting of shareholders is adjourned by one or more
adjournments for an aggregate of 30 days or more, notice of the adjourned
meeting shall be given as for an original meeting.
10.20 RESOLUTION IN WRITING
A resolution in writing signed by all the shareholders entitled to
vote on that resolution at a meeting of shareholders is as valid as if it had
been passed at a meeting of the shareholders.
10.21 ONLY ONE SHAREHOLDER
Where the Corporation has only one shareholder, or only one holder
of any class or series of shares, the shareholder present in person or by proxy
constitutes a meeting.
<PAGE>
SECTION ELEVEN
DIVISION AND DEPARTMENTS
11.01 CREATION AND CONSOLIDATION OF DIVISIONS
The board may cause the business and operations of the Corporation
or any part thereof to be divided or to be segregated into one or more divisions
upon such basis, including without limitation, character or type of operation,
geographical territory, product manufactured or service rendered, as the board
may consider appropriate in each case. The board may also cause the business and
operations of any such division to be further divided into sub-units to be
consolidated upon such basis as the board may consider appropriate in each case.
11.02 NAME OF DIVISION
Subject to law, any division or its sub-units may be designated by
such name as the board may from time to time determine and may transact
business, enter into contracts, sign cheques and other documents of any kind and
do all acts and things under such name. Any such contract, cheque or document
shall be binding upon the Corporation as if it has been entered into or signed
in the name of the Corporation.
11.03 OFFICERS OF DIVISION
From time to time the board or, if authorized by the board, the
chief executive officer, may appoint one or more officers for any division,
prescribe their powers and duties and settle their terms of employment and
remuneration. The board or, if authorized by the board, the chief executive
officer, may remove at its or his pleasure any officer so appointed without
prejudice to such officer's rights under any employment contract. Officers of
divisions or their sub-units shall not, as such, be officers of the Corporation.
SECTION TWELVE
INFORMATION AVAILABLE TO SHAREHOLDERS
12.01 Except as provided by the Act, no shareholder shall be entitled to
discovery of any information respecting any details or conduct of the
Corporation's business which in the opinion of the directors would be
inexpedient in the interests of the Corporation to communicate to the public.
12.02 The Directors, may, from time to time, subject to the rights
conferred by the Act, determine whether and to what extent and at what time and
place and under what circumstances or regulations the documents, books and
registers and accounting records of the Corporation or any of them shall be open
to
<PAGE>
inspection of shareholders and no shareholder shall have any right to inspect
any document or book or register or accounting records of the Corporation except
as conferred by statute or authorized by the board of Directors or by a
resolution of the shareholders.
SECTION THIRTEEN
NOTICES
13.01 METHOD OF GIVING NOTICES
Any notice (which term includes any communication or document) to be
given (which term includes sent, delivered or served) pursuant to the Act, the
regulations thereunder, the articles, the by-laws or otherwise to a shareholder,
director, officer, auditor or member of a committee of the board shall be
sufficiently given if delivered personally to the person to whom it is to be
given or if delivered to his recorded address or if mailed to him at his
recorded address by prepaid ordinary or air mail or if sent to him at his
recorded address by any means of prepaid transmitted or recorded communication
including facsimile transmission. A notice so delivered shall be deemed to have
been given when it is delivered personally or to the recorded address as
aforesaid; a notice so mailed shall be deemed to have been given when dispatched
or delivered to the appropriate communication company or agency or its
representative for dispatch. The secretary may change or cause to be changed the
recorded address of any shareholder, director, officer, auditor or member of a
committee of the board in accordance with any information believed by him to be
reliable.
13.02 NOTICE TO JOINT SHAREHOLDERS
If two or more persons are registered as joint holders of any share,
any notice shall be addressed to all of such joint holders but notice to one of
such persons shall be sufficient notice to all of them.
13.03 COMPUTATION OF TIME
In computing the date when notice must be given under any provision
requiring a specified number of days' notice of any meeting or other event, the
date of giving the notice shall be excluded and the date of the meeting or other
event shall be included.
13.04 UNDELIVERED NOTICES
If notices given to a shareholder pursuant to Clause 13.01 are
returned on three consecutive occasions because he cannot be found, the
Corporation shall not be required to give
<PAGE>
any further notices to such shareholder until he informs the Corporation in
writing of his new address.
13.05 OMISSIONS AND ERRORS
The accidental omission to give any notice to any shareholder,
director, officer, auditor or member of a committee of the board or the
non-receipt of any notice by any such person or any error in any notice not
affecting the substance thereof shall not invalidate any action taken at the
meeting held pursuant to such notice or otherwise founded thereon.
13.06 PERSONS ENTITLED BY DEATH OR OPERATION OF LAW
Every person who, by operation of law, transfer, death of a
shareholder or any other means whatsoever shall become entitled to any share,
shall be bound by every notice in respect of such share which shall have been
duly given to the shareholder from whom he derives his title to such share prior
to his name and address being entered on the securities register (whether such
notice was given before or after happening of the event upon which he became so
entitled) and prior to his furnishing to the Corporation the proof of authority
or evidence of his entitlement prescribed by the Act.
13.07 WAIVER OF NOTICE
Any shareholder (or his duly appointed proxyholder), director,
officer, auditor or member of a committee of the board may at any time waive any
notice, or waive or abridge the time for any notice, required to be given to him
under any provision of the Act, the regulations thereunder, the articles, the
by-laws or otherwise and such waiver or abridgement shall cure any default in
the giving or in the time of such notice, as the case may be. Any such waiver or
abridgement shall be in writing except a waiver or notice of a meeting of
shareholders or of the board which may be given in any manner.
FRONT OF CERTIFICATE EXHIBIT (4)(C)
Number Shares
SEVEN SEAS PETROLEUM INC.
CONTINUED IN THE YUKON TERRITORY UNDER THE BUSINESS CORPORATIONS ACT
CUSIP NUMBER 817917 10 7
THIS
CERTIFIES
THAT
IS THE
REGISTERED
HOLDER OF
FULLY PAID AND NON-ASSESSABLE COMMON SHARES WITHOUT PAR VALUE IN THE CAPITAL OF
SEVEN SEAS PETROLEUM INC.
A transfer of the shares represented by this certificate will not be
registered in a register of transfers of the Corporation except upon
surrender of this certificate, duly endorsed by the appropriate person.
This certificate is not valid until countersigned by a Transfer Agent and
registered by a Registrar of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed by its duly authorized officers.
DATED
COUNTERSIGNED AND REGISTERED
MONTREAL TRUST COMPANY OF CANADA
TRANSFER AGENT AND REGISTRAR
CHAIRMAN AND CHIEF EXECUTIVE OFFICER BY: _____________________________
Authorized Officer
<PAGE>
Back of Certificate
For value received _____________ hereby sell, assign and transfer unto
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME, ADDRESS AND S.I.N. OF ASSIGNEE)
_______________________________________________________________________________
SOCIAL SECURITY NUMBER
____________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________________
___________________________________ Attorney to transfer the said stock on the
Books of the within-named Corporation with full power of substitution in the
premises.
Dated __________________
____________________________________
In the presence of
____________________________________
Signature Guaranteed by:
THE CLASS B WARRANTS REPRESENTED BY THIS CERTIFICATE WILL BE VOID AND OF NO
VALUE UNLESS EXERCISED BY 5:00 P.M. (VANCOUVER TIME) ON OCTOBER 15, 1997.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE UNITED STATES SECURITIES ACT
OF 1933 (THE "U.S. ACT"), AS AMENDED OR UNDER THE SECURITIES LAWS OF ANY STATE
THEREOF, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR
ITS TERRITORIES OR POSSESSIONS OR TO A CITIZEN, RESIDENT OR NATIONAL OF THE
UNITED STATES DURING THE 40 DAY PERIOD COMMENCING ON THE DATE OF ISSUANCE OF THE
SECURITIES REPRESENTED HEREBY UNLESS SUCH SECURITIES ARE REGISTERED UNDER THE
U.S. ACT OR PURSUANT TO AN EXEMPTION FROM THE U.S. ACT.
CLASS B WARRANTS
SEVEN SEAS PETROLEUM INC.
Suite 960 Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas
77056
(Incorporated under the laws of the Province of British Columbia)
Class B WARRANT ___________ Class B WARRANTS
CERTIFICATE NO. _________ one such warrant entitling the holder to
purchase 1 Common Share at a price of
U.S. $18.50 per Common Share on or
before October 15, 1997.
THIS IS TO CERTIFY THAT _____________________________________ (herein called the
"holder") is entitled to acquire in the manner herein provided, subject to the
restrictions herein contained, during the period commencing on the date hereof
and ending at 5:00 p.m. (Vancouver time) on October 15, 1997 (the "Expiry
Date"), the number of fully paid and non-assessable common shares ("Common
Shares") without nominal or par value of Seven Seas Petroleum Inc. ("the
Corporation") as set forth above.
Such right to purchase Common Shares may only be exercised by the holder hereof
within the time hereinbefore set out by:
<PAGE>
(a) duly completing in the manner indicated and executing the Exercise
Form attached hereto; and
(b) surrendering this Class B Warrant Certificate to Montreal Trust
Company of Canada (the "Trustee") at the principal office of the
Trustee in the City of Vancouver, British Columbia; and
(c) payment by cash or certified cheque or money order in lawful monies
of the United States of America, payable to or to the order of the
Corporation in the amount of EIGHTEEN DOLLARS AND FIFTY CENTS
($18.50), for each Common Share to be purchased until the Expiry
Date (the "Exercise Price") at the principal office of the Trustee
in the City of Vancouver, British Columbia.
These Class B Warrants shall be deemed to be so surrendered only upon personal
delivery thereof or, if sent by post or other means of transmission, upon actual
receipt thereof by the Trustee at the office referred to above.
Upon such surrender, the person or persons in whose name or names the Common
Shares issuable upon exercise of the Class B Warrants are to be issued shall be
deemed for all purposes (except as provided in the Indenture hereinafter
referred to) the holder or holders of record of such Common Shares and the
Corporation covenants that it will (subject to the provisions of the Indenture)
cause a certificate or certificates representing such Common Shares to be
delivered or mailed to such person or persons at the address or addresses
specified in such Exercise Form.
The registered holder of these Class B Warrants may acquire any lesser number of
Common Shares than the number of Common Shares which may be acquired for the
Class B Warrants represented by this Class B Warrant Certificate and in such
event shall be entitled to receive a new Class B Warrant Certificate in respect
of the balance of the Common Shares which may be acquired.
To the extent that the Class B Warrants represented by this Class B Warrant
Certificate confer the right to acquire a fraction of a Common Share, such right
may be exercised in respect of such fraction only in combination with an
additional Class B Warrant or Class B Warrants which in the aggregate entitle
the holder to acquire a whole number of Common Shares. No fractional Common
Shares will be issued.
The Class B Warrants represented by this Class B Warrant Certificate are issued
under and pursuant to a Class B Warrant indenture (herein called the
"Indenture") made as of October 15, 1996, between the Corporation and the
Trustee (which expression shall include any successor trustee appointed under
the Indenture), to which Indenture and any instruments supplemental thereto
reference is hereby made for a full description of the rights of the holders of
the Class B Warrants and the terms and conditions upon which such Class B
Warrants are, or are to be, issued and held, all to the same effect as if the
provisions of the Indenture and all instruments supplemental thereto were herein
set forth, and to all of which provisions the holder of these Class B Warrants
by acceptance hereof assents.
<PAGE>
In the event of any alteration of the Common Shares, including any subdivision,
consolidation or reclassification, and in the event of any form of
reorganization of the Corporation, including any amalgamation, merger or
arrangement, an adjustment shall be made to the terms of the Class B Warrants
such that the holders thereof, upon exercise of any Class B Warrants following
the completion of any of the above noted events, will be entitled to receive the
same number and kind of securities that they would have been entitled to receive
had they exercised their Class B Warrants immediately prior to such event.
The registered holder of this Class B Warrant Certificate may at any time prior
to the Expiry Date of the Class B Warrants, upon surrender hereof to the Trustee
at its principal office in the City of Vancouver, British Columbia and payment
of the charges provided for in the Indenture, exchange this Class B Warrant
Certificate for other Class B Warrant Certificates evidencing Class B Warrants
entitling the holder to acquire in the aggregate the same number of Common
Shares as may be acquired under this Class B Warrant Certificate.
The holding of the Class B Warrants evidenced by this Class B Warrant
Certificate shall not constitute the holder hereof a shareholder of the
Corporation or entitle such holder to any right or interest in respect thereof
except as herein and in the Indenture expressly provided.
The Indenture contains provisions making binding upon all holders of Class B
Warrant Certificates outstanding thereunder resolutions passed at meetings of
such holders held in accordance with such provisions and instruments in writing
signed by the holders of Class B Warrants entitled to acquire a specified
majority of the Common Shares which may be acquired pursuant to all then
outstanding Class B Warrant Certificates.
The Class B Warrants evidenced by this Class B Warrant Certificate may not be
transferred or assigned.
This Class B Warrant Certificate shall not be valid for any purpose whatever
unless and until it has been countersigned by or on behalf of the Trustee.
Time shall be of the essence hereof.
<PAGE>
Words and phrases defined in the Indenture where used in this Class B Warrant
Certificate shall be given the meanings ascribed thereto in the Indenture unless
otherwise defined herein.
IN WITNESS WHEREOF the Corporation has caused this Class B Warrant Certificate
to be signed by its duly authorized officers effective as of October 15, 1996.
SEVEN SEAS PETROLEUM INC.
Per:
Per: c/s
Countersigned by:
MONTREAL TRUST COMPANY OF CANADA
TRUSTEE
By:
Authorized Signature
<PAGE>
EXERCISE FORM
TO: MONTREAL TRUST COMPANY OF CANADA
The undersigned hereby exercises the right to acquire _________________ Common
Shares without nominal or par value of Seven Seas Petroleum Inc. (or such number
of other securities or property to which such Class B Warrants entitle the
undersigned in lieu thereof or in addition thereto under the provisions of the
Indenture mentioned in the Class B Warrant Certificate) according to the terms
of the Indenture mentioned in the Class B Warrant Certificate.
Such securities or property are to be issued as follows:
NAME:
ADDRESS IN FULL:
DATED this day of , 19 .
SIGNATURE GUARANTEED SIGNATURE
(BY A CANADIAN CHARTERED BANK, TRUST
COMPANY OR A MEMBER OF THE VANCOUVER, (PRINT FULL NAME)
TORONTO, MONTREAL OR NEW YORK STOCK
EXCHANGES)
(PRINT FULL ADDRESS)
<PAGE>
INSTRUCTIONS:
The registered holder may exercise his right to acquire Common Shares by
completing the above form, surrendering this Class B Warrant Certificate and
paying the Exercise Price to Montreal Trust Company of Canada at its principal
office in Vancouver, British Columbia. For the protection of the holder, it
would be prudent to register if forwarding by mail. Certificates for Common
Shares will be delivered or mailed as soon as practicable after the exercise of
the Class B Warrants. The rights of the registered holder cease if the Class B
Warrants are not exercised prior to 5:00 p.m. (Vancouver time) on the Expiry
Date. If any of the Common Shares subscribed for are to be issued to a person or
persons other than the registered holder, the signature of the registered holder
must be guaranteed by a Canadian chartered bank, trust company or by a member of
the Vancouver, Toronto, Montreal or New York stock exchanges.
THIS Class B WARRANT INDENTURE is made as of the 15th day of
October, 1996,
BETWEEN:
SEVEN SEAS PETROLEUM INC., of Suite 960 Three Post
Oak Central, 1990 Post Oak Boulevard, Houston, Texas,
77056
(hereafter called the "Corporation")
OF THE FIRST PART
AND:
MONTREAL TRUST COMPANY OF CANADA, of 4th Floor, 510 Burrard Street,
Vancouver, British Columbia V6C 3B9
(hereinafter called the "Trustee")
OF THE SECOND PART
WHEREAS the Corporation is proposing to issue Class B Warrants in
the manner herein set forth;
AND WHEREAS one Class B Warrant shall entitle the holder thereof to
acquire one Common Share of the Corporation at the Exercise Price upon the terms
and conditions herein set forth;
AND WHEREAS all acts and deeds necessary have been done and
performed to make the Class B Warrants when issued, as in this Indenture
provided, legal, valid and binding upon the Corporation with the benefits and
subject to the terms of this Indenture;
NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the
mutual covenants and agreements of the parties contained herein, the parties
hereto agree as follows:
<PAGE>
- 2 -
ARTICLE I
INTERPRETATION
In this Indenture, including the recitals and schedules hereto and
in all indentures supplemental hereto:
(a) "ADJUSTMENT PERIOD" means the period from and including the date of
issuance of the Class B Warrants up to and including the Time of
Expiry;
(b) "APPLICABLE LEGISLATION" means the provisions of the BUSINESS
CORPORATION ACT (Yukon) as from time to time amended, and any
statute of Canada or a province thereof, and the regulations under
any such named or other statute, relating to trust indentures or to
the rights, duties and obligations of trustees and of corporations
under trust indentures, to the extent that such provisions are at
the time in force and applicable to this Indenture;
(c) "BUSINESS DAY" means a day which is not Saturday or Sunday or
a legal holiday in the City of Vancouver, British Columbia;
(d) CLASS B WARRANTS" means warrants issued by the Corporation in
registered form in accordance with the terms and conditions of this
Indenture;
(e) "CLASS B WARRANTHOLDER" means a holder of record of one or more
Class B Warrants;
(f) "COMMON SHARES" means fully paid and non-assessable common
shares of the Corporation as presently constituted;
(g) "CORPORATION'S AUDITORS" means a firm of chartered accountants
duly appointed as auditors of the Corporation;
(h) "COUNSEL" means a barrister or solicitor acceptable to the Trustee;
(i) "EFFECTIVE DATE" means October 15, 1996;
(j) "EQUITY SHARES" means the Common Shares and any shares of any other
class or series of the Corporation which may from time to time be
authorized for issue if by their terms such shares confer on the
holders thereof the right to participate in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or
<PAGE>
- 3 -
winding-up of the Corporation beyond a fixed sum or a fixed sum
plus accrued dividends;
(k) "EXERCISE DATE" means, with respect to any Class B Warrant, the date
on which the Warrant Certificate representing such Class B Warrant
is surrendered for exercise in accordance with the provisions of
Article III hereof;
(l) "EXERCISE PRICE" means, in respect of Class B Warrants, $18.50 in
lawful money of the United States of America per Common Share,
unless such price shall have been adjusted in accordance with the
provisions of Article IV, in which case it shall mean the adjusted
price then in effect.
(m) "EXPIRY DATE" means October 15, 1997;
(n) "PERSON" means an individual, body corporate, partnership, trust,
trustee, executor, administrator, legal representative or any
unincorporated organization;
(o) "QUALIFICATION DATE" means the day on which a receipt is issued by
the British Columbia Securities Commission for a final prospectus
qualifying the exchange of certain special warrants issued by the
Issuer pursuant to a special warrant indenture dated as of October
15, 1996;
(p) "SHAREHOLDER" means a holder of record of one or more Common
Shares;
(q) "tHIS CLASS B WARRANT INDENTURE", "THIS INDENTURE", "HEREIN",
"HEREBY" and similar expressions mean and refer to this Indenture
and any indenture, deed or instrument supplemental hereto; and the
expressions "ARTICLE", "SECTION", "SUBSECTION" and "PARAGRAPH"
followed by a number mean and refer to the specified article,
section, subsection or paragraph of this Indenture;
(r) "TIME OF EXPIRY" means 5:00 o'clock in the afternoon, Vancouver
time, on the Expiry Date;
(s) "TRADING DAY" means, with respect to a stock exchange, a day on
which such exchange is open for the transaction of business;
(t) "TRANSFER AGENT" means the Transfer Agent for the time being of
the Common Shares;
<PAGE>
- 4 -
(u) "WARRANT AGENCY" means the principal office of the Trustee in the
City of Vancouver, British Columbia;
(v) "WARRANT CERTIFICATE" means a certificate issued on or after the
Effective Date to evidence Class B Warrants;
(w) "WARRANTHOLDERS" or "holders" means the persons who, after the
Effective Date, are registered owners of Class B Warrants;
(x) "WARRANTHOLDERS' REQUEST" means an instrument signed in one or more
counterparts by Warrantholders entitled to acquire in the aggregate
not less than 10% of the aggregate number of Common Shares which
could be acquired pursuant to all Class B Warrants then unexercised
and outstanding, requesting the Trustee to take some action or
proceeding specified therein; and
(y) "WRITTEN ORDER OF THE CORPORATION", "WRITTEN REQUEST OF THE
CORPORATION", "WRITTEN CONSENT OF THE CORPORATION" and "CERTIFICATE
OF THE CORPORATION" mean, respectively, a written order, request,
consent and certificate signed in the name of the Corporation by its
Chairman, President, a Vice-President, or a director and, in
addition, by its Secretary, Treasurer, or a director, and may
consist of one or more instruments so executed.
1.02 GENDER AND NUMBER
Unless herein otherwise expressly provided or unless the context
otherwise requires, words importing the singular include the plural and vice
versa and words importing gender include all genders.
1.03 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Indenture into Articles and Sections, the
provision of a table of contents and the insertion of headings are for
convenience of reference only and shall not affect the construction or
interpretation of this Indenture.
1.04 DAY NOT A BUSINESS DAY
In the event that any day on or before which any action is required
to be taken hereunder is not a Business Day, then such action shall be required
to be taken at or before the requisite time on the next succeeding day that is a
Business Day.
<PAGE>
- 5 -
1.05 TIME OF THE ESSENCE
Time shall be of the essence of this Indenture.
1.06 APPLICABLE LAW
This Indenture and the Warrant Certificates shall be construed in
accordance with the laws of the Province of British Columbia and shall be
treated in all respects as British Columbia contracts.
ARTICLE II
ISSUE OF CLASS B WARRANTS
2.01 ISSUE OF CLASS B WARRANTS
(a) 275,000 Class B Warrants, entitling the holders to acquire up to an
aggregate of 275,000 Common Shares, subject to adjustment in
accordance with Article IV hereof, are hereby created and authorized
to be issued.
(b) The Warrant Certificates shall be substantially in the form set out
in Schedule "A" hereto, shall be dated in respect of any Warrant
Certificate as of the Effective Date in respect of those Class B
Warrants represented by the Warrant Certificate (including all
replacements issued in accordance with this Indenture), shall bear
such distinguishing letters and numbers as the Corporation may,
with the approval of the Trustee, prescribe, and shall be issuable
in any denomination excluding fractions.
2.02 FORM AND TERMS OF CLASS B WARRANTS
(a) One Class B Warrant authorized to be issued hereunder shall entitle
the holder thereof to acquire one Common Share, subject to
adjustment in accordance with Article IV hereof, at any time after
the Effective Date until the Time of Expiry upon payment of the
Exercise Price.
(b) No fractional Class B Warrants shall be issued or otherwise provided
for hereunder.
(c) The number of Common Shares which may be acquired pursuant to the
Class B Warrants shall be adjusted in the events and in the manner
specified in Article IV.
<PAGE>
- 6 -
2.03 WARRANTHOLDER NOT A SHAREHOLDER
Except as provided for in subsection 5.02(g), nothing in this
Indenture or in the holding of a Class B Warrant itself evidenced by a Warrant
Certificate or otherwise, shall confer or be construed as conferring upon a
Warrantholder any right or interest whatsoever as a Shareholder or as any other
shareholder of the Corporation, including, but not limited to, the right to vote
at, to receive notice of, or to attend, meetings of shareholders or any other
proceedings of the Corporation, or the right to receive dividends and other
distributions.
2.04 CLASS B WARRANTS TO RANK PARI PASSU
All Class B Warrants shall rank pari passu, whatever may be the
actual date of issue of the same.
2.05 SIGNING OF WARRANT CERTIFICATES
The Warrant Certificates shall be signed under seal by any two
directors or officers of the Corporation. The signatures of such directors or
officers may be mechanically reproduced in facsimile and Warrant Certificates
bearing such facsimile signatures shall be binding upon the Corporation as if
they had been manually signed by such directors or officers. Notwithstanding
that any of the persons whose manual or facsimile signature appears on any
Warrant Certificate as one of such directors or officers may no longer hold
office at the date of such Warrant Certificate or at the date of certification
or delivery thereof, any Warrant Certificate signed as aforesaid shall, subject
to Section 2.06, be valid and binding upon the Corporation and the holder
thereof shall be entitled to the benefits of this Indenture.
2.06 COUNTERSIGNATURE BY THE TRUSTEE
(a) No Warrant Certificate shall be issued or, if issued, shall be valid
for any purpose or entitle the holder to the benefit hereof until it
has been countersigned by manual signature by or on behalf of
the Trustee in the form set out in Schedule "A" hereto, and such
countersignature by the Trustee upon any Warrant Certificate shall
be conclusive evidence as against the Corporation that the
Warrant Certificate so certified has been duly issued hereunder
and that the holder is entitled to the benefits hereof.
(b) The countersignature of the Trustee on Warrant Certificates issued
hereunder shall not be construed as a representation or warranty by
the Trustee as to the validity of this Indenture or the Warrant
Certificates (except the due countersigning thereof) and the Trustee
shall in no respect be liable or answerable for the use
<PAGE>
- 7 -
made of the Warrant Certificate or any of them or of the
consideration therefor except as otherwise specified herein.
2.07 ISSUE IN SUBSTITUTION FOR WARRANT CERTIFICATES LOST, ETC.
(a) In case any of the Warrant Certificates shall become mutilated or
be lost, destroyed or stolen, the Corporation, subject to applicable
law, shall issue and thereupon the Trustee shall certify and
deliver, a new Warrant Certificate of like tenor as the one
mutilated, lost, destroyed or stolen in exchange for and in place
of and upon cancellation of such mutilated Warrant Certificate, or
in lieu of and in substitution for such lost, destroyed or stolen
Warrant Certificate, and the substituted Warrant Certificate shall
be in a form approved by the Trustee and shall be entitled to the
benefits hereof and shall rank equally in accordance with its terms
and all other Warrant Certificates issued or to be issued
hereunder.
(b) The applicant for the issue of a new Warrant Certificate pursuant to
this Section 2.07 shall bear the cost of the issue thereof and in
case of loss, destruction or theft shall, as a condition precedent
to the issue thereof, furnish to the Corporation and to the Trustee
such evidence of ownership and of the loss, destruction or theft of
the Warrant Certificate so lost, destroyed or stolen as shall be
satisfactory to the Corporation and to the Trustee in their sole
discretion, and such applicant may also be required to furnish an
indemnity or security in amount and form satisfactory to the
Corporation and the Trustee in their discretion and shall pay the
reasonable charges of the Corporation and the Trustee in connection
therewith.
2.08 EXCHANGE OF WARRANT CERTIFICATES
(a) Warrant Certificates representing Class B Warrants to acquire any
specified number of Common Shares may, upon compliance with the
reasonable requirements of the Trustee, be exchanged for another
Warrant Certificate or Warrant Certificates entitling the holder
thereto to acquire in the aggregate the same number of Common Shares
as may be acquired under the Warrant Certificate or Warrant
Certificates so exchanged.
(b) Warrant Certificates may be exchanged only at the Warrant Agency
provided for in subsection 3.01(d) or at any other place that is
designated by the Corporation with the approval of the
<PAGE>
- 8 -
Trustee. Any Warrant Certificate tendered for exchange shall be
cancelled and surrendered by the Warrant Agency to the Trustee.
2.09 CHARGES FOR EXCHANGE
Except as otherwise herein provided, the Warrant Agency shall charge
to the holder requesting an exchange fee of $3.00 for each new Warrant
Certificate issued in exchange for Warrant Certificate(s); and payment of such
charge and reimbursement of the Trustee or the Corporation for any and all stamp
taxes or governmental or other charges required to be paid shall be made by such
holder as a condition precedent to such exchange.
2.10 TRANSFERABILITY AND OWNERSHIP OF CLASS B WARRANTS
The Class B Warrants may be transferred or assigned.
The Corporation and the Trustee will deem and treat the registered
owner of any Class B Warrant as the beneficial owner thereof for all purposes
and neither the Corporation nor the Trustee shall be affected by any notice to
the contrary.
Subject to the provisions of this Indenture and applicable law, the
Warrantholder shall be entitled to the rights and privileges attaching to the
Class B Warrants and the issue of Common Shares by the Corporation upon the
exercise of Class B Warrants by any Warrantholder in accordance with the terms
and condition herein contained shall discharge all responsibilities of the
Corporation and the Trustee with respect to such Class B Warrants and neither
the Corporation nor the Trustee shall be bound to inquire into the title of any
such holder.
ARTICLE III
EXERCISE OF CLASS B WARRANTS
3.01 METHOD OF EXERCISE OF CLASS B WARRANTS
(a) The holder of any Class B Warrant may exercise the right thereby
conferred on such holder to acquire Common Shares by
surrendering, prior to the Time of Expiry, to the Warrant Agency
the Warrant Certificate with a duly completed and executed
exercise form as attached to the Warrant Certificate and cash or
a certified cheque, bank draft or money order in lawful money of
Canada payable to or to the order of the Corporation or the
Trustee in an amount equal to the Exercise Price multiplied by the
number of Common Shares to be acquired.
A Warrant Certificate with the duly completed and executed exercise
form referred to in this subsection 3.01(a) shall be
<PAGE>
- 9 -
deemed to be surrendered only upon personal delivery thereof or, if
sent by mail or other means of transmission, upon actual receipt
thereof at, in each case, the Warrant Agency provided for in
subsection 3.01(d).
(b) Any exercise form referred to in subsection 3.01(a) shall be signed
by the Warrantholder and shall specify the number of Common
Shares which the holder desires to acquire (being not more than
those which the holder is entitled to acquire pursuant to the
Warrant Certificate(s) surrendered), the person or persons in
whose name or names such Common Shares are to be issued, the
address or addresses of such persons and the number of Common
Shares to be issued to each such person if more than one is so
specified. If any of the Common Shares subscribed for are to be
issued to a person or persons other than the Warrantholder:
(i) the Warrantholder shall pay to the Corporation or the
Warrant Agency on behalf of the Corporation, all applicable
transfer or similar taxes and the Corporation shall not be
required to issue or deliver certificates evidencing Common
Shares unless or until such Warrantholder shall have paid to
the Corporation, or the Warrant Agency on behalf of the
Corporation, the amount of such tax or shall have
established to the satisfaction of the Corporation that such
tax has been paid or that no tax is due;
(ii) the signature of the Warrantholder on the exercise form will
be guaranteed by a Canadian chartered bank or trust company or
by a member of the Vancouver, Toronto, Montreal or New York
Stock Exchanges; and
(iii) the Warrantholder shall comply with all other reasonable
requests of the Trustee.
(c) Notwithstanding any provision to the contrary herein or contained
in the Warrant Certificates, on the exercise of Class B Warrants,
Common Shares will not be issued to a person whose address is
in, or whom the Corporation or the Trustee has reason to believe
is a citizen or national or resident of, the United States of
America, its territories and possessions except pursuant to a
registration statement under the UNITED STATES SECURITIES ACT OF
1933 and in compliance with applicable securities laws of various
States or pursuant to an exemption available from registration and
such Common Shares may not be offered or sold directly or
indirectly in the United States of America or its territories or
<PAGE>
- 10 -
possession or to a national or resident thereof, or any partnership,
corporation or other entity organized or incorporated under the laws
of the United States during the 40 day period commencing on the
exercise of such Class B Warrants except pursuant to a registration
statement under the UNITED STATES SECURITIES ACT OF 1933 and in
compliance with applicable securities laws of various States or
pursuant to an exemption available from such registration.
(d) In connection with the exchange of Warrant Certificates and exercise
of Class B Warrants and compliance with such other terms and
conditions hereof as may be required, the Corporation shall
establish the Warrant Agency at which Warrant Certificates may be
surrendered for exchange or at which Class B Warrants may be
exercised. The Corporation shall give notice to the Trustee of any
change of the Warrant Agency.
3.02 EFFECT OF EXERCISE OF CLASS B WARRANTS
(a) Upon compliance by the holder of any Warrant Certificate with the
provisions of Section 3.01, and subject to Section 3.03, the Common
Shares subscribed for shall be deemed to have been issued and the
person or persons to whom such Common Shares are to be issued shall
be deemed to have become the holder or holders of record of such
Common Shares on the Exercise Date unless the transfer registers of
the Corporation shall be closed on such date, in which case the
Common Shares subscribed for shall be deemed to have been issued,
and such person or persons deemed to have become the holder or
holders of record of such Common Shares, on the date on which such
transfer registers are reopened.
(b) Within five Business Days after the Exercise Date of a Class B
Warrant as aforesaid, the Corporation shall cause to be mailed to
the person or persons in whose name or names the Common Shares so
subscribed for have been issued, as specified in the subscription,
at the address specified in such subscription or, if so specified in
such subscription, cause to be delivered to such person or persons
at the Warrant Agency where such Warrant Certificate was
surrendered, a certificate or certificates for the appropriate
number of Common Shares so subscribed for.
<PAGE>
- 11 -
3.03 PARTIAL EXERCISE OF CLASS B WARRANTS; FRACTIONS
(a) The holder of any Warrant Certificate(s) may acquire a number of
Common Shares less than the number which the holder is entitled to
acquire pursuant to the surrendered Warrant Certificate(s) provided
that, in no event shall fractional Common Shares be issued with
regard to Class B Warrants exercised. In the event of any
acquisition of a number of Common Shares less than the number which
the holder is entitled to acquire, the holder of the Warrant
Certificate(s) upon exercise thereof shall, in addition, be entitled
to receive, without charge therefor, a new Warrant Certificate(s) in
respect of the balance of the Common Shares which such holder was
entitled to acquire pursuant to the surrendered Warrant
Certificate(s) and which were not then acquired.
(b) Notwithstanding anything herein contained including any
adjustment provided for in Article IV, the Corporation shall not be
required, upon the exercise of any Class B Warrants, to issue
fractions of Common Shares or to distribute certificates which
evidence fractional Common Shares. In lieu of fractional Common
Shares, there shall be paid to the holder upon surrender of
Warrant Certificate(s) for exercise of Class B Warrants pursuant
to Section 3.01, within ten Business Days after surrender, an
amount in lawful money of Canada equal to the then current
market value of such fractional interest calculated on the basis of
the closing price of the Common Shares on The Toronto Stock
Exchange (or such other stock exchange or electronic trading
facility upon which the Common Shares are then listed) on the
Trading Day immediately prior to the Exercise Date.
3.04 EXPIRATION OF CLASS B WARRANTS
After the Time of Expiry, all rights under any Class B Warrant in
respect of which the right of subscription and acquisition herein and therein
provided for shall not theretofore have been exercised in accordance herewith
and therewith shall wholly cease and terminate and such Class B Warrant shall be
void and of no effect.
3.05 CANCELLATION OF SURRENDERED CLASS B WARRANTS
All Warrant Certificates surrendered to the Warrant Agency pursuant
to Sections 2.07, 2.08, 3.01 and 5.01 shall be returned to the Trustee for
cancellation and, after the expiry of any period of retention prescribed by law,
destroyed by the Trustee and the Trustee shall furnish the Corporation with a
destruction certificate identifying the Warrant Certificates so destroyed and
the number of Class B Warrants
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evidenced thereby and the number of Common Shares which could have been acquired
pursuant to each destroyed Warrant Certificate.
3.06 ACCOUNTING AND RECORDING
(a) The Trustee shall promptly account to the Corporation with respect
to Class B Warrants exercised. Any securities or other instruments,
from time to time received by the Trustee shall be received in trust
for, and shall be segregated and kept apart by the Trustee in trust
for, the Corporation.
(b) The Trustee shall record the particulars of Class B Warrants
exercised which shall include the names and addresses of the persons
who become holders of Common Shares on exercise and the Exercise
Date. Within five Business Days of each Exercise Date, the Trustee
shall provide such particulars in writing to the Corporation.
ARTICLE IV
ADJUSTMENT OF NUMBER OF COMMON SHARES
4.01 ADJUSTMENT OF NUMBER OF COMMON SHARES
The acquisition rights in effect at any date attaching to the Class
B Warrants shall be subject to adjustment from time to time as follows:
(a) if and whenever at any time from the date hereof and prior to the
Time of Expiry, the Corporation shall:
(i) subdivide, redivide or change its outstanding Common
Shares into a greater number of shares; or
(ii) reduce, combine or consolidate its outstanding Common
Shares into a smaller number of shares,
the number of Common Shares obtainable under each Class B Warrant
shall each be adjusted immediately after the effective date of the
events referred to in (i) and (ii) above by multiplying the number
of Common Shares theretofore obtainable on the exercise of the Class
B Warrants by a fraction of which the numerator shall be the total
number of Common Shares outstanding immediately after such date and
the denominator shall be the total number of Common Shares
outstanding immediately
<PAGE>
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prior to such date. Such adjustment shall be made successively
whenever any event referred to in this subsection shall occur;
(b) if and whenever at any time from the date hereof and prior to the
Time of Expiry, there is a reclassification or redesignation of the
Common Shares or a capital reorganization of the Corporation other
than as described in subsection 4.01(a) or a consolidation,
arrangement, amalgamation or merger of the Corporation with or into
any other body corporate, trust, partnership or other entity, or a
sale or conveyance of the property and assets of the Corporation as
an entirety or substantially as an entirety to any other body
corporate, trust, partnership or other entity, any Warrantholder who
has not exercised his right of acquisition prior to the effective
date of such reclassification, redesignation, capital
reorganization, consolidation, arrangement, amalgamation, merger,
sale or conveyance, upon the exercise of such right thereafter,
shall be entitled to receive and shall accept, in lieu of the number
of Common Shares then sought to be acquired by him, the number of
shares or other securities or property of the Corporation or of the
body corporate, trust, partnership or other entity resulting from
such merger, amalgamation, arrangement, or consolidation, or to
which such sale or conveyance may be made, as the case may be, that
such Warrantholder would have been entitled to receive on such
reclassification, redesignation, capital reorganization,
consolidation, arrangement, amalgamation, merger, sale or
conveyance, if, on the record date or the effective date thereof, as
the case may be, the Warrantholder had been the registered holder of
the number of Common Shares receivable upon the exercise of Class B
Warrants then held. If determined appropriate by the Trustee to give
effect to or to evidence the provisions of this subsection 4.01(b),
the Corporation, its successor, or such purchasing body corporate,
partnership, trust or other entity, as the case may be, shall, prior
to or contemporaneously with any such reclassification,
redesignation, capital reorganization, consolidation, amalgamation,
arrangement, merger, sale or conveyance, enter into an indenture
which shall provide, to the extent possible, for the application of
the provisions set forth in this Indenture with respect to the
rights and interests thereafter of the Warrantholders to the end
that the provisions set forth in this Indenture shall thereafter
correspondingly be made applicable, as nearly as may reasonably be,
with respect to any shares, other securities or property to which a
Warrantholder is entitled on the exercise of his acquisition rights
thereafter. Any indenture entered into between the Corporation and
the Trustee pursuant to the provision of this
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subsection 4.01(b) shall be a supplemental indenture entered into
pursuant to the provisions of Article VIII hereof. Any indenture
entered into between the Corporation, any successor to the
Corporation or such purchasing body corporate, partnership, trust or
other entity and the Trustee shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the
adjustments provided in this Section 4.01 and which shall apply to
successive reclassifications, redesignations, capital
reorganizations, consolidations, arrangements, amalgamations,
mergers, sales or conveyances;
(c) if and whenever at any time prior to the Time of Expiry, the
Corporation shall:
(i) subdivide the outstanding Common Shares into a greater
number of Common Shares,
(ii) consolidate the outstanding Common Shares into a lesser
number of Common Shares, or
(iii) issue Common Shares by way of a stock dividend (other than the
issue of Common Shares to holders of Common Shares as a stock
dividend in lieu of a cash dividend paid in the ordinary
course),
the Exercise Price shall, on the effective date of such subdivision
or consolidation or on the record date of such subdivision or stock
dividend, as the case may be, be adjusted to that amount which is in
the same proportion to the Exercise Price in effect immediately
prior to such subdivision, consolidation or stock dividend, as the
number of outstanding Common Shares after giving effect to such
subdivision, consolidation or stock dividend bears to the number of
outstanding Common Shares after giving effect such subdivision,
consolidation or stock dividend. Such adjustment shall be made
successively whenever any event referred to in this subsection (1)
shall occur; and any such issue of Common Shares by way of a stock
dividend shall be deemed to have been made on the record date for
the stock dividend for the purpose of calculating the number of
outstanding Common Shares under subsections (d) and (e) of this
Section 4.01;
(d) if and whenever at any time prior to the Time of Expiry, the
Corporation shall fix a record date for the issuance of rights,
options or warrants to all or substantially all the holders of the
outstanding Common Shares entitling them to subscribe for or
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purchase Common Shares, or securities convertible into Common Shares
at a price per share or having a conversion or exchange price per
share less than 95% of the Current Market Price (as defined in
subsection (f) of this Section 4.01), on such record date, the
Exercise Price shall be adjusted immediately after such record date
so that it shall equal the price determined by multiplying the
Exercise Price in effect on such record date by a fraction of which
the numerator shall be the total number of Common Shares outstanding
at such record date plus a number of Common Shares equal to the
number arrived at by dividing the aggregate price of the total
number of additional Common Shares offered for subscription or
purchase, or into which the convertible securities so offered are
convertible, or the aggregate conversion or exchange price of the
convertible securities so offered, by such Current Market Price, and
of which the denominator shall be the total number of Common Shares
outstanding on such record date plus the total number of additional
Common Shares offered for subscription or purchase or into which the
convertible Securities so offered are convertible; Common Shares
owned by or held for the account of the Corporation or any
subsidiary of the Corporation shall be deemed not to be outstanding
for the purpose of any such computation; such adjustment shall be
made successively whenever such a record date is fixed; to the
extent that any rights, options or warrants are not so issued or any
such rights, options or warrants are not exercised prior to the
expiration thereof, the Exercise Price shall then be readjusted to
the Exercise Price which would then be in effect if such record data
had not been fixed or to the Exercise Price which would then be in
effect based upon the number of Common Shares, or securities
convertible into Common Shares, actually issued upon the exercise of
such rights, options or warrants, as the case may be;
(e) if and whenever at any time prior to the Time of Expiry, the
Corporation shall fix a record date for the making of a distribution
to all or substantially all the holders of its outstanding Common
Shares of:
(i) shares of any class other than Common Shares whether of the
Corporation or any other corporation (other than shares
distributed to holders of Common Shares as a stock dividend in
lieu of a cash dividend paid in the ordinary course), or
(ii) rights, options or warrants (other than those referred to in
subsection (d) of this Section 4.01), or
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(iii) evidences of its indebtedness, or
(iv) assets (other than cash dividends paid in the ordinary
course)
then, in each such case, the Exercise Price shall be adjusted
immediately after such record date so that it shall equal the price
determined by multiplying the Exercise Price in effect on such
record date by a fraction, of which the numerator shall be the total
number of Common Shares outstanding on such record date multiplied
by the Current Market Price on such record date, less the aggregate
fair market value (as determined by the directors and approved by
the Trustee) of such shares or rights, options or warrants or
evidences of indebtedness or assets so distributed, and of which the
denominator shall be the total number of Common Shares outstanding
on such record date multiplied by such Current Market Price; Common
Shares owned by or held for the account of the Corporation or any
subsidiary of the Corporation shall be deemed not to be outstanding
for the purpose of any such computation; such adjustment shall be
made successively whenever such a record date is fixed; and to the
extent that such distribution is not so made, the Exercise Price
shall then be readjusted to the Exercise Price which would then be
in effect if such record date had not been fixed or to the Exercise
Price which would then be in effect based upon such shares or
rights, options or warrants or evidences of indebtedness or assets
actually distributed, as the case may be;
(f) for the purpose of any computation under subsections (d) or (e)
of this Section 4.01, the "Current Market Price" at any date shall
be the weighted average of the closing prices per share for
Common Shares for any 30 consecutive trading days selected by
the Corporation commencing not more than 45 trading days
before such date on The Toronto Stock Exchange (or such other
stock exchange or electronic trading facility on which the
Common Shares shall then trade). The weighted average price
shall be determined by dividing the aggregate sale price or the
average closing bid and ask prices of all such shares sold on the
said exchange or facility during the said 30 consecutive trading
days by the total number of such shares so sold;
(g) in any case in which this Article IV shall require that an
adjustment shall become effective immediately after a record date
for an event referred to herein, the Corporation may defer, until
the occurrence of such event, issuing to the holder of any Class
<PAGE>
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B Warrant exercised after such record date and before the occurrence
of such event the additional Common Shares issuable upon such
exercise by reason of the adjustment required by such event before
giving effect to such adjustment; provided, however, that the
Corporation shall deliver to such holder an appropriate instrument
evidencing such holder's right to receive such additional Common
Shares upon the occurrence of the event requiring such adjustment
and the right to receive any distributions made on such additional
Common Shares which may be acquired upon the exercise of Class B
Warrants declared in favour of holders of record of Common Shares on
and after the Exercise Date or such later date as such holder would,
but for the provisions of this subsection (g), have become the
holder of record of such additional Common Shares pursuant to
Section 4.01; and
(h) the adjustments provided for in this Article IV in the number of
Common Shares, Exercise Price and classes of securities which
are to be received on the exercise of Class B Warrants, are
cumulative. After any adjustment pursuant to this Section 4.01,
the terms "Common Shares" where used in this Indenture shall be
interpreted to mean securities of any class or classes which, as a
result of such adjustment and all prior adjustments pursuant to
this Section 4.01, the Warrantholder is entitled to receive upon
the exercise of his Class B Warrant, and the number of Common
Shares indicated by any exercise made pursuant to a Class B
Warrant shall be interpreted to mean the number of Common
Shares or other property or securities a Warrantholder is entitled
to receive, as a result of such adjustment and all prior adjustments
pursuant to this Section 4.01, upon the full exercise of a Class B
Warrant.
4.02 ENTITLEMENT TO COMMON SHARES ON EXERCISE OF CLASS B WARRANT
All shares of any class, or other securities which a Warrantholder
is at the time in question entitled to receive on the exercise of his Class B
Warrant, whether or not as a result of adjustments made pursuant to this Section
shall, for the purposes of the interpretation of this Indenture, be deemed to be
shares and other securities which such Warrantholder is entitled to acquire
pursuant to such Class B Warrant.
<PAGE>
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4.03 DETERMINATION BY CORPORATION'S AUDITORS
In the event of any question arising with respect to the adjustments
provided for in this Article IV such question shall be conclusively determined
by the Corporation's auditors who shall have access to all necessary records of
the Corporation, and such determination shall be binding upon the Corporation,
the Trustee, all Warrantholders and all other persons interested therein.
4.04 PROCEEDINGS PRIOR TO ANY ACTION REQUIRING ADJUSTMENT
As a condition precedent to the taking of any action which would
require an adjustment in any of the acquisition rights pursuant to any of the
Class B Warrants, including the number of Common Shares which are to be received
upon the exercise thereof, the Corporation shall take any corporate action which
may, in the opinion of counsel, be necessary in order that the Corporation has
unissued and reserved in its authorized capital and may validly and legally
issue as fully paid and non-assessable all the shares which the holders of such
Class B Warrants are entitled to receive on the full exercise thereof in
accordance with the provisions hereof.
4.05 CERTIFICATE OF ADJUSTMENT
The Corporation shall from time to time immediately after the
occurrence of any event which requires an adjustment or readjustment as provided
in Article IV, deliver a certificate of the Corporation to the Trustee
specifying the nature of the event requiring the same and the amount of the
adjustment necessitated thereby and setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based, which
certificate and the amount of the adjustment specified therein shall be verified
by the Trustee.
4.06 PROTECTION OF TRUSTEE
The Trustee:
(a) shall not at any time be under any duty or responsibility to any
Warrantholder to determine whether any facts exist which may require
any adjustment contemplated by Section 4.01 or with respect to the
nature or extent of any such adjustment when made, or with respect
to the method employed in making the same;
(b) shall not be accountable with respect to the validity or value (or
the kind or amount) of any Common Shares or of any shares or other
securities or property which may at any time be issued or delivered
upon the exercise of the rights attaching to any Class B Warrant;
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(c) shall not be responsible for any failure of the Corporation to
issue, transfer or deliver Common Shares or certificates for the
same upon the surrender of any Class B Warrants for the purpose of
the exercise of such rights or to comply with any of the covenants
contained in this Article IV; and
(d) shall not incur any liability or responsibility whatever or be in
any way responsible for the consequences of any breach on the part
of the Corporation of any of the representations, warranties or
covenants herein contained or of any acts of the agents or servants
of the Corporation.
ARTICLE V
RIGHTS OF THE CORPORATION AND COVENANTS
5.01 OPTIONAL PURCHASES BY THE CORPORATION
The Corporation may from time to time purchase by private contract
or otherwise any of the Class B Warrants. Any such purchase shall be made at the
lowest price or prices at which, in the opinion of the directors, such Class B
Warrants are then obtainable, plus reasonable costs of purchase, and may be made
in such manner, from such persons and on such other terms as the Corporation, in
its sole discretion, may determine. The Warrant Certificate representing the
Class B Warrants purchased pursuant to this Section 5.01 shall forthwith be
delivered to and cancelled by the Trustee.
5.02 GENERAL COVENANTS
The Corporation covenants with the Trustee that so long as any Class
B Warrants remain outstanding:
(a) it will reserve and keep available a sufficient number of Common
Shares for the purpose of enabling it to satisfy its obligations to
issue Common Shares upon the exercise of the Class B Warrants in the
event that the Corporation does not have an unlimited number of
Common Shares authorized;
(b) it will cause the Common Shares and the certificates representing
the Common Shares from time to time acquired pursuant to the
exercise of the Class B Warrants to be duly issued and delivered in
accordance with the Warrant Certificates and the terms hereof;
<PAGE>
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(c) all Common Shares which shall be issued upon exercise of the right
to acquire provided for herein and in the Warrant Certificates shall
be fully paid and non-assessable;
(d) it will use its best efforts to maintain its corporate existence;
(e) it will use its best efforts to ensure that all Common Shares of the
Corporation outstanding or issuable from time to time continue to be
traded on the Canadian Dealing Network and/or such other exchange or
electronic trading facility as satisfactory to the directors of the
Corporation;
(f) it will make all requisite filings under applicable Canadian
securities legislation including those necessary to remain a
reporting issuer not in default in the province of British Columbia;
(g) if the Corporation pays a dividend or makes any other distribution
in cash or property or securities of the Corporation (including
rights, options or warrants to acquire Common Shares or
securities convertible into or exchangeable for Common Shares
and including evidences of its indebtedness) to Shareholders prior
to the Expiry Date, the Corporation agrees that it will pay the
same amount of such dividend or make the same distribution to
the Warrantholders, as if they were holders of such number of
Common Shares which such Warrantholders are entitled to
acquire upon the exercise of the Class B Warrants. The
Corporation will mail a notice to each holder of Class B Warrants
specifying the particulars of such payment or distribution within
two (2) Business Days of such payment or distribution;
(h) generally, it will well and truly perform and carry out all of the
acts or things to be done by it as provided in this Indenture.
5.03 TRUSTEE'S REMUNERATION AND EXPENSES
The Corporation covenants that it will pay to the Trustee from time
to time reasonable remuneration for its services hereunder and will pay or
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in the administration
or execution of the trusts hereby created (including the reasonable compensation
and the disbursements of its counsel and all other advisers and assistants not
regularly in its employ) both before any default hereunder and thereafter until
all duties of the Trustee hereunder shall be finally and fully performed, except
any such expense, disbursement or advance as may arise out of or result from the
Trustee's negligence, wilful misconduct or bad faith.
<PAGE>
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5.04 PERFORMANCE OF COVENANTS BY TRUSTEE
If the Corporation shall fail to perform any of its covenants
contained in this Warrant Indenture, the Trustee may notify the Warrantholders
of such failure on the part of the Corporation or may itself perform any of the
said covenants capable of being performed by it, but, subject to Section 9.02,
shall be under no obligation to perform said covenants or to notify the
Warrantholders of such performance by it. All sums expended or advanced by the
Trustee in so doing shall be repayable as provided in Section 5.03. No such
performance, expenditure or advance by the Trustee shall relieve the Corporation
of any default hereunder or of its continuing obligations under the covenants
herein contained.
ARTICLE VI
ENFORCEMENT
6.01 SUITS BY WARRANTHOLDERS
All or any of the rights conferred upon any Warrantholder by any of
the terms of the Warrant Certificates or of the Indenture, or of both, may be
enforced by the Warrantholder by appropriate proceedings but without prejudice
to the right which is hereby conferred upon the Trustee to proceed in its own
name to enforce each and all of the provisions herein contained for the benefit
of the Warrantholders.
6.02 IMMUNITY OF SHAREHOLDERS, ETC.
The Trustee and, by the acceptance of the Warrant Certificates and
as part of the consideration for the issue of the Class B Warrants, the
Warrantholders hereby waive and release any right, cause of action or remedy now
or hereafter existing in any jurisdiction against any incorporator or any past,
present or future shareholder, director, officer, employee or agent of the
Corporation or any successor corporation for the issue of the Common Shares
pursuant to any Class B Warrants or on any covenant, agreement, representation
or warranty by the Corporation herein or contained in the Warrant Certificates.
6.03 LIMITATION OF LIABILITY
The obligations hereunder are not personally binding upon, nor shall
resort hereunder be had to, the private property of any of the past, present or
future directors or shareholders of the Corporation or any successor corporation
or any of the past, present or future officers, employees or agents of the
Corporation or any successor corporation, but only the property of the
Corporation or any successor corporation shall be bound in respect hereof.
<PAGE>
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6.04 WAIVER OF DEFAULT
Upon the happening of any default hereunder:
(a) the holders of not less than 51% of the Class B Warrants then
outstanding shall have power (in addition to the powers exercisable
by extraordinary resolution as provided in Section 7.10) by
requisition in writing to instruct the Trustee to waive any default
hereunder and the Trustee shall thereupon waive the default upon
such terms and conditions as shall be prescribed in such
requisition; or
(b) the Trustee shall have power to waive any default hereunder upon
such terms and conditions as the Trustee may deem advisable, if, in
the Trustee's opinion, the same shall have been cured or adequate
provision made therefor;
provided that no delay or omission of the Trustee or of the Warrantholders to
exercise any right or power accruing upon any default shall impair any such
right or power or shall be construed to be a waiver of any such default or
acquiescence therein and provided further that no act or omission either of the
Trustee or of the Warrantholders shall extend to or be taken in any manner
whatsoever to affect any subsequent default hereunder or the rights resulting
therefrom.
ARTICLE VII
MEETINGS OF WARRANTHOLDERS
7.01 RIGHT TO CONVENE MEETINGS
The Trustee may at any time and from time to time, and shall on
receipt of a written request of the Corporation or of a Warrantholders' Request
and upon being indemnified to its reasonable satisfaction by the Corporation or
by the Warrantholders signing such Warrantholders' Request against the costs
which may be incurred in connection with the calling, and holding of such
meeting, convene a meeting of the Warrantholders. In the event of the Trustee
failing to convene a meeting within seven days after receipt of such written
request of the Corporation or such Warrantholders' Request and indemnity given
as aforesaid, the Corporation or such Warrantholders, as the case may be, may
convene such meeting. Every such meeting shall be held in the City of Vancouver
or at such other place as may be approved or determined by the Trustee.
<PAGE>
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7.02 NOTICE
At least ten (10) days' prior notice of any meeting of
Warrantholders shall be given to the Warrantholders in the manner provided for
in Section 10.02 and a copy of such notice shall be sent by mail to the Trustee
(unless the meeting has been called by the Trustee) and to the Corporation
(unless the meeting has been called by the Corporation). Such notice shall state
the time when and the place where the meeting is to be held, shall state briefly
the general nature of the business to be transacted thereat and shall contain
such information as is reasonably necessary to enable the Warrantholders to make
a reasoned decision on the matter, but it shall not be necessary for any such
notice to set out the terms of any resolution to be proposed or any of the
provisions of this Article VII.
7.03 CHAIRMAN
An individual (who need not be a Warrantholder) designated in
writing by the Trustee shall be chairman of the meeting and if no individual is
so designated, or if the individual so designated is not present within 15
minutes from the time fixed for the holding of the meeting, the Warrantholders
present in person or by proxy shall choose some individual present to be
chairman.
7.04 QUORUM
Subject to the provisions of Section 7.11, at any meeting of the
Warrantholders a quorum shall consist of Warrantholders present in person or by
proxy and entitled to acquire at least 25% of the aggregate number of Common
Shares which could be acquired pursuant to all the then outstanding Class B
Warrants, provided that at least two persons entitled to vote thereat are
personally present. If a quorum of the Warrantholders shall not be present
within 30 minutes from the time fixed for holding any meeting, the meeting, if
summoned by the Warrantholders or on a Warrantholders' Request, shall be
dissolved; but in any other case the meeting shall be adjourned to the same day
in the next week (unless such day is not a Business Day, in which case it shall
be adjourned to the next following Business Day) at the same time and place and
no notice of the adjournment need be given. Any business may be brought before
or dealt with at an adjourned meeting which might have been dealt with at the
original meeting in accordance with the notice calling the same. No business
shall be transacted at any meeting unless a quorum be present at the
commencement of business. At the adjourned meeting the Warrantholders present in
person or by proxy shall form a quorum and may transact the business for which
the meeting was originally convened, notwithstanding that they may not be
entitled to acquire at least 25% of the aggregate number of Common Shares which
may be acquired pursuant to all then outstanding Class B Warrants.
<PAGE>
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7.05 POWER TO ADJOURN
The chairman of any meeting at which a quorum of the Warrantholders
is present may, with the consent of the meeting, adjourn any such meeting, and
no notice of such adjournment need be given except such notice, if any, as the
meeting may prescribe.
7.06 SHOW OF HANDS
Every question submitted to a meeting shall be decided in the first
place by a majority of the votes given on a show of hands except that votes on
an extraordinary resolution shall be given in the manner hereinafter provided.
At any such meeting, unless a poll is duly demanded as herein provided, a
declaration by the chairman that a resolution has been carried or carried
unanimously or by a particular majority or lost or not carried by a particular
majority shall be conclusive evidence of the fact.
7.07 POLL AND VOTING
On every extraordinary resolution, and on any other question
submitted to a meeting and after a vote by show of hands when demanded by the
chairman or by one or more of the Warrantholders acting in person or by proxy
and entitled to acquire in the aggregate at least 5% of the aggregate number of
Common Shares which could be acquired pursuant to all the Class B Warrants then
outstanding, a poll shall be taken in such manner as the chairman shall direct.
Questions other than those required to be determined by extraordinary resolution
shall be decided by a majority of the votes cast on the poll.
On a show of hands, every person who is present and entitled to
vote, whether as a Warrantholder or as proxy for one or more absent
Warrantholders, or both, shall have one vote. On a poll, each Warrantholder
present in person or represented by a proxy duly appointed by instrument in
writing shall be entitled to one vote in respect of each Common Share which he
is entitled to acquire pursuant to the Class B Warrant or Class B Warrants then
held or represented by him. A proxy need not be a Warrantholder. The chairman of
any meeting shall be entitled, both on a show of hands and on a poll, to vote in
respect of the Class B Warrants, if any, held or represented by him.
7.08 REGULATIONS
The Trustee, or the Corporation with the approval of the Trustee,
may from time to time make and from time to time vary such regulations as it
shall think fit for:
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(a) the setting of the record date for a meeting for the purpose of
determining Warrantholders entitled to receive notice of and to
vote at a meeting;
(b) the issue of voting certificates by any bank, trust company or
other depository satisfactory to the Trustee stating that the
Warrant Certificates specified therein have been deposited with it
by a named person and will remain on deposit until after the
meeting, which voting certificates shall entitle the persons named
therein to be present and vote at any such meeting and at any
adjournment thereof or to appoint a proxy or proxies to represent
them and vote for them at any such meeting and at any
adjournment thereof in the same manner and with the same effect
as though the persons so named in such voting certificates were
the actual bearers of the Warrant Certificates specified therein;
(c) the deposit of voting certificates and instruments appointing
proxies at such place and time as the Trustee, the Corporation or
the Warrantholders convening the meeting, as the case may be, may in
the notice convening the meeting direct;
(d) the deposit of voting certificates and instruments appointing
proxies at some approved place or places other than the place at
which the meeting is to be held and enabling particulars of such
instruments appointing proxies to be mailed, cabled, telegraphed
or sent by other means of electronic transmission before the
meeting to the Corporation or to the Trustee at the place where
the same is to be held and for the voting of proxies so deposited
as though the instruments themselves were produced at the
meeting;
(e) the form of the instrument of proxy; and
(f) generally for the calling of meetings of Warrantholders and the
conduct of business thereat.
Any regulations so made shall be binding and effective and the votes
given in accordance therewith shall be valid and shall be counted. Save as such
regulations may provide, the only persons who shall be recognized at any meeting
as a Warrantholder, or be entitled to vote or be present at the meeting in
respect thereof (subject to Section 7.09), shall be Warrantholders or their
counsel, or proxies of Warrantholders.
<PAGE>
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7.09 CORPORATION AND TRUSTEE MAY BE REPRESENTED
The Corporation and the Trustee, by their respective directors and
officers, and the counsel for the Corporation and for the Trustee may attend any
meeting of the Warrantholders, but shall have no vote as such unless in their
capacity as a Warrantholder.
7.10 POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION
In addition to all other powers conferred upon them by any other
provisions of this Indenture or by law, the Warrantholders at a meeting shall,
subject to the provisions of Section 7.11, have the power, exercisable from time
to time by extraordinary resolution:
(a) to agree to any modification, abrogation, alteration, compromise or
arrangement of the rights of Warrantholders or the Trustee in its
capacity as trustee hereunder or on behalf of the Warrantholders
against the Corporation whether such rights arise under this
Indenture or the Warrant Certificates or otherwise;
(b) to amend, alter or repeal any extraordinary resolution previously
passed or sanctioned by the Warrantholders;
(c) to direct or to authorize the Trustee to enforce any of the
covenants on the part of the Corporation contained in this Indenture
or the Warrant Certificates or to enforce any of the rights of the
Warrantholders in any manner specified in such extraordinary
resolution or to refrain from enforcing any such covenant or right;
(d) to waive, and to direct the Trustee to waive, any default on the
part of the Corporation in complying with any provisions of this
Indenture or the Warrant Certificates either unconditionally or upon
any conditions specified in such extraordinary resolution;
(e) to restrain any Warrantholder from taking or instituting any suit,
action or proceeding against the Corporation for the enforcement of
any of the covenants on the part of the Corporation in this
Indenture or the Warrant Certificates or to enforce any of the
rights of the Warrantholders;
(f) to direct any Warrantholder who, as such, has brought any suit,
action or proceeding to stay or to discontinue or otherwise to deal
with the same upon payment of the costs, charges and expenses
<PAGE>
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reasonably and properly incurred by such Warrantholder in
connection therewith;
(g) to assent to any change in or omission from the provisions contained
in the Warrant Certificates and this Indenture or any ancillary or
supplemental instrument which may be agreed to by the Corporation,
and to authorize the Trustee to concur in and execute any ancillary
or supplemental indenture embodying the change or omission;
(h) with the consent of the Corporation, to remove the Trustee or its
successor in office and to appoint a new trustee or trustees to take
the place of the Trustee so removed; and
(i) to assent to any compromise or arrangement with any creditor or
creditors or any class or classes of creditors, whether secured or
otherwise, and with holders of any shares or other securities of the
Corporation.
7.11 MEANING OF EXTRAORDINARY RESOLUTION
(a) The expression "extraordinary resolution" when used in this
Indenture means, subject as hereinafter provided in this
Section 7.11 and in Section 7.14, a resolution proposed at a
meeting of Warrantholders duly convened for that purpose and
held in accordance with the provisions of this Article VII at which
there are present in person or by proxy Warrantholders entitled to
acquire at least 25% of the aggregate number of Common Shares
which may be acquired pursuant to all the then outstanding Class
B Warrants and passed by the affirmative votes of Warrantholders
entitled to acquire not less than 75% of the aggregate number of
Common Shares which may be acquired pursuant to all the then
outstanding Class B Warrants represented at the meeting and
voted on the poll upon such resolution.
(b) If, at any meeting called for the purpose of passing an
extraordinary resolution, Warrantholders entitled to acquire at
least 25% of the aggregate number of Common Shares which
may be acquired pursuant to all the then outstanding Class B
Warrants are not present in person or by proxy within 30 minutes
after the time appointed for the meeting, then the meeting, if
convened by Warrantholders or on a Warrantholders' Request,
shall be dissolved; but in any other case it shall stand adjourned
to such day, being not less than 15 or more than 60 days later,
and to such place and time as may be appointed by the chairman.
<PAGE>
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Not less than ten days' prior notice shall be given of the time and
place of such adjourned meeting in the manner provided for in
Section 10.02. Such notice shall state that at the adjourned meeting
the Warrantholders present in person or by proxy did not form a
quorum but it shall not be necessary to set forth the purposes for
which the meeting was originally called or any other particulars. At
the adjourned meeting the Warrantholders present in person or by
proxy shall form a quorum and may transact the business for which
the meeting was originally convened and a resolution proposed at
such adjourned meeting and passed by the requisite vote as provided
in subsection 7.11(a) shall be an extraordinary resolution within
the meaning of this Indenture notwithstanding that Warrantholders
entitled to acquire at least 25% of the aggregate number of Common
Shares which may be acquired pursuant to all the then outstanding
Class B Warrants are not present in person or by proxy at such
adjourned meeting.
(c) Votes on an extraordinary resolution shall always be given on a poll
and no demand for a poll on an extraordinary resolution shall be
necessary.
7.12 POWERS CUMULATIVE
Any one or more of the powers or any combination of the powers in
this Indenture stated to be exercisable by the Warrantholders by extraordinary
resolution or otherwise may be exercised from time to time and the exercise of
any one or more of such powers or any combination of powers from time to time
shall not be deemed to exhaust the right of the Warrantholders to exercise such
power or powers or combination of powers then or thereafter from time to time.
7.13 MINUTES
Minutes of all resolutions and proceedings at every meeting of
Warrantholders shall be made and duly entered in books to be provided from time
to time for that purpose by the Trustee at the expense of the Corporation, and
any such minutes as aforesaid, if signed by the chairman or the secretary of the
meeting at which such resolutions were passed or proceedings had shall be PRIMA
FACIE evidence of the matters therein stated and, until the contrary is proved,
every such meeting in respect of the proceedings of which minutes shall have
been made shall be deemed to have been duly convened and held, and all
resolutions passed thereat or proceedings taken shall be deemed to have been
duly passed and taken.
<PAGE>
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7.14 INSTRUMENTS IN WRITING
All actions which may be taken and all powers that may be exercised
by the Warrantholders at a meeting held as provided in this Article VII may also
be taken and exercised by Warrantholders entitled to acquire at least 75% of the
aggregate number of Common Shares which may be acquired pursuant to all the then
outstanding Class B Warrants by an instrument in writing signed in one or more
counterparts by such Warrantholders in person or by attorney duly appointed in
writing, provided that such instrument was submitted to, and the expression
"extraordinary resolution" when used in this Indenture shall include an
instrument so signed.
7.15 BINDING EFFECT OF RESOLUTIONS
Every resolution and every extraordinary resolution passed in
accordance with the provisions of this Article VII at a meeting of
Warrantholders shall be binding upon all the Warrantholders, whether present at
or absent from such meeting, and every instrument in writing signed by
Warrantholders in accordance with Section 7.14 shall be binding upon all the
Warrantholders, whether signatories thereto or not, and each and every
Warrantholder and the Trustee (subject to the provisions for indemnity herein
contained) shall be bound to give effect accordingly to every such resolution
and instrument in writing.
7.16 HOLDINGS BY CORPORATION DISREGARDED
In determining whether Warrantholders holding Warrant Certificates
evidencing the entitlement to acquire the required number of Common Shares are
present at a meeting of Warrantholders for the purpose of determining a quorum
or have concurred in any consent, waiver, extraordinary resolution,
Warrantholders' Request or other action under this Indenture, Class B Warrants
owned legally or beneficially by the Corporation or any subsidiary of the
Corporation shall be disregarded in accordance with the provisions of Section
10.08.
ARTICLE VIII
SUPPLEMENTAL INDENTURES
8.01 PROVISION FOR SUPPLEMENTAL INDENTURES FOR CERTAIN PURPOSES
From time to time the Corporation (when authorized by action by the
directors) and the Trustee may, subject to the provisions hereof, and they
shall, when so directed in accordance with the provisions hereof, execute and
deliver by their proper officers, indentures or instruments supplemental hereto,
which thereafter shall form part hereof, for any one or more or all of the
following purposes:
<PAGE>
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(a) setting forth any adjustments resulting from the application of the
provisions of Article IV;
(b) adding to the provisions hereof such additional covenants and
enforcement provisions as, in the opinion of counsel, are necessary
or advisable in the premises, provided that the same are not in the
opinion of the Trustee, based upon the advice of counsel prejudicial
to the interests of the Warrantholders;
(c) giving effect to any extraordinary resolution passed as provided in
Article VII;
(d) making such provisions not inconsistent with this Indenture as may
be necessary or desirable with respect to matters or questions
arising hereunder or for the purpose of obtaining a listing or
quotation of the Class B Warrants on any stock exchange, provided
that such provisions are not, in the opinion of the Trustee, based
upon the advice of counsel prejudicial to the interests of the
Warrantholders;
(e) adding to or altering the provisions hereof in respect of the
transfer of Class B Warrants, making provision for the exchange of
Warrant Certificates, and making any modification in the form of the
Warrant Certificates which does not affect the substance thereof;
(f) modifying any of the provisions of this Indenture, including
relieving the Corporation from any of the obligations, conditions
or restrictions herein contained, provided that such modification
or relief shall be or become operative or effective only if, in the
opinion of the Trustee, based upon the advice of counsel, such
modification or relief in no way prejudices any of the rights of the
Warrantholders or of the Trustee, and provided further that the
Trustee may in its sole discretion decline to enter into any such
supplemental indenture which in its opinion, based upon the
advice of counsel, may not afford adequate protection to the
Trustee when the same shall become operative; and
(g) for any other purpose not inconsistent with the terms of this
Indenture, including the correction or rectification of any
ambiguities, defective or inconsistent provisions, errors, mistakes
or omissions herein, provided that in the opinion of the Trustee,
based upon the advice of counsel, the rights of the Trustee and of
the Warrantholders are in no way prejudiced thereby.
<PAGE>
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8.02 SUCCESSOR CORPORATIONS
In the case of the consolidation, amalgamation, merger or transfer
of the undertaking or assets of the Corporation as an entirety or substantially
as an entirety to another corporation ("successor corporation"), the successor
corporation resulting from such consolidation, amalgamation, merger or transfer
(if not the Corporation) shall expressly assume, by supplemental indenture
satisfactory in form to the Trustee and executed and delivered to the Trustee,
the due and punctual performance and observance of each and every covenant and
condition of this Indenture to be performed and observed by the Corporation.
ARTICLE IX
CONCERNING THE TRUSTEE
9.01 TRUST INDENTURE LEGISLATION
(a) If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with a mandatory requirement of Applicable
Legislation, such mandatory requirement shall prevail.
(b) The Corporation and the Trustee agree that each will, at all times
in relation to this Indenture and any action to be taken hereunder,
observe and comply with and be entitled to the benefits of
Applicable Legislation.
9.02 RIGHTS AND DUTIES OF TRUSTEE
(a) In the exercise of the rights and duties prescribed or conferred by
the terms of this Indenture, the Trustee shall exercise that degree
of care, diligence and skill that a reasonably prudent trustee would
exercise in comparable circumstances. No provision of this Indenture
shall be construed to relieve the Trustee from liability for its own
negligent action, its own negligent failure to act, or its own
wilful misconduct or bad faith.
(b) The obligation of the Trustee to commence or continue any act,
action or proceeding for the purpose of enforcing any rights of the
Trustee or the Warrantholders hereunder shall be conditional upon
the Warrantholders furnishing, when required by notice by the
Trustee, sufficient funds to commence or to continue such act,
action or proceeding and an indemnity reasonably satisfactory to
the Trustee to protect and to hold harmless the Trustee against
the costs, charges and expenses and liabilities to be incurred
thereby and any loss and damage it may suffer by reason thereof.
<PAGE>
- 32 -
None of the provisions contained in this Indenture shall require the
Trustee to expend or to risk its own funds or otherwise to incur
financial liability in the performance of any of its duties or in
the exercise of any of its rights or powers unless indemnified and
funded as aforesaid.
(c) The Trustee may, before commencing or at any time during the
continuance of any such act, action or proceeding, require the
Warrantholders, at whose instance it is acting to deposit with the
Trustee the Class B Warrants held by them, for which Class B
Warrants the Trustee shall issue receipts.
(d) Every provision of this Indenture that by its terms relieves the
Trustee of liability or entitles it to rely upon any evidence
submitted to it is subject to the provisions of Applicable
Legislation, of this Section 9.02 and of Section 9.03.
9.03 EVIDENCE, EXPERTS AND ADVISERS
(a) In addition to the reports, certificates, opinions and other
evidence required by this Indenture, the Corporation shall furnish
to the Trustee such additional evidence of compliance with any
provision hereof, and in such form, as may be prescribed by
Applicable Legislation or as the Trustee may reasonably require by
written notice to the Corporation.
(b) In the exercise of its rights and duties hereunder, the Trustee may,
if it is acting in good faith, rely as to the truth of the
statements and the accuracy of the opinions expressed in statutory
declarations, opinions, reports, written requests, consents, or
orders of the Corporation, certificates of the Corporation or other
evidence furnished to the Trustee pursuant to any provision hereof
or of Applicable Legislation or pursuant to a request of the
Trustee, provided that such evidence complies with Applicable
Legislation and that the Trustee examines the same and determines
that such evidence complies with the applicable requirements of this
Indenture.
(c) Whenever it is provided in this Indenture or under Applicable
Legislation that the Corporation shall deposit with the Trustee
resolutions, certificates, reports, opinions, requests, orders or
other documents, it is intended that the trust, accuracy and good
faith on the effective date thereof and the facts and opinions
stated in all such documents so deposited shall, in each and every
<PAGE>
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such case, be conditions precedent to the right of the Corporation
to have the Trustee take the action to be based thereon.
(d) Proof of the execution of an instrument in writing, including a
Warrantholders' Request, by an Warrantholder may be made by the
certificate of a notary public, or other officer with similar
powers, that the person signing such instrument acknowledged to him
the execution thereof, or by an affidavit of a witness to such
execution or in any other manner which the Trustee may consider
adequate.
(e) The Trustee may employ or retain such counsel, accountants,
appraisers or other experts or advisers as it may reasonably
require for the purpose of discharging its duties hereunder and
may pay reasonable remuneration for all services so performed by
any of them, without taxation of costs of any counsel, and shall
not be responsible for any misconduct or negligence on the part
of any such experts or advisers who have been appointed with
due care by the Trustee.
9.04 DOCUMENTS, MONIES, ETC. HELD BY TRUSTEE
Any securities, documents of title or other instruments that may at
any time be held by the Trustee subject to the trusts hereof may be placed in
the deposit vaults of the Trustee or of any Canadian chartered bank or deposited
for safekeeping with any such bank. Unless herein otherwise expressly provided,
any monies so held pending the application or withdrawal thereof under any
provisions of this Indenture may be deposited in the name of the Trustee in any
Canadian chartered bank at the rate of interest (if any) then current on similar
deposits or, with the consent of the Corporation, may be:
(i) deposited in the deposit department of the Trustee or any
other loan or trust company authorized to accept deposits
under the laws of Canada or a province thereof, or
(ii) invested in securities issued or guaranteed by the
Government of Canada or a province thereof or in
obligations maturing not more than one year from the date
of investment, of any Canadian chartered bank or loan or
trust company. Unless the Corporation shall be in default
hereunder, all interest or other income received by the
Trustee in respect of such deposits and investments shall
belong to the Corporation.
<PAGE>
- 34 -
9.05 ACTIONS BY TRUSTEE TO PROTECT INTEREST
The Trustee shall have power to institute and to maintain such
actions and proceedings as it may consider necessary or expedient to preserve,
protect or enforce its interests and the interests of the Warrantholders.
9.06 TRUSTEE NOT REQUIRED TO GIVE SECURITY
The Trustee shall not be required to give any bond or security in
respect of the execution of the trusts and powers of this Indenture or otherwise
in respect of the premises.
9.07 PROTECTION OF TRUSTEE
By way of supplement to the provisions of any law for the time being
relating to Trustees it is expressly declared and agreed as follows:
(a) the Trustee shall not be liable for or by reason of any statements
of fact or recitals in this Indenture or in the Warrant Certificates
(except the representation contained in Section 9.09 or in the
signature of the Trustee on the Warrant Certificates) or be required
to verify the same, but all such statements or recitals are and
shall be deemed to be made by the Corporation;
(b) nothing herein contained shall impose any obligation on the Trustee
to see to or to require evidence of the registration or filing (or
renewal thereof) of this Indenture or any instrument ancillary or
supplemental hereto;
(c) the Trustee shall not be bound to give notice to any person or
persons of the execution hereof; and
(d) the Trustee shall not incur any liability or responsibility whatever
or be in any way responsible for the consequence of any breach on
the part of the Corporation of any of the covenants herein contained
or of any acts of any directors, officers, employees, agents or
servants of the Corporation.
9.08 REPLACEMENT OF TRUSTEE; SUCCESSOR BY MERGER
(a) The Trustee may resign its trust and be discharged from all further
duties and liabilities hereunder, subject to this Section 9.08, by
giving to the Corporation not less than 90 days' prior notice in
writing or such shorter prior notice as the Corporation may accept
as sufficient. The Warrantholders by extraordinary resolution shall
<PAGE>
- 35 -
have power at any time to remove the existing Trustee and to appoint
a new trustee. In the event of the Trustee resigning or being
removed as aforesaid or being dissolved, becoming bankrupt, going
into liquidation or otherwise becoming incapable of acting
hereunder, the Corporation shall forthwith appoint a new trustee
unless a new trustee has already been appointed by the
Warrantholders; failing such appointment by the Corporation, the
retiring Trustee or any Warrantholder may apply to a justice of the
Supreme Court of the Province of British Columbia, on such notice as
such justice may direct, for the appointment of a new trustee; but
any new trustee so appointed by the Corporation or by the Court
shall be subject to removal as aforesaid by the Warrantholders. Any
new trustee appointed under any provision of this Section 9.08 shall
be a corporation authorized to carry on the business of a trust
company in the Province of British Columbia and, if required by the
Applicable Legislation for any other provinces, in such other
provinces. On any such appointment the new trustee shall be vested
with the same powers, rights, duties and responsibilities as if it
had been originally named herein as Trustee hereunder.
(b) Upon the appointment of a successor trustee, the Corporation shall
promptly notify the Warrantholders thereof in the manner provided
for in Article X hereof.
(c) Any corporation into or with which the Trustee may be merged or
consolidated or amalgamated, or any corporation resulting
therefrom to which the Trustee shall be a party, or any
corporation succeeding to the trust business of the Trustee shall
be the successor to the Trustee hereunder without any further act
on its part or any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor
trustee under subsection 9.08(a).
(d) Any Warrant Certificates countersigned but not delivered by a
predecessor trustee may be countersigned by the successor trustee in
the name of the predecessor or successor trustee.
9.09 CONFLICT OF INTEREST
(a) The Trustee represents to the Corporation that at the time of
execution and delivery hereof no material conflict of interest
exists between its role as a trustee hereunder and its role in any
other capacity and agrees that in the event of a material conflict
of interest arising hereafter it will, within 90 days after
ascertaining
<PAGE>
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that it has such material conflict of interest, either eliminate the
same or assign its trust hereunder to a successor trustee approved
by the Corporation and meeting the requirements set forth in
subsection 9.08(a). Notwithstanding the foregoing provisions of this
subsection 9.09(a), if any such material conflict of interest exists
or hereafter shall exist, the validity and enforceability of this
Indenture and the Warrant Certificates shall not be affected in any
manner whatsoever by reason thereof.
(b) Subject to subsection 9.09(a), the Trustee, in its personal or any
other capacity, may buy, lend upon and deal in securities of the
Corporation and generally may contract and enter into financial
transactions with the Corporation or any subsidiary of the
Corporation without being liable to account for any profit made
thereby.
9.10 ACCEPTANCE OF TRUST
The Trustee hereby accepts the trusts in this Indenture declared and
provided for and agrees to perform the same upon the terms and conditions herein
set forth.
9.11 TRUSTEE NOT TO BE APPOINTED RECEIVER
The Trustee and any person related to the Trustee shall not be
appointed a receiver, a receiver and manager or liquidator of all or any part of
the assets or undertaking of the Corporation.
9.12 INDEMNIFICATION
Without limiting any protection or indemnity of the Trustee under
any other provision hereof, or otherwise at law, the Corporation hereby agrees
to indemnify and hold harmless the Trustee from and against any and all
liabilities, losses, damages, penalties, claims, actions, suits, costs, expenses
and disbursements, including reasonable legal or advisor fees and disbursements,
of whatever kind and nature which may at any time be imposed on, incurred by or
asserted against the Trustee in connection with the performance of its duties
and obligations hereunder, other than such liabilities, losses, damages,
penalties, claims, actions, suits, costs, expenses and disbursements arising by
reason of the negligence or fraud of the Trustee. This provision shall survive
the resignation or removal of the Trustee, or the termination of the Indenture.
The Trustee shall not be under any obligation to prosecute or to defend any
action or suit in respect of the relationship which, in the opinion of its
counsel, may involve it in expense or liability, unless the Company shall, so
often as required, furnish the Trustee with satisfactory indemnity and funding
against such expense or liability.
<PAGE>
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ARTICLE X
GENERAL
10.01 NOTICE TO THE CORPORATION AND THE TRUSTEE
(a) Unless herein otherwise expressly provided, any notice to be given
hereunder to the Corporation or the Trustee shall be deemed to be
validly given if delivered or if sent by registered letter, postage
prepaid:
if to the Corporation:
Seven Seas Petroleum Inc.
Suite 960 Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas
77056
ATTENTION: TIM STEPHENS
if to the Trustee:
Montreal Trust Company of Canada
4th Floor, 510 Burrard Street
Vancouver, B.C.
V6C 3B9
ATTENTION: MANAGER, CORPORATE TRUST
and any such notice delivered in accordance with the foregoing shall be deemed
to have been received on the date of delivery or, if mailed, on the fifth
Business Day following the date of the postmark on such notice.
(b) The Corporation or the Trustee, as the case may be, may from
time to time notify the other in the manner provided in
subsection 10.01(a) of a change of address which, from the
effective date of such notice and until changed by like notice,
shall be the address of the Corporation or the Trustee, as the case
may be, for all purposes of this Indenture. A copy of any notice
of change of address given pursuant to subsection 10.01(b) shall
be sent to the Warrant Agency, where it shall be available for
inspection by Warrantholders during normal business hours.
<PAGE>
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(c) If, by reason of a strike, lockout or other work stoppage, actual or
threatened, involving postal employees, any notice to be given to
the Trustee or to the Corporation hereunder could reasonably be
considered unlikely to reach its destination, such notice shall be
valid and effective only if it is delivered to the named officer of
the party to which it is addressed or, if it is delivered to such
party at the appropriate address provided in subsection 10.01(a),
by cable, telegram, telex or other means of prepaid, transmitted
and recorded communication.
10.02 NOTICE TO WARRANTHOLDERS
(a) Any notice to the Warrantholders under the provisions of this
Indenture shall be valid and effective if sent by telegram, telex or
telecopier or letter or circular through the ordinary post addressed
to such holders at their post office addresses appearing on the
register hereinbefore mentioned and shall be deemed to have been
effectively given on the date of delivery or, if mailed, five
Business Days following actual posting of the notice.
(b) If, by reason of a strike, lockout or other work stoppage, actual or
threatened, involving postal employees, any notice to be given to
the Warrantholders hereunder could reasonably be considered
unlikely to reach its destination, such notice shall be valid and
effective only if it is delivered personally to such Warrantholders
or if delivered to the address for such Warrantholders contained
in the register of Class B Warrants maintained by the Trustee, by
cable, telegram, telex or other means of prepaid, transmitted and
recorded communication.
10.03 OWNERSHIP OF CLASS B WARRANTS
The Corporation and the Trustee may deem and treat the registered
owner of any Warrant Certificate as the absolute owner of the Class B Warrant
represented thereby for all purposes, and the Corporation and the Trustee shall
not be affected by any notice or knowledge to the contrary except where the
Corporation or the Trustee is required to take notice by statute or by order of
a court of competent jurisdiction. A Warrantholder shall be entitled to the
rights evidenced by such Warrant Certificate free from all equities or rights of
set-off or counterclaim between the Corporation and the original or any
intermediate holder thereof and all persons may act accordingly and the receipt
of any such Warrantholder for the Common Shares which may be acquired pursuant
thereto shall be a good discharge to the Corporation and the Trustee for the
same and neither the Corporation nor the Trustee shall be bound to inquire into
the title of any such holder except where the Corporation or the
<PAGE>
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Trustee is required to take notice by statute or by order of a court of
competent jurisdiction.
10.04 Intentionally Left Blank.
<PAGE>
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10.05 COUNTERPARTS
This Indenture may be executed in several counterparts, each of
which when so executed shall be deemed to be an original and such counterparts
together shall constitute one and the same instrument and notwithstanding their
date of execution they shall be deemed to be dated as of the date hereof.
10.06 SATISFACTION AND DISCHARGE OF INDENTURE
Upon the earlier of:
(a) the date by which there shall have been delivered to the Trustee for
exercise or destruction all Warrant Certificates theretofore
countersigned hereunder; or
(b) the Time of Expiry;
this Indenture shall cease to be of further effect and the Trustee, on demand of
and at the cost and expense of the Corporation and upon delivery to the Trustee
of a certificate of the Corporation stating that all conditions precedent to the
satisfaction and discharge of this Indenture have been complied with, shall
execute proper instruments acknowledging satisfaction of and discharging this
Indenture.
<PAGE>
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10.07 PROVISIONS OF INDENTURES AND CLASS B WARRANTS FOR THE SOLE BENEFIT
OF PARTIES AND WARRANTHOLDERS
Nothing in this Indenture or in the Warrant Certificates, expressed
or implied, shall give or be construed to give to any person other than the
parties hereto and the Warrantholders, as the case may be, any legal or
equitable right, remedy or claim under this Indenture, or under any covenant or
provision herein or therein contained, all such covenants and provisions being
for the sole benefit of the parties hereto and the Warrantholders.
<PAGE>
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10.08 COMMON SHARES OR CLASS B WARRANTS OWNED BY THE CORPORATION
OR ITS SUBSIDIARIES - CERTIFICATE TO BE PROVIDED
For the purpose of disregarding any Class B Warrants owned legally
or beneficially by the Corporation or any subsidiary of the Corporation in
Section 7.16, the Corporation shall provide to the Trustee, from time to time, a
certificate of the Corporation setting forth as at the date of such certificate:
(a) the names (other than the name of the Corporation) of the registered
holders of Common Shares which, to the knowledge of the Corporation,
are owned by or held for the account of the Corporation or any
Subsidiary of the Corporation; and
(b) the number of Class B Warrants owned legally or beneficially by
the Corporation or any subsidiary of the Corporation;
and the Trustee, in making the computations in Section 7.16, shall be entitled
to rely on such certificate without more.
IN WITNESS WHEREOF the parties hereto have executed this Indenture under their
respective corporate seals and the hands of their proper officers in that behalf
as of the date first above written.
SEVEN SEAS PETROLEUM INC.
Per: _________________________________
Per: _________________________________
MONTREAL TRUST COMPANY OF CANADA
Per: _________________________________
Per: _________________________________
<PAGE>
THIS IS SCHEDULE "A" TO A Class B WARRANT INDENTURE
MADE AS OF OCTOBER 15, 1996 BETWEEN
SEVEN SEAS PETROLEUM INC.
MONTREAL TRUST COMPANY OF CANADA, AS TRUSTEE.
THE Class B WARRANTS REPRESENTED BY THIS CERTIFICATE WILL BE VOID AND
OF NO VALUE UNLESS EXERCISED BY 5:00 P.M. (VANCOUVER TIME) ON
OCTOBER 15, 1997.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE UNITED STATES SECURITIES ACT
OF 1933 (THE "U.S. ACT"), AS AMENDED OR UNDER THE SECURITIES LAWS OF ANY STATE
THEREOF, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR
ITS TERRITORIES OR POSSESSIONS OR TO A CITIZEN, RESIDENT OR NATIONAL OF THE
UNITED STATES DURING THE 40 DAY PERIOD COMMENCING ON THE DATE OF ISSUANCE OF THE
SECURITIES REPRESENTED HEREBY UNLESS SUCH SECURITIES ARE REGISTERED UNDER THE
U.S. ACT OR PURSUANT TO AN EXEMPTION FROM THE U.S. ACT.
CLASS B WARRANTS
SEVEN SEAS PETROLEUM INC.
Suite 960 Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas
77056
(Incorporated under the laws of the Province of British Columbia)
Class B WARRANT _____________ Class B WARRANTS
CERTIFICATE NO.______________ one such warrant entitling the holder to
purchase 1 Common Share at a price of
U.S. $18.50 per Common Share on or
before October 15, 1997.
THIS IS TO CERTIFY THAT ____________________________________________________
(herein called the "holder") is entitled to acquire in the manner herein
provided, subject to the restrictions herein contained, during the period
commencing on the date hereof and ending at 5:00 p.m. (Vancouver time) on
October 15, 1997 (the "Expiry Date"), the number of fully paid and
non-assessable common shares ("Common Shares") without nominal or par value of
Seven Seas Petroleum Inc. ("the Corporation") as set forth above.
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Such right to purchase Common Shares may only be exercised by the holder hereof
within the time hereinbefore set out by:
(a) duly completing in the manner indicated and executing the
Exercise Form attached hereto; and
(b) surrendering this Class B Warrant Certificate to Montreal Trust
Company of Canada (the "Trustee") at the principal office of the
Trustee in the City of Vancouver, British Columbia; and
(c) payment by cash or certified cheque or money order in lawful monies
of the United States of America, payable to or to the order of the
Corporation in the amount of EIGHTEEN DOLLARS AND FIFTY CENTS
($18.50), for each Common Share to be purchased until the Expiry
Date (the "Exercise Price") at the principal office of the Trustee
in the City of Vancouver, British Columbia.
These Class B Warrants shall be deemed to be so surrendered only upon personal
delivery thereof or, if sent by post or other means of transmission, upon actual
receipt thereof by the Trustee at the office referred to above.
Upon such surrender, the person or persons in whose name or names the Common
Shares issuable upon exercise of the Class B Warrants are to be issued shall be
deemed for all purposes (except as provided in the Indenture hereinafter
referred to) the holder or holders of record of such Common Shares and the
Corporation covenants that it will (subject to the provisions of the Indenture)
cause a certificate or certificates representing such Common Shares to be
delivered or mailed to such person or persons at the address or addresses
specified in such Exercise Form.
The registered holder of these Class B Warrants may acquire any lesser number of
Common Shares than the number of Common Shares which may be acquired for the
Class B Warrants represented by this Class B Warrant Certificate and in such
event shall be entitled to receive a new Class B Warrant Certificate in respect
of the balance of the Common Shares which may be acquired.
To the extent that the Class B Warrants represented by this Class B Warrant
Certificate confer the right to acquire a fraction of a Common Share, such right
may be exercised in respect of such fraction only in combination with an
additional Class B Warrant or Class B Warrants which in the aggregate entitle
the holder to acquire a whole number of Common Shares. No fractional Common
Shares will be issued.
The Class B Warrants represented by this Class B Warrant Certificate are issued
under and pursuant to a Class B Warrant indenture (herein called the
"Indenture") made as of October 15, 1996, between the Corporation and the
Trustee (which expression shall include any successor trustee appointed under
the Indenture), to which Indenture
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and any instruments supplemental thereto reference is hereby made for a full
description of the rights of the holders of the Class B Warrants and the terms
and conditions upon which such Class B Warrants are, or are to be, issued and
held, all to the same effect as if the provisions of the Indenture and all
instruments supplemental thereto were herein set forth, and to all of which
provisions the holder of these Class B Warrants by acceptance hereof assents.
In the event of any alteration of the Common Shares, including any subdivision,
consolidation or reclassification, and in the event of any form of
reorganization of the Corporation, including any amalgamation, merger or
arrangement, an adjustment shall be made to the terms of the Class B Warrants
such that the holders thereof, upon exercise of any Class B Warrants following
the completion of any of the above noted events, will be entitled to receive the
same number and kind of securities that they would have been entitled to receive
had they exercised their Class B Warrants immediately prior to such event.
The registered holder of this Class B Warrant Certificate may at any time prior
to the Expiry Date of the Class B Warrants, upon surrender hereof to the Trustee
at its principal office in the City of Vancouver, British Columbia and payment
of the charges provided for in the Indenture, exchange this Class B Warrant
Certificate for other Class B Warrant Certificates evidencing Class B Warrants
entitling the holder to acquire in the aggregate the same number of Common
Shares as may be acquired under this Class B Warrant Certificate.
The holding of the Class B Warrants evidenced by this Class B Warrant
Certificate shall not constitute the holder hereof a shareholder of the
Corporation or entitle such holder to any right or interest in respect thereof
except as herein and in the Indenture expressly provided.
The Indenture contains provisions making binding upon all holders of Class B
Warrant Certificates outstanding thereunder resolutions passed at meetings of
such holders held in accordance with such provisions and instruments in writing
signed by the holders of Class B Warrants entitled to acquire a specified
majority of the Common Shares which may be acquired pursuant to all then
outstanding Class B Warrant Certificates.
The Class B Warrants evidenced by this Class B Warrant Certificate may not be
transferred or assigned.
This Class B Warrant Certificate shall not be valid for any purpose whatever
unless and until it has been countersigned by or on behalf of the Trustee.
Time shall be of the essence hereof.
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Words and phrases defined in the Indenture where used in this Class B Warrant
Certificate shall be given the meanings ascribed thereto in the Indenture unless
otherwise defined herein.
IN WITNESS WHEREOF the Corporation has caused this Class B Warrant Certificate
to be signed by its duly authorized officers effective as of October 15, 1996.
SEVEN SEAS PETROLEUM INC.
Per:_______________________________
Per:_______________________________c/s
Countersigned by:
MONTREAL TRUST COMPANY OF CANADA
TRUSTEE
By:_______________________________
Authorized Signature
<PAGE>
EXERCISE FORM
TO: MONTREAL TRUST COMPANY OF CANADA
The undersigned hereby exercises the right to acquire _________________ Common
Shares without nominal or par value of Seven Seas Petroleum Inc. (or such number
of other securities or property to which such Class B Warrants entitle the
undersigned in lieu thereof or in addition thereto under the provisions of the
Indenture mentioned in the Class B Warrant Certificate) according to the terms
of the Indenture mentioned in the Class B Warrant Certificate.
Such securities or property are to be issued as follows:
NAME:_________________________________________________
ADDRESS IN FULL:______________________________________
______________________________________
______________________________________
DATED this ______ day of ___________________, 19___.
SIGNATURE GUARANTEED SIGNATURE
(BY A CANADIAN CHARTER BANK, TRUST
COMPANY OR A MEMBER OF THE VANCOUVER, (PRINT FULL NAME)
TORONTO, MONTREAL OR NEW YORK STOCK
EXCHANGES)
(PRINT FULL ADDRESS)
<PAGE>
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INSTRUCTIONS:
The registered holder may exercise his right to acquire Common Shares by
completing the above form, surrendering this Class B Warrant Certificate and
paying the Exercise Price to Montreal Trust Company of Canada at its principal
office in Vancouver, British Columbia. For the protection of the holder, it
would be prudent to register if forwarding by mail. Certificates for Common
Shares will be delivered or mailed as soon as practicable after the exercise of
the Class B Warrants. The rights of the registered holder cease if the Class B
Warrants are not exercised prior to 5:00 p.m. (Vancouver time) on the Expiry
Date. If any of the Common Shares subscribed for are to be issued to a person or
persons other than the registered holder, the signature of the registered holder
must be guaranteed by a Canadian chartered bank, trust company or by a member of
the Vancouver, Toronto, Montreal or New York stock exchanges.
EXHIBIT (10)(A)
[Letterhead of Seven Seas Petroleum Inc.]
August 14, 1995
Mr. Larry Ray
GHK Company
6305 Waterford Boulevard
Suite 470
Oklahoma City, OK 73118
Re: Dindal and Rio Seco Association Contracts
El Segundo Test Well
Emerald Mountain Prospect
Colombia, South America
Dear Larry:
Seven Seas Petroleum Colombia, Inc. ("SSPC") wishes to participate with GHK
Company Colombia ("GHK") in the Dindal and Rio Seco Association Contracts and
the El Segundo test well, as previously agreed, subject to documentation, via
letter dated June 21, 1995. The relevant terms and conditions are:
(1) GHK will assign and convey to SSPC an undivided 10.0% of
GHK's rights and interest in the Dindal and Rio Seco
Association Contracts;
(2) SSPC agrees to pay $106,383 to GHK in reimbursement of a
portion of costs previously incurred by GHK;
(3) SSPC will pay its proportionate share of geological, geophysical and
overhead costs applicable to the El Segundo test well, and its
proportionate share of the first year obligations under the Rio Seco
Association Contract (estimated total: $150,000);
(4) SSPC will pay its proportionate share of the actual costs
to drill, test and complete the El Segundo test well, to be
operated by GHK;
(5) In the event Ecopetrol has not approved the form of assignment to SSPC
and SSPC is not in receipt of the executed assignment prior to the
spudding of the El Segundo well, the parties will prepare a mutually
satisfactory trust agreement providing for the holding in trust by GHK
of SSPC's interest pending final approvals and execution and delivery of
the assignment. In that event, SSPC will
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2
pay the amounts mentioned in (2), (3) and (4) above upon execution of
the trust agreement;
(6) All operations related to the drilling of the El Segundo well will be
governed by the International Operating Agreement, executed by the
partners in the well.
If you are in agreement with the foregoing, please so indicate by executing and
returning one copy of this letter to us.
Sincerely,
By: /s/ TIMOTHY T. STEPHENS
Timothy T. Stephens
President
Accepted and agreed to this
31st day of August, 1995
By: /s/ LARRY A. RAY
Larry A. Ray
Vice President
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GHK COMPANY COLOMBIA
6305 Waterford Blvd., Suite 470
Oklahoma City, Oklahoma 73118
Phone: 405.858.9800 Fax: 405.858.9898
Mr. Timothy T. Stephens
Seven Seas Petroleum, Inc.
1990 Post Oak Blvd., Suite 960
Three Post Oak Central
Houston, TX 77056
Re: Dindal and Rio Seco Association Contracts
El Segundo Test Well
Emerald Mountain Prospect
Colombia, S.A.
Dear Tim:
GHK Company Colombia ("GHK") and Seven Seas Petroleum Colombia, Inc. ("SSPC")
have previously entered into a Letter Agreement dated August 14, 1995 (the
"Agreement") and a Trust Agreement effective September 1, 1995 (the "Trust
Agreement") which provide for the participation by SSPC in the drilling of the
El Segundo test well and referenced Association Contracts. GHK and SSPC hereby
agree to amend the Agreement and the Trust Agreement as follows:
1. The 100% interest in Paragraph (1) on Page 1 of the
Agreement shall be changed to 15%.
2. This same 10% figure shall be changed to 15% in the
following places in the Trust Agreement:
a. Paragraph (E) on Page 1
b. Paragraph 4) on Page 2
c. In the definition of "Relevant Interest" in Article 1.0 at
the bottom of Page 2
d. At the end of Article 2.1 on Page 3
3. The dollar amount of $15,960 at the end of Paragraph 1)
on Page 2 of the Trust Agreement shall be changed to
$23,940.
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2
If the foregoing is in accordance with your understanding of our agreement, we
ask that you please confirm such by signing in the space below and returning one
copy of this letter to us.
Sincerely,
GHK Company Colombia
/s/ LARRY A. RAY
Larry A. Ray
Accepted and agreed to this 30th day of November 1995.
SEVEN SEAS PETROLEUM COLOMBIA, INC.
By: /S/ TIMOTHY T. STEPHENS
Timothy T. Stephens
President
EXHIBIT 10(B)
FINAL TRANSLATION (MARCH 15, 1993)
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NUMBER 270
TWO HUNDRED SEVENTY
In the City of Santa Fe de Bogota Capital District, Republic of Colombia, at the
ninth day of February of Nineteen Hundred Ninety Three (1993). In my presence,
Otto Barrios Gawes, Public Notary Number 16, of the Bogota circle, appeared
Doctor Dario Cardenas Navas domiciled in Santa Fe de Bogota D.C. identified with
citizen certificate number 17066629 of Bogota and military card number B250188
of the special military district who opts in own name and manifests: First: that
he presents in a conservative manner in the protocol of this Notary the contract
of the ASSOCIATION for the sector designated as DINDAL executed between EMPRESA
COLOMBIANA DE PETROLEOS SA "ECOPETROL", GHK COMPANY COLOMBIA and PETROLINSON
S.A. dated 22nd of January of Nineteen Hundred Ninety Three with its respective
annexes: "A" consisting of the contracted area and the calculated coordinates
Gauss and "B" consisting of the operation agreement. The notary declares
contract legal under the number of the public register the aforementioned
documents. Based on the act, requested copies can be expedited to the parties
conforming and arranged with numeral 3 of article 27 of Decree 2076 of the 23rd
of December of Nineteen Hundred Ninety Two. "ECOPETROL" Empresa Colombiana de
Petroleos must act as agent for retaining taxes of the signed contract. Duly
read this instrument is signed for its validity jointly with the subscribed
notary who in this form authorizes contract. Signed on page number AB27474598
free of charge of the notary only notary cost of rights of $3,000.00 pesos as
conformed authorized Decree 172 of the 28th of January of 1992.
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ASSOCIATION CONTRACT
ASSOCIATE: THE GHK COMPANY AND PETROLINSON S.A.
SECTOR: DINDAL
EFFECTIVE DATE: MARCH 23 OF 1993
The contracting Parties known as the Colombian Company of Petroleum,
from now on to be called ECOPETROL, commercial and industrial company of the
State authorized by the Law 165 of 1948 and governed by Decree 062 of 1970, with
principal domicile in Santa Fe de Bogota, represented by JUAN MARIA RENDON
GUTIERREZ, identified with the citizenship certificate No. 17.125.100 issued in
Santa Fe de Bogota, domiciled in Santa Fe of Bogota, who manifests: 1. That in
his character as President of ECOPETROL works to represent this Company, and 2.
Has the power of the present Contract authorized by the Executive Branch/Office
of ECOPETROL, according to No. 2012 of the 3 of November 1992 and, by the other
Party, THE GHK COMPANY COLOMBIA organized according to the laws of Oklahoma,
with a branch being established in Santa Fe de Bogota D.C., Colombia.
1. Represented by RUSS A. CUNNINGHAM, identified with Passport
Number P.O. 82019832 of the United States of America, who manifest: 1. That in
his character as a legal officer works to represent the GHK COMPANY COLOMBIA
and, 2. Has authorization to execute the present contract according to power
given to him. And PETROLINSON S.A. company organized according to laws in the
Republic of Panama, with a subsidiary established in Colombia and principle
domicile in Santa Fe de Bogota according to the Public Notice number 4489 of the
6th of July, 1964, granted in the fifth Notary of the Circle of Santa Fe de
Bogota, represented by NORMAN R. ROWLINSON, identified with the certificate of
foreign number 73.192 issued in Bogota, who manifests:
1. That in capacity of General Trustee works in representation of
PETROLINSON S.A. and company
2. Has the power to execute the present contract according to the
certificate of existence and legal representation issued by the Chamber of
Commerce of Santa Fe de Bogota. In the course of this Contract THE GHK COMPANY
and PETROLINSON S.A. will be called THE
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ASSOCIATE. In the noted conditions, ECOPETROL and THE ASSOCIATE make it known
that they have executed the contract in the following clauses:
CHAPTER 1 - GENERAL PROVISIONS
CLAUSE 1 - OBJECT OF THIS CONTRACT
1.1 The object of this contract is the exploration of the Contracted
Area and the exploitation of such nationally owned oil as may be found therein,
as described in Clause 3 below.
1.2 According to the object of this contract Article 1., Decree No.
2310 of 1974 the exploration and exploitation of hydrocarbons of national
property entrusted to ECOPETROL, who may carry out said activities directly or
by means of contracts with private parties. Based on the mentioned disposition
ECOPETROL has agreed with THE ASSOCIATE to exploit the Contracted Area and to
exploit the Petroleum that could find in the terms and conditions anticipated in
the present document, Annex "A" and Annex "B" (Operating Agreement) that form an
integral part of this contract.
1.3 Without prejudice of the provisions stipulated in the contract,
it is understood that THE ASSOCIATE shall have the same rights and obligations
in respect to the Petroleum produced in the Contracted Area and to its share of
the same as are assigned under Colombian law to anyone exploiting
nationally-owned Petroleum in this country.
1.4 ECOPETROL and THE ASSOCIATE agree that they will carry out
exploration work and exploitation in the terrain of the Contracted Area, that
they will distribute costs and risks in the same proportion and terms
anticipated in this contract and that the properties they may acquire and the
stored and produced Petroleum will belong to each Party in the stipulated
proportions.
CLAUSE 2 - APPLICATION OF THIS CONTRACT
This contract applies to the Contracted Area, whose boundaries are
described in Clause 3 below, or to any portion thereof, subject to the terms
hereof, whenever Clause 8 has been applied.
CLAUSE 3 - CONTRACTED AREA
This Contracted Area is called "DINDAL", and comprises an extension
of 80.154 hectares with 8.500 square meters and is located in the municipal
jurisdictions of Caparrapi, La
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Palma, Guaduas, Chaguani, Viani, Villeta, Quebrada Negra, Utica and Yacopi in
the Department of Cundinamarca. This area is described herein below and, as
shown in the map enclosed as Annex "A" has been taken as frame of reference the
Geodetic Vertex "TAPE - 24" of the Geographic Institute "Agustin Codazzi," whose
flat coordinates Gauss with Origin Bogota are: N-1,063, 470.38 meters, E-
951,466.09 meters that correspond with the geographic coordinates: Latitude
05(degree) 10' 22" .276" to the North of the Equator and Longitude 74(degree)
31' 07" .154 to the West of Greenwich. Of this frame of reference is continued
with N course 57(degree) octadecadiene '09" .072 W by uniting distance of
4,553.45 meters until arriving to the point "A", lot point whose coordinates
Gauss are: N-1,065,900.00 meters, E-947,615.00 meters, E-947,615.00 meters. Of
this point "A" is continued with North course by uniting distance of 4,100.00
meters until arriving to the point "B" whose coordinates Gauss are: N-1,
070,000.00 meters, E-947,615.00 meters. Of this point "B" is continued with West
course by distance of 13,615.00 meters until arriving to the point "C" whose
coordinates Gauss are: N-1,070.000.00 meters, E-934,000.00 meters. The linear
"B-C" adjoins in the part West with the linear "H-G" of the undersigned Honda
Contract with COCODRILL OIL. Of this point "C" is continued with N course
28(degree) 04' 20" .953E and by distance of 34,000.00 meters until arriving to
the point "D" whose coordinates Gauss are: N-1,100,000.00 meters, E-950,000.00
meters. Of this point "D" is continued with course East by uniting distance of
18,000.00 meters until arriving to the point "E" whose coordinates Gauss are:
N-1,100,000.00 meters, E-968,000.00 meters. Of this point "E" is continued with
course S 28(degree) 04' 20" .953 W by distance of 34,000.00 meters until
arriving to the point "F" whose coordinates Gauss are: N-1,070,000.00 meters,
E-952,000.00 meters. Of this point "F" is continued with course S 07(degree) 07'
30" .059E And by distance of 16,124.51 meters until arriving to the point "G"
whose coordinates Gauss are: N-1,054,000.00 meters, E-954,000.00 meters. Of this
point "G" is continued with course S15(degree) 42' 31" .096 W by uniting
distance of 16,620.77 meters until arriving to the point "H" whose coordinates
Gauss are: N-1,038,000.00 meters, E-949,500.00 meters. Of this point "H" is
continued with West course by distance of 5,800.00 meters until arriving to the
point "I" whose coordinates Gauss are: N-1,038,000.00 meters, E-943,700.00
meters. The linear "HI" adjoins in all its extension with the part East of the
linear "M-L" of the VIANI Contract undersigned by AMERICAN INTERNATIONAL
PETROLEUM CORPORATION OF COLOMBIA. Of this point "I" is continued with North
course by uniting distance of 27,900.00 meters until arriving to the point "J"
whose coordinates Gauss are: N-1,065,900.00 meters, E-943,700.00 meters. Of this
point "J" is continued with course this by
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uniting distance of 3,915.00 meters until arriving to the point "A" lot point of
the boundary and shutdown of the polygon.
PARAGRAPH 1
Whenever a person files a claim asserting that he/she is the owner
of the subsoil in the Contracted Area, ECOPETROL will assume the attention of
the case and any other required obligations.
CLAUSE 4 - DEFINITIONS
For purposes of this Contract, the terms mentioned below shall have
the following meaning:
4.1 CONTRACTED AREA: The terrain defined in the Clause 3 previous,
with subordination to the Clause 8.
4.2 COMMERCIAL FIELD: It is that portion of the Contracted Area that
it will be able of producing Petroleum in quantity and quality economically
workable.
4.3 EXECUTIVE COMMITTEE: Is the committee that is integrated within
thirty (30) following days to the acceptance of a Commercial Field, to
supervise, control and approve all the operations and shares that are advanced
during the force of the contract.
4.4 DIRECT EXPLORATION COSTS: Those monetary expenditures in which
incurs THE ASSOCIATE by the drilling of Exploration wells that they may have
resulted producing, as well as by locations, completion, equipment and tests of
such wells, flow lines and separators. Direct Exploration Costs do not include
administrative or technical support from the head office or central offices of
the Company.
4.5 JOINT ACCOUNT: The records that are carried by means of
accounting books, books, according to the Colombian laws for crediting or
debiting the parties for their participation in the Joint Operation.
4.6 BUDGETARY EXECUTION: The resources actually expended and/or
committed for each of the programs and projects approved for a given calendar
year.
4.7 EFFECTIVE DATE: It will be the calendar day in which exceeds a
term of sixty (60) calendar days counted from the date in which a signature is
present on the contract, from which are counted all the terms in the covenant,
subject to the validity of the same.
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4.8 CASH FLOW: Constitutes the physical money movement (income and
disbursements) that the Joint Account must make in order to attend the different
obligations that develop from the normal operations the Association acquires.
4.9 NATURAL GAS: Hydrocarbons mixture in gaseous state, composed by
most volatile members of the hydrocarbon paraffinic series.
4.10 DIRECT EXPENDITURES: All expenditures charged to the Joint
Account as a result of payments to personnel directly working for the
Association, purchase of materials and supplies, service contracts made with
third parties and any overhead required by the Joint Operation for the normal
performance of activities.
4.11 INDIRECT EXPENSES: Those disbursements charged to the Joint
Account for administrative and/or technical support which the Operator may
eventually furnish the Joint Operation using his own organization.
4.12 COMMERCIAL INTEREST: When referring to Colombian Pesos, it
shall be the current interest rate as certified by the Bank Superintendency for
the corresponding period; in the case of dollars of the United States of America
it shall be the principal rate as fixed by CITY BANK of New York.
4.13 INTEREST IN THE OPERATION: The share in the obligations and
rights each Party acquired in the exploration and exploitation of the Contracted
Area.
4.14 DEVELOPMENT INVESTMENTS: Refers to money invested in assets and
equipment that are capitalized as assets for the Joint Operation in a Commercial
Field accepted by the Parties.
4.15 PRODUCTION OBJECTIVES: They are the formations, strata or sands
with possible hydrocarbons accumulation.
4.16 JOINT OPERATION: The activities and executed works or in
process of execution on behalf of the Parts and by account of these.
4.17 OPERATOR: The person nominated by the Parties so that, on their
behalf, carries out the operations necessary to explore and exploit the
Petroleum that is found in the Contracted Area.
4.18 PARTIES: On the Effective Date, ECOPETROL and THE ASSOCIATE.
Thereafter and, at any time, ECOPETROL and THE ASSOCIATE and/or its assignees,
of the other.
4.19 PERIOD OF EXPLORATION: It is the time lapse that THE ASSOCIATE
has to comply with the obligations stipulated in the Clause 5 of this contract
and that it will not exceed six
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(6) years counted as of the Effective Date, on exception of the cases provided
in the Clause 9 (subparagraph 9.3 and 9.8) and 34.
4.20 PERIOD OF EXPLOITATION: The time elapses from when the Period
of Exploration ends, until the termination of this contract.
4.21 PETROLEUM: The natural hydrocarbons mixture in liquid or
gaseous state, in normal conditions, as well as those substances that accompany
them or are derived from them with exception from helium and rare gases.
4.22 EXPLORATORY WELLS Any designate well as such by THE ASSOCIATE
to be drilled or deepen by their responsibility in the Area Contracted in search
for Petroleum. The fulfillment of the obligations covenanted in Clause 5 of the
presents contract, the respective exploration well will be previously qualified
between ECOPETROL and THE ASSOCIATE.
4.23 EXPLOITATION WELL (OR DEVELOPMENT WELL): Any well previously
scheduled by the Executive Committee to produce Petroleum in the Commercial
Area.
4.24 BUDGET: The basic planning instrument used to assigned
resources for specific projects to be applied within a calendar year, or part of
the year, in order to accomplish the goals and objectives proposed by THE
ASSOCIATE or by the Operator.
4.25 EXTENSIVE TEST OF PRODUCTION: They are the operations that are
executed in one or various producing exploration wells, in order to evaluate the
conditions of production and behavior of the oil field.
4.26 REFUND: Payment in proportion that corresponds to ECOPETROL by
the direct cost of exploration (incurred by THE ASSOCIATE) of the exploration
wells that have productive results.
4.27 EXPLORATION WORK: They are those operations executed by THE
ASSOCIATE in concern to the research and discovery of Petroleum within the area
of the contract.
CHAPTER II - EXPLORATION
CLAUSE 5 - TERMS AND CONDITIONS
5.1.1 During the first year counted from the effective date of this
Contract THE ASSOCIATE will be obligated to carry out the drilling of two (2)
exploratory wells until reaching to penetrate the formations that they could
produce petroleum in the area. During the second year THE ASSOCIATE will carry
out the drilling of two (2) Exploratory wells until reaching to penetrate the
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formations that they could produce Petroleum in the area. At the end of each
year THE ASSOCIATE will have be the option of resigning to the contract,
provided that may have been given fulfillment to the respective obligations.
5.1.2 During the third year THE ASSOCIATE will drill two (2)
Exploratory wells until reaching to penetrate the formations that they could
produce Petroleum in the area. At the time of expiration of this year the
contract will be terminated if has not been applied and authorized in accordance
with subparagraph 5.2 of this Clause or no commercial field has been discovered.
5.1.3 At the expiration of the first year of the Period of
Exploration THE ASSOCIATE will be able to reduce the Contracted Area by fifty
percent (50%) of the original area, according to the determining boundaries and
that are accepted by ECOPETROL. In case that THE ASSOCIATE exercise this
faculty, the exploratory obligations will be reduced to the drilling of one (1)
Exploratory well by the start of the second year of exploration.
5.2 If THE ASSOCIATE has been satisfactory in fulfilling the
obligations stipulated in Clause 5, ECOPETROL, by request of THE ASSOCIATE, will
extend annually up to three (3) additional years to the period of exploration
and after the first extended year THE ASSOCIATE will be obligated to carry out
exploration work in the Contracted Area, consisting in two (2) exploration wells
until penetrating formation that could produce Petroleum in the area.
5.3 If, during any one (1) year of the Period of Exploration, THE
ASSOCIATE determines to advance work corresponding to obligations of the
following year it can apply from ECOPETROL to approve such work. If the request
is approved by ECOPETROL, it will determine in which form and value the transfer
is made of the obligations mentioned.
5.4 During the force of this contract, THE ASSOCIATE will be able to
effect Exploration Works in areas that are conserve according with Clause 8 and
THE ASSOCIATE will be solely responsible for the risks and costs of these
activities and, therefore, will have the exclusive and complete control of the
same. This will not modify the maximum duration of the contract.
CLAUSE 6 - SUPPLY OF INFORMATION DURING EXPLORATION
6.1 ECOPETROL shall supply THE ASSOCIATE, whenever this applies, all
the information it has in its possession within the Contracted Area. The costs
of reproductibility and supply of such information will be charged to THE
ASSOCIATE.
6.2 During the Period of Exploration THE ASSOCIATE shall deliver to
ECOPETROL, as it is obtained, all the geological and geophysical information,
edited magnetic
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tapes, processed seismic sections and all the field information that serves them
as support, magnetic and gravimetric logs, all in reproducible originals, copies
of geophysical reports, reproducible originals of all logs as the wells are
drilled by THE ASSOCIATE, including the final composite graph for each well and
copies of the final drilling report, including core sample analyses, results of
production tests and any other information relating to the drilling, survey, or
interpretation of any kind performed by THE ASSOCIATE for the Contracted Area
without limitation. ECOPETROL is entitled, in any time and through any procedure
it may consider appropriate, to attend all the operations and to verify the
previously listed information.
6.3 The Parties agree that during the validity of this contract all
the information obtained in the development of the same is confidential. The
Parties agree equally that each case will be able to effect exchanges with the
associated or non-associated companies with ECOPETROL. It is understood that
this agreement is without prejudice to the obligation to furnish the Ministry of
Mines and Energy with any information it may request under current legal and
regulatory provisions. Nevertheless, it is understood and agreed that THE
ASSOCIATE may, at its sole discretion, supply information required by its
affiliates, consultants, contractors, and financial entities, and as required by
the competent authorities with jurisdiction over THE ASSOCIATE or its
affiliates, or under regulations of any stock exchange in which capital stock of
THE ASSOCIATE or related corporations is listed.
CLAUSE 7 - BUDGET AND EXPLORATION SCHEDULES
THE ASSOCIATE will have the obligation to prepare with observance of
what was established in this contract, the programs and cost estimates necessary
to effect the exploration of the Contracted Area. Said programs and cost
estimates will be presented in a timely manner to ECOPETROL.
CLAUSE 8 - RESTITUTION OF THE AREAS
8.1 Independently to the reduction of the Contracted Area that by
decision of THE ASSOCIATE will be carried out as laid down in Clause 5
(subparagraph 5.1.3). Upon termination of the initial exploration period or any
extensions thereof obtained by THE ASSOCIATE, or at the end of the sixth (6)
year at the latest, if a Commercial Field has been discovered in the Contracted
Area, said area shall be reduced to fifty percent (50%) of the original area;
two (2) years later, the area shall be reduced to twenty five percent (25%) of
the area that was initially contracted and two
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(2) years thereafter, such area shall be reduced to the area of the Commercial
Field or Fields under production or development, plus a five (5) kilometer wide
reserve zone surrounding each field. The Commercial Fields, plus the zone
surrounding each field, shall be called the Exploitation Area, and shall be the
only part of the Contracted Area that shall remain subject to the terms of this
contract.
8.2 The ASSOCIATE will determine the areas that shall be returned to
ECOPETROL in lots of minimum extensions of five thousand (5,000) hectares each,
unless THE ASSOCIATE shows evidence that such is not possible. Notwithstanding
the requirement to relinquish areas as referred to in Clause 8 (subparagraph
8.1), THE ASSOCIATE is not obliged to return development or production areas,
including the 5 kilometer wide reserve belt surrounding them, unless development
or production operations are suspended continuously for over a year, without
just cause and for reasons attributable to THE ASSOCIATE, in which case the
areas will be returned to ECOPETROL, this terminating the contract for said
areas or parts of areas. These stipulations are also applicable to exploitation
under the sole risk modality.
CHAPTER III - EXPLOITATION
CLAUSE 9 - TERMS AND CONDITIONS
9.1 To initiate the Joint Operation under the terms of this contract
its considered that the works of exploitation begin on the date the Parties
recognize the existence of a commercial field or when they are met on Clause 9
(subparagraph 9.5). THE ASSOCIATE will prove the existence of a Commercial Field
by drilling, in the proposed Commercial Field, a number of wells sufficient to
reasonable define the area and commerciality of the field. In this case THE
ASSOCIATE will notify ECOPETROL in writing about such discovery, furnishing the
studies which have led to this conclusion. Within ninety (90) calendar days from
the date THE ASSOCIATE hands over all supporting information, ECOPETROL must
accept or object to the existence of such Commercial Field. ECOPETROL may
request such additional information as it may deem necessary within the thirty
(30) days following the date of submission of the first supporting information.
9.2.1 If ECOPETROL accepts the existence of the Commercial Field, it
will give announcement in this sense to THE ASSOCIATE within ninety (90)
calendar days as provided in Clause 9 (subparagraph 9.1) and entered to
participate, in the terms of this contract, into the development of the
Commercial Field, discovered by THE ASSOCIATE.
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9.2.2 ECOPETROL will reimburse to THE ASSOCIATE fifty percent (50%)
of the Direct Exploration Costs of the wells when, having been drilled by THE
ASSOCIATE as Exploratory Wells within the Commercial Field referred to under
Clause 9 (subparagraph 9.1), prove commercially productive.
9.2.3 The amount of these costs is determined in dollars of the
United States of America, taking as date of reference that in which ECOPETROL
warns THE ASSOCIATE that accepts the existence of the Commercial Field;
therefore, the costs caused in Colombian pesos are liquidated to the
representative exchange rate of the market certify by the Banking Superintendent
that governs in the here signed date.
9.2.4 The reimbursement of the corresponding costs to each well will
be made by ECOPETROL to THE ASSOCIATE from the moment in which the well is
placed on production by the Operator, with the amount on dollars of its direct
participation on the production of the respective well.
9.3 If ECOPETROL does not accept the existence of the Commercial
Field as referred to under Clause 9 (subparagraph 9.1) it will be able to
indicate to THE ASSOCIATE the additional works that considers necessary to
demonstrate the existence of a Commercial Field, works whose cost will not
exceed TWO MILLION DOLLARS (US $2,000,000.00), they will neither be able to
require for the execution a lapse greater than one (1) year, in which case the
Period of Exploration for the Contracted Area is extended automatically by the
same period as that agreed by the Parties as necessary to perform the additional
work requested by ECOPETROL in this clause, but without prejudice to reduction
of areas as stipulated in Clause 8 (subparagraph 8.1).
9.4 If ECOPETROL, after executing the additional works required
according with Clause 9 (subparagraph 9.3), accepts the existence of the
Commercial Field referred to in Clause 9 (subparagraph 9.1), enters to
participate in the development operations of the field before mentioned in the
terms established in this contract and will refund to THE ASSOCIATE, in the
shape stipulated in the Clause 9 (subparagraph 9.2.2), fifty percent (50%) of
the cost of the applied additional works, referred to in Clause 9 (subparagraph
9.3) and the executed works became property of the Joint Account.
9.5 If ECOPETROL does not accept the existence of a Commercial
Field, after effected completion additional works referred to in Clause 9
(subparagraph 9.3), THE ASSOCIATE has the right to execute works that estimates
necessary for the exploitation of said field and be refunded two hundred percent
(200%) of the total cost of the works executed by its own accounts and
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risks, and for the effects of this clause with the value of the Petroleum
production, less the royalties referred to in Clause 13, deducting costs of
production, gathering, transportation and sales. For liquidation purposes the
dollar equivalent of the disbursements made in pesos will be calculated using
the exchange rate on the date ECOPETROL notifies the non-existence of a
Commercial Field. For the purpose of this clause, the value of each barrel of
Petroleum produced in said field during a calendar month will be the average
price by barrel that THE ASSOCIATE receives of the sales of its participation in
the Petroleum produced in the Contracted Area during the same month. When THE
ASSOCIATE has reimbursed the percentage established in this clause, all the
drilled wells, the installations and all kinds of assets acquired by THE
ASSOCIATE for the exploitation of the field and paid as indicated in this
clause, will become property of the Joint Account free of charge, previous
acceptance of ECOPETROL of participating in the development of such field.
9.6 ECOPETROL at any time may enter to participate in the operation
of the field discovered and developed by THE ASSOCIATE, without prejudice to THE
ASSOCIATE'S right to reimburse itself for the investments made at its expense,
in the form and percentage stated in Clause 9 (subparagraph 9.5). Once THE
ASSOCIATE is reimbursed, ECOPETROL shall start to participate in the financial
results of the developed wells by exclusive expense of THE ASSOCIATE.
9.7 To define a Commercial Field all the geological and geophysical
information will be considered and that of the drilled wells within said field
or those related to it.
9.8 If upon expiration of the six (6) year Exploration Period
referred to in Clause 5 (subparagraph 5.2), THE ASSOCIATE has drilled one or
more Exploratory Wells which indicate the possible existence of a Commercial
Field, ECOPETROL, at the ASSOCIATE'S request, shall extend the Exploration
Period for the necessary time, not to exceed one (1) year, for THE ASSOCIATE to
demonstrate the existence of said Commercial Field, without prejudice to that
set out in Clause 8.
CLAUSE 10 - TECHNICAL CONTROL OF OPERATIONS
10.1 The parties agree that THE ASSOCIATE is the Operator and as
such, within the limitations set forth in this contract, shall have control of
all the operations and activities it may consider necessary for a technical,
efficient and economic exploitation of the Oil existing within the area of the
Commercial Field.
10.2 The Operator has the obligation of accomplishing all the
development operations and production according to the industrial standards and
practices, using the better technical methods
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and systems that requires the economical and efficient exploitation of
Petroleum, and fulfilling the pertinent legal and regulatory provisions on the
subject.
10.3 The Operator shall be considered as an entity distinct from the
Parties hereto for all objectives of this contract, as well as for purposes of
the implementation of civil, labor and administrative legislation and for the
Operation's relations with the personnel it employs, pursuant to Clause 32.
10.4 The Operator shall have the right to resign as such, by means
of written notice given to the Parties six (6) months in advance of the
effective date of such resignation. The Executive Committee shall then appoint a
new Operator pursuant to Clause 19 (subparagraph 19.3.2).
CLAUSE 11 - EXPLOITATION SCHEDULES AND BUDGET
11.1 Within three (3) months following acceptance of a Commercial
Field in the Contracted Area, the Operator shall present to the Parties an
activity schedule and a Budget for the rest of the calendar year thereof. Should
there be less than six and one-half (6 1/2) months to the end of such year, the
Operator shall prepare and present the Budget and schedules for the following
calendar year within a term of three (3) months. Future Budgets and schedules
shall be presented to the Parties in the ordinary meeting of the Executive
Committee held in July of the previous year. Within twenty (20) days following
receipt of the Budgets and schedules, the Parties shall advise the Operator in
writing of the changes they wish to propose. When this happens, the Operator
shall take into account the observations and amendments proposed by the Parties
in the preparation of the Budget and schedules, which shall be submitted for
final approval by the Executive Committee, at the ordinary meeting held each
November; except if there are less than six and one-half (6 1/2) months left
before the end of the year when the existence of the Commercial Field is
recognized. Should the total Budget not be approved before November, those
aspects of the Budget items on which agreement has been reached shall be
approved by the Executive Committee, while the items on which no agreements has
been reached shall be immediately submitted to the Parties for their subsequent
review and final decision, in the manner provided for in Clause 20.
11.2 The Parts will be able to propose additions or inspections to
the Budget and to the approved schedules, but, except in cases emergency, they
will not have to be formulated frequently inferior at three (3) months. The
Executive Committee will decide about the additions and inspection proposed in
meetings; the one which is convened within the thirty (30) days following
presentation of the same.
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11.3 The schedules and Budgets are mainly designed to:
11.3.1 Determine the operations and to be carried out during the
following calendar year.
11.3.2 To determine the expenses and investments that the Operator
is authorized to undertake.
11.4 The terms Schedule and Budget mean the proposed work plan and
the estimated expenses and investments that the Operator shall carry out in the
different aspects of the operation, such as:
11.4.1 Capital investments in production: Drilling for the
development of reservoirs, well workover or recovery, and second construction
specific to production.
11.4.2 General construction and equipment: Industrial and camp
facilities, transport and building equipment, drilling and production equipment,
other construction and equipment.
11.4.3 Maintenance and operating expenses: production expenses,
geological expenses and administrative overhead for the operation.
11.4.4 Working capital requirements.
11.4.5 Funds for contingencies (unforeseen occurrences)
11.5 The Operator shall make all the expenditures and investments
and carry out the development and production operations in accordance with the
schedules and Budgets referred to in Clause 11 (subparagraph 11.1), without
exceeding the total Budget for each year by ten percent (10%), except by
authorization of the Parties in special cases.
11.6 The Operator voluntarily will not initiate any project, nor
charge the Joint Account expenses not approved in the Budget, that exceed the
sum of forty thousand dollars of United States of America currency (US $40,000)
or its equivalent in Colombian currency, by project or by trimester.
11.7 The Operator remains authorized to effect chargeable expenses
to the Joint Account without previous authorization of the Executive Committee,
when emergency measures must be taken to safeguard staff or emergency expenses
originated in fire, floods, storms or other disasters; indispensable emergency
expenses for the operation and the maintenance of the installations of
production, inclusive of the maintenance of the wells in conditions of producing
with the maximum efficiency; indispensable emergency expenses for the protection
and conservation of materials and necessary equipment in the operations. In this
case the Operator must convene a special meeting of the Executive Committee as
soon as it will be possible, to obtain their approval in order to continue with
the emergency measures.
CLAUSE 12 - PRODUCTION
12.1 Whenever necessary and duly approved by the Executive
Committee, the Operator shall determine the Maximum Efficiency Rate of
Production (MER) for each Commercial Field. This Maximum Efficiency Rate (MER)
will be the maximum producing rate of Oil that can be extracted from a reservoir
for the purpose of maximum final recovery of reserves. Estimated production
should be diminished as necessary to compensate real or anticipated operating
conditions, such as wells under repair which are not producing, limited capacity
of gathering lines, pumps, separators, tanks, pipelines and other installations.
12.2 The Operator shall determine periodically, and at least once a
year, with the Executive Committee's approval, the area deemed capable of
producing Oil in commercial quantity in each field and shall propose spacing and
programming for drilling Exploitation Wells in an economical and efficient
manner.
12.3 The Operator shall prepare and deliver to each one of the
Parties, at regular intervals of three (3) months, a schedule that indicates the
participation in the production and other that shows the distribution for each
Party, for the following six (6) months. The production forecast will be made on
the basis of the Maximum Grade of Productive Efficiency (MER) as has been
stipulated in the Clause 12 (numeral 12.1) and adjusted to the rights of each
Party, according to this contract. The distribution schedule of production is
defined upon the petitions periodic requests of each Party, and according to
Clause 14 (numeral 14.2) with the corrections that may be necessary to assure
that none of the Parties, being in capacity from withdrawing, receiving less
than the quantity to the fact that has the right according to entitlement in the
Clause 14 and without prejudice of the provisions in Clause 21 (subparagraph
21.2) and 22 (subparagraph 22.5).
12.4 If any one of the parties foresees a reduction in its capacity
to receive Oil as regards to the forecast furnished to the Operator, it shall so
advise the Operator as soon as possible, and if such reduction is due to an
emergency situation, such Party shall advise the Operator within twelve (12)
hours following the occurrence of the event causing such reduction. In
consequence, the Party concerned shall provide the Operator with a new receipt
schedule, taking into consideration the corresponding reduction.
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12.5 The Operator may use the crude oil and gas which is consumed in
the performance of production operations in the Contracted Area, and such crude
and gas so consumed shall be exempt from the royalties referred to in Clause 13
(subparagraph 13.1 and 13.2).
CLAUSE 13 - ROYALTIES
13.1 During the exploitation of the Contracted Area, and before
sharing out production among the Parties, the Operator will hand over to
ECOPETROL twenty percent (20%) of the fiscalized liquid hydrocarbon production
coming from said area, as a royalty. At its own risk and for its own account,
ECOPETROL shall take in kind the production percentage pertaining to royalties
from the tanks belonging to the joint account.
13.2 As a royalty, the Operator shall deliver to ECOPETROL twenty
percent (20%) of the production of gas.
13.3 From the production percentage covering the royalty, ECOPETROL
shall, in the manner and under the terms set forth by the Law, pay to the
Nation, the Departments and the Municipalities the royalties applicable to the
total production of the Commercial Field, and THE ASSOCIATE shall in no case be
liable for any payments to those entities or persons.
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF OIL
14.1 The produced Petroleum, excepting the one which may have been
used in enrichment of the operations of this contract and the one which
inevitably is wasted in these functions, will be transported to the common tanks
of the Parties or to other measurement installations that the Parties agree. The
Petroleum will be measured pursuant to the standards and methods accepted by the
oil industry and, based on this measurement, are determined the percentages
referred to in Clause 13. From that moment, the remaining Petroleum remains the
property of each Party in the proportions specified in this contract.
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14.2 Sliding Scale Production Distribution. Having deduced the
corresponding percentage to the royalty, the remainder of Petroleum and produced
gas originating from the field is
the property of the Parties in the following proportion:
TOTAL ACCUMULATED PRODUCTION
================================================================================
BARRELS ECOPETROL ASSOCIATE
% %
- --------------------------------------------------------------------------------
FROM 0 TO 60,000,000 50% 50%
- --------------------------------------------------------------------------------
FROM 60,000,001 TO 90,000,000 55% 45%
- --------------------------------------------------------------------------------
FROM 90,000,001 TO 120,000,000 60% 40%
- --------------------------------------------------------------------------------
FROM 120,000,001 TO 150,000,000 65% 35%
- --------------------------------------------------------------------------------
OVER 150,000,001 70% 30%
================================================================================
14.2.1 For the purpose of this clause, field hydrocarbons
accumulation that is found stored within an area accepted as commercial included
the zone of five reservation (5) kilometers wide surrounding it, as referred to
in Clause 8 (subparagraph 8.1) of this contract.
14.2.2 Should several Commercial Fields be discovered under this
Contract, the production distribution percentage of the field having the
greatest total accumulated production shall apply to the distribution of the
production from all Commercial Fields in the Contracted Area.
14.2.3 Should a field produce crude oil and gas, in order to apply
the above distribution table, the total accumulated production to be taken into
account shall be that of the main hydrocarbon in keeping with the authorization
granted by the Ministry of Mines and Energy for exploitation of said field. In
order to determine the total accumulated production, the measure for the
equivalent gas is the amount of 7,000 standard cubic feet of gas per barrel of
oil.
14.3 In addition to the jointly owned tanks and other facilities
each Party shall have the right to build its own production facilities in the
Contracted Area for its own and exclusive use in compliance with legal
regulations. The transport and delivery of each Party's Oil to the pipeline and
to other storage facilities not jointly owned, shall be the sole responsibility
and risk of the receiving Party.
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14.4 In case that obtained production is in localities not connected
by pipelines, the Parties may be able to agree on the pipeline installation
until the point in which the Petroleum could be sold, or to a locality that
connects with the pipeline. If the Parties agree the construction of such
pipelines, they will execute the contracts they considered convenient to the
effect and designate the Operator according to the outstanding legal
dispositions.
14.5 Each Party shall own the oil produced and stored as a result of
the operation hereunder and that may be available to it pursuant to the
provisions of this contract, and each Party must receive such Oil in kind or
sell it or dispose of it separately, at its own expense, as provided for in
Clause 14 (subparagraph 14.3).
14.6 If some of the Parties, by any reason, can not separately have
or withdraw from the tanks from the Joint Account all or part of the Petroleum
that corresponds to it according to this contract, the following procedure is
applied:
14.6.1 If ECOPETROL is the Party that is unable to withdraw in whole
or in part its quota of Oil (in other words, share plus royalty) pursuant to
Clause 12 (subparagraph 12.3), the Operator may continue producing the field and
delivering to THE ASSOCIATE, in addition to the portion representing THE
ASSOCIATE'S quota in the operation on the basis of one hundred percent (100%) of
the MER, all such Oil as THE ASSOCIATE chooses and is able to withdraw up to the
limit of one hundred percent (100%) of the MER, crediting ECOPETROL for
subsequent delivery, the volume of Oil ECOPETROL was entitled to withdraw but
failed to do so. But with respect to volume of Petroleum not withdrawn that
corresponds in the month by royalties to ECOPETROL, THE ASSOCIATE at the request
of ECOPETROL, will pay in dollars of the United States of America, the
difference between the quantity of Petroleum withdrawn and the quantity of
Petroleum that corresponds on account of the royalty referred to in the Clause
13 (subparagraphs 13.1 and 13.2), it being understood that any Oil withdrawal
made by ECOPETROL shall be applied in the first place to royalty payment in
kind, and subsequently, any additional Oil withdrawals shall be applied to
ECOPETROL'S share under Clause 14 (subparagraph 14.2)
14.6.2 In case that THE ASSOCIATE will be the Party that can not
withdraw, in all or in part, its portion assigned under the Clause 12
(subparagraph 12.3), the Operator will deliver to ECOPETROL, based on one
hundred percent (100%) of the MER, not only the participation and the quota that
corresponds, but also the Petroleum that ECOPETROL is in capacity from
withdrawing until a limit from one hundred percent (100%) of the MER,
accrediting with THE ASSOCIATE subsequent delivery, the part that corresponds
and that may not have been able to withdraw.
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14.7 When both Parties are in of receiving the Oil allocated under
Clause 12 (subparagraph 12.3), the Operator shall deliver to the Party which had
been previously unable to receive its production quota, upon such Party's
request, in addition to its share in the operation, a minimum of ten percent
(10%) per month of the production corresponding to the other Party every month
and, by mutual agreement, up to one hundred (100%) of the non-received share, up
to the time when the total amounts credited to the Party that had been unable to
receive its Oil are canceled out.
14.8 Without prejudice of the legal dispositions that regulate the
matter, each Party will have freedom, in any moment, of selling or exporting its
quota of obtained Petroleum, according to this contract, or having same in any
shape.
CLAUSE 15 - UTILIZATION OF GAS
In the event one or more liquid Oil fields with associated gas are
discovered, the Operator shall, within the two (2) years following commencement
of commercial production from the field, will submit a project on the use of
natural gas for the benefit of the Joint Account. The Executive Committee shall
approve the project and decide on the schedule therefor. If the Operator fails
either to present any project within the two (2) years or to execute the
approved project within the time limits stipulated by the Executive Committee,
ECOPETROL may take free-of-charge all available gas from the exploitation
reservoirs except that required for the efficient exploitation of the field.
CLAUSE 16 - UNITIZATION
Whenever an economically exploitable reservoir extends continuously
to a structure located in the Contracted Area and to another adjoining area or
areas, the Operator shall implement, in agreement with ECOPETROL and any other
interested parties, upon approval of the Ministry of Mines and Energy, a unitary
exploitation schedule to be in accordance with the generally accepted Oil
production engineering technology.
CLAUSE 17 - FURNISHING OF INFORMATION AND INSPECTION DURING
EXPLOITATION
17.1 The Operator shall deliver to the Parties, as they are
obtained, originals reproducibles (sepias), and copies of the electric logs,
radio-active and sonic of the drilled wells,
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histories, core analyses, tests of production and all the routine reports made
or received in ratio with the operations and activities developed in the
Contracted Area.
17.2 Each one of the Parties, at its expense, account, and risk,
will have the right, by means of authorized representatives, to survey the wells
and the installations of the Contracted Area and the activities related to it.
Such representatives will have the right to examine cores, samples, maps,
records of the drilled wells, surveys, books and all other sources of
information relate with the development of this contract.
17.3 To enable ECOPETROL to comply with the provisions of Clause 29,
the Operator shall prepare and deliver to ECOPETROL all reports required by the
National Government.
17.4 The information and data connected with exploitation operations
shall be treated as confidential in the same way as set forth in Clause 6
(subparagraph 6.3).
CHAPTER IV - EXECUTIVE COMMITTEE
CLAUSE 18 - BYLAWS
18.1 Within the thirty (30) calendar days following acceptance of a
Commercial Field, each Party must appoint a representative as well as his first
and second alternates who shall form the Executive Committee notifying the other
Party in writing of the names and addresses of their representatives and
alternates. Each Party may replace its representative or alternates at any time,
but shall give written notice thereof to the other Party. The vote or decision
of the representative of each Party shall be binding upon such Party. If the
principal representative of any of the Parties is unable to attend a Committee,
he shall designate in writing the alternate who is to attend the meeting, and
such alternate shall have the same authority as the principal.
18.2 The Executive Committee will hold ordinary meetings during the
months of March, July and November, to review the Operator's exploitation
schedule and immediate plans. Annually, in the ordinary meeting in the month of
July, the Operator will present to the Executive Committee the annual operations
schedule and the expenses and investment Budget for the next calendar year,
those which will be examined and approved in the ordinary meeting of the month
of November.
18.3 The Parts and the Operator will be able to apply that is
convened to special meetings of the Executive Committee to analyze conditions
specific to the operation. The President of the Committee shall notify within
ten (10) calendar days the date of the meeting and topics to be
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discussed. Any subject that may not have been included in the agenda of the
meeting will be discussed during this, previous acceptance of the
representatives of the Parties in the Committee.
18.4 The representative of each Party shall have, any issues
discussed by the Executive Committee, a vote equivalent to the percentage of its
total Interest in the Joint Operation. Any resolution or decision made by the
Executive Committee, in order to be valid, must have the affirmative vote of
over fifty percent (50%) of the total Interest. In accordance with this
procedure, any decisions made by the Executive Committee shall be binding and
final upon the Parties and the Operator.
CLAUSE 19 - FUNCTIONS
19.1 A representative of the Parties will attend the meetings of the
Executive Committee, which shall have full authority and responsibility to
establish and adopt exploitation, development, and operation schedules and
Budgets in relation with this contract. A representative of the Operator shall
attend the Executive Committee meetings.
19.2 The Executive Committee shall name a Secretary. The Secretary
shall keep minutes and detailed/complete minutes of all the meetings, as well as
notes of all the discussions and decisions made by the Committee. The copies of
these minutes, for its validity, should be approved and signed by the
representatives of the Parties within the five (5) days following the
adjournment of the meeting and delivered to them as soon as possible.
19.3 Some Executive Committee functions include the following:
19.3.1 To adopt its own regulations.
19.3.2 To designate the Operator in case of resignation or removal.
19.3.3 To designate the External Auditor for the Joint Account.
19.3.4 To approve or reject the annual operations schedule and
Budget of expenditures, and any modifications or revisions thereto, and to
authorize extraordinary expenditures.
19.3.5 To determine policies and rules on expenditures.
19.3.6 To approve or reject any expenditure recommendation made by
the Operator (that has not been included in the approval Budget), when such
expenditures exceed the amount of Forty Thousand dollars of the United States of
America (US $40,000) or its equivalent in Colombian currency.
19.3.7 To advise the Operator and to decide on matters referred for
the Committee's consideration.
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19.3.8 To create such sub-committees that it may deem necessary and
establish their functions to be carried out under the direction of Executive
Committee and charged to the Joint Account.
19.3.9 To define the type and frequency of reports on drilling,
operation and production, and any other information to be furnished by the
Operator to the Parties, chargeable to the Joint Account.
19.3.10 To supervise the operation of the Joint Account.
19.3.11 Authorize the Operator to execute contracts on behalf of the
Joint Operation when the amount thereof exceeds forty thousand dollars of the
United States of America (US $40,000) or the equivalent in Colombian currency,
and
19.3.12 In general, to carry out all the functions authorized in
this contract that are not the responsibility of any other entity or individual
under a specific clause hereof or under a legal or regulatory provision.
CLAUSE 20 - DECISION IN CASE OF DISAGREEMENT OF THE OPERATION
20.1 Any project related to the joint operation that requires the
approval of the Executive Committee, as established in this contract, and for
which the representatives of the Parties disagree. It will be directly sent to
the highest executive of each Party, residing in Colombia, to make a joint
decision. If within the sixty (60) calendar days the Parties shall arrive at a
decision over the questionable matter, they shall communicate it to the
Secretary of the Executive Committee who shall call a Committee meeting within
fifteen (15) calendar days following the receipt of the information and the
members of the Committee are obligated to ratify the decision in this meeting.
20.2 If the Parties fail to reach an agreement on the matter under
discussion within sixty (60) calendar days after the consultation is presented,
the operations may be carried out in accordance with Clause 21.
CLAUSE 21 - OPERATIONS AT THE RISK OF ONE OF THE PARTIES
21.1 If at any time one of the Parties wished to drill an
Exploitation Well not approved under the operation schedule, it shall give the
other Party in written notice not less than thirty (30) calendar days in advance
of the next meeting of the Executive Committee of its will to drill such well,
including data such as location, recommendation to drill, depth and estimated
costs. The Operator shall include such proposal among the points to be discussed
in the next meeting of the
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Executive Committee. If such proposal is approved by the Executive Committee,
said well shall be drilled and chargeable to the Joint Account. If the Executive
Committee does not accept such proposal, the Party interested in drilling the
aforementioned well, hereinafter referred to as the "Participating Party", shall
have the right to drill, complete, produce, or abandon such well at its sole
expense and risk. The Party not wishing to participate in the operation herein
described shall be called the non-Participating Party. The Participating Party
must start drilling of said well within one hundred eighty (180) days from its
rejection by the Executive Committee. If drilling is not commenced within this
period, the matter shall again be submitted to the Executive Committee's
consideration. Upon request of the Participating Party, the Operator shall drill
the aforementioned well for the Participating Party's account and risk, provided
that, in the Operator's opinion, this operation does not interfere with the
normal progress of the operations of the field, upon advance payment to the
Operator by the Participating Party of such amounts as the Operator may deem
necessary in order to drill. In the event that the Operator is unable to drill
the well without interfering with the normal progress of the operations, the
Participating Party shall have the right to drill said well directly or through
a competent service company, and in this case, the Participating Party shall be
liable for such operation, without interfering with the performance of the
normal operations of the field.
21.2 If the well referred to in Clause 21 (subparagraph 21.1) is
completed as producing, this will be managed by the Operator and the production
of such well, after deducting the royalty as set forth in Clause 13, will be of
property of the participating Party, which shall cover all the costs of the
operation of such well until when the net value of the production, after
deducting the production costs, or recollections, storage, transport and other
similar costs as well as sales, be equal to two hundred percent (200%) of the
drilling and completion cost of said well, that from now on for intents and
purposes of the present contract shall be the property of the Joint Account. For
purposes of this clause, the value of each barrel of Petroleum produced in said
well, during a calendar month, before deducting the previously mentioned costs,
it will be the average price by barrel that receives the participating Party of
the sale of its participation in the Petroleum produced in the Area Contracted
during the same month.
21.3 If at any time either Party wishes to workover, drill deeper or
plug a well that is not in commercial production or a dry well that may have
been drilled by the Joint Account, and if these operations have not been
included in a schedule approved by the Executive Committee, such Party will give
announcement to the other Part of its intention to workover, drill deeper or
plug such
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well. Should there be no equipment at the location the procedure set forth in
Clause 21 (subparagraphs 21.1 and 21.2) shall be applicable. If in the location
of the well is found the adequate equipment to effect the proposed operations,
the Party that receives the notice of the operation. If no response is received
during this term, it shall be understood that the operation shall be performed
at the Joint Account's expense and risk. If the proposed work is effected by
account and risk of only one Party, the well shall be managed as per Clause 21
(subparagraph 21.2).
21.4 If at any time one of the Parties wishes to construct new
installations for gas liquids extraction, transportation and export of
Petroleum, hereinafter called additional facilities, such Party shall give
written notice to the other, providing the following information:
21.4.1 General description, design, specifications, and estimated
costs of the additional facilities;
21.4.2 Projected capacity.
21.4.3 Approximate date of commencement of construction operations
and duration of same. Within the ninety (90) days counted as of the notice date,
the other Party, through written announcement, has the right to deciding in
participating in the projected additional installations. In such case that Party
opts not to participate in the additional installations, or no turnaround to the
proposal of the participating Party, that hereinafter called Building Party, the
latter will proceed with the additional installations and to order the Operator
to construct, to operate and maintain said installations at sole expense and
risk of the constructing Party, without prejudice of the normal development of
the Joint Operations. The Building Party will be able to negotiate with the
other Party the use of such installations for the Joint Operation. During the
time in which the installations will be operated by account and risk of the
constructing Party, the Operator shall charge all the operation and maintenance
costs of the additional installations according to the accounting standards
generally accepted accounting standards.
CHAPTER V - JOINT ACCOUNT
CLAUSE 22 - MANAGEMENT
22.1 Without prejudice to other provisions contained herein,
expenses covering Exploration Operations shall be for THE ASSOCIATE'S account
and risk.
22.2 As from the time the Parties accept the existence of a
Commercial Field, and subject to the provisions of Clause 5 (subparagraph 5.2)
and Clause 13 (subparagraph 13.1 and 13.2),
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the ownership of the rights or Interest in the Operation of the Contracted Area
shall be divided as follows: ECOPETROL fifty percent (50%) and THE ASSOCIATE
fifty percent (50%). From then on, all expenses, payments, investments, costs
and obligations carried out and contracted for the performance of the operations
thereunder, as well as the investments made by THE ASSOCIATE before and after a
Commercial Field is accepted, in drilling and completing wells, which result in
production within the field, shall be charged to the Joint Account. Except as
provided in Clauses 14 (subparagraph 14.3) and 21, all property acquired or used
thereafter for the performance of activities of the Commercial Field operation
shall be paid and owned by the Parties in the proportions set forth in this
Clause.
22.3 The first five (5) days of each month the Parties will, in the
bank designated by Operator, pay the Operator their share of Budget according to
the needs and in the currency in which the expenses should be made, that is to
say, in Colombian pesos or in dollars of the United States of America, according
to the Operator according to the schedules and cost estimates approved by the
Executive Committee. When THE ASSOCIATE does not have the necessary Colombian
pesos to cover the quota that it corresponds, to exchange in this currency,
ECOPETROL will have the right to supply such pesos and to receive the credit to
its dollar obligations, using the official rate for purchase of exchange
certificates of the Central Bank on the day ECOPETROL is to make such
contribution, provided such transaction is legally acceptable.
22.4 The Operator shall present monthly to the Parties, and within
the thirty (30) days following calendar to the completion of each month, a
monthly statement in the one which shows the total anticipated, the effected
expenses, the pending obligations and a report of all the charges and credits
made to the Joint Account, report that is elaborated according to Annex "B". If
the payments as set forth in Clause 22 (subparagraph 22.3) are not made within
the anticipated term and the Operator elects to cover them, the slow paying
Party shall pay the Commercial Interest in the same currency in which may have
been caused the payment, during the term of delinquency.
22.5 If either Party should fail to timely supply the Joint Account
the total that correspond, as of that such date, the Party shall be considered
"slow-pay" Party and, the other Party the "prompt" Party. If the prompt Party
has paid the delinquent Party's share, in addition to its own, the former shall
have the right, after a sixty (60) days delay, to have the Operator deliver to
the Delinquent Party's total participation in the Contracted Area, (excluding
the royalty percentage), up to such amount of production as shall give the
prompt Party a net income from sales equal to the sum not paid by the Delinquent
Party plus an annual interest equal to the Commercial Interest rate,
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beginning sixty (60) days after the date of commencement of delinquency. "Net
Income" is understood to mean the difference between the sales price of the
crude taken by the prompt Party, less cost of transportation, storage, loading
and other reasonable expenses incurred by the prompt Party in the sale of the
products taken. The prompt Party shall have thirty (30) days from having advised
the Delinquent Party in writing of its intention to take all or a part of the
Delinquent Party's share of the production.
22.6.1 Without consideration to the percentages of production that
each one of the
Parties receives in the development of the contract, all the Direct Expenses of
the Joint Operation are charged to the Parties in the following proportion:
ACCUMULATED PRODUCTION
===============================================================================
BARRELS ECOPETROL ASSOCIATE
% %
- -------------------------------------------------------------------------------
FROM 0 TO 60,000,000 50% 50%
- -------------------------------------------------------------------------------
FROM 60,000,001 TO 90,000,000 55% 45%
- -------------------------------------------------------------------------------
FROM 90,000,001 TO 120,000,000 60% 40%
- -------------------------------------------------------------------------------
FROM 120,000,001 TO 150,000,000 65% 35%
- -------------------------------------------------------------------------------
OVER 150,000,001 70% 30%
===============================================================================
22.6.2 The Indirect Expenses are charged to the Parties in the same
established proportion as Direct Expenditures as in the numeral 22.6.1 of this
clause. The amount of these
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expenses will be the result of taking the annual total value of the investments
and expenses (excluding the administrative and technical support) and to apply
to the equation a+m (X-b); where X = total annual investments and expenses, and
"a", "m" and "b", are constants whose value is set out in the following chart in
relation to the amount of annual investments and expenses:
================================================================================
AMOUNT INVESTMENTS AND EXPENDITURES CONSTANT VALUES
- ----------------------------------- ----------------------------------------
"X" (US$) "a" (US$) m(fract) "b" (US$)
---------------------------- ---------- -------- -----------
1. 0 25,000,000 0 0.10 0
- --------------------------------------------------------------------------------
2. 25,000,001 50,000,000 2,500,000 0.08 25,000,000
- --------------------------------------------------------------------------------
3. 50,000,001 100,000,000 4,500,000 0.07 50,000,000
- --------------------------------------------------------------------------------
4. 100,000,001 200,000,000 8,000,000 0.06 100,000,000
- --------------------------------------------------------------------------------
5. 200,000,001 300,000,000 14,000,000 0.04 200,000,000
- --------------------------------------------------------------------------------
6. 300,000,001 400,000,000 18,000,000 0.02 300,000,000
- --------------------------------------------------------------------------------
7. 400,000,001 and more 20,000,000 0.01 400,000,000
================================================================================
The equation is applied once a year in each case applying the constants that
correspond to the total annual investments and expenditures.
22.7 The monthly account states as set forth in Clause 22
(subparagraph 22.4) will be overhauled or objected by anyone of the Parties from
the moment in which they will be received by these until two (2) years after the
completion of the calendar year that corresponds, specify clearly the objected
or adjusted lots and the corresponding reason. Any account that may not have
been adjusted or objected within this period, is considered as final and
correct.
22.8 The Operator shall carry accounting records, vouchers and
reports of the Joint Account in Colombian pesos according to all the Colombian
laws, every debit or credit to the Joint Account will be made according to the
accounting procedure established in Annex "B", that shapes part of this
contract. In the event of discrepancy between said accounting procedure and the
provisions herein, the provisions of this contract shall prevail.
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22.9 The Operator can sell materials or equipment during the first
twenty (20) years of Exploitation Period for the benefit of the Joint Account,
provided that the amount sold does not exceed five thousand dollars of the
United States of America (US$5,000) or its equivalent in Colombian currency.
This type of operations shall not exceed the amount of fifty thousand dollars of
the United States of America dollars (US$50,000) or its equivalent in Colombian
currency in any one calendar year. Any sale in excess of these amounts or sales
of real property shall be approved by the Executive Committee. Such materials or
equipment shall be sold at a reasonable commercial price depending on their
state of wear and tear.
22.10 Any machinery, equipment or other assets or personal property
of facilities acquired by the Operator for the performance of this contract and
charged to the Joint Account shall be owned by the Parties in equal shares.
However, should any one of the Parties decide to terminate its Interest under
this Contract prior to the expiration of the first seventeen (17) years of the
Exploitation Period, except in the case of Clause 25, such Party agrees to sell
to the other Party all or part of its Interest in the said property at a
reasonable commercial price or at its book value, whichever is lower. In case
the other Party does not wish to purchase said assets within ninety (90) days
following the formal sale offer, the Party wishing to withdraw shall have the
right to assign to a Third Party, the Interest in its portion of such machinery,
equipment or property. Should THE ASSOCIATE decide to withdraw after expiration
of the seventeen (17) years of the Exploitation Period, its interest in the
Joint Operation shall pass to ECOPETROL on a free of charge basis.
CHAPTER VI - LENGTH OF THE CONTRACT
CLAUSE 23 - MAXIMUM DURATION
As for the effective date hereof, the maximum length of this contract shall be
twenty-eight (28) years, divided as follows: Up to six (6) years as Exploration
Period, pursuant to Clause 5, without prejudice to the provisions of Clause 9
(subparagraphs 9.3 and 9.8), and twenty-two (22) years as Exploitation Period,
counted from the date of termination of the Exploration Period. It is understood
that in the events contemplated hereunder, in which the Exploration Period is
extended, the total duration shall in no case exceed twenty-eight (28) years.
CLAUSE 24 - TERMINATION
This contract shall terminate in any of the following instances:
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24.1 Due to the expiration of the Exploration Period without THE
ASSOCIATE having discovered a Commercial Field, except as provided for in
Clauses 9 (subparagraphs 9.5 and 9.8) and 34.
24.2 Upon expiration of the term of duration of the contract, as set
forth in Clause 23.
24.3 At any time at THE ASSOCIATE'S will, upon fulfillment of its
obligations as set forth in Clause 5 and of any other contracted hereunder. 24.4
Due to the special causes as set forth in Clause 25.
CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION
25.1 ECOPETROL may unilaterally terminate this contract, any time
before the expiration of the period set forth in Clause 23, in the following
instances:
25.1.1 Due to dissolution of THE ASSOCIATE and its assignees.
25.1.2 In the event THE ASSOCIATE and its assignees were to assign
this contract in whole or in part without complying with the requirements under
Clause 27.
25.1.3 Due to the financial insolvency of THE ASSOCIATE and its
assignee, which insolvency is presumed to exist when a Court declares bankruptcy
or a "creditors' meeting" is judicially convened.
25.1.4 Due to THE ASSOCIATES failure to comply with its obligations
hereunder at the expiration of each one of the contemplated period for
accomplishment of the exploration obligations, the Associate will present two
(2) written reports that demonstrate the accomplishment of the obligations of
the respective period. In the event that they are not met, the operator shall
have a period of sixty (60) days to complete diligently complete according to
good industry standards. If this is an insufficient term, the Party shall agree
to good additional time for said accomplishments. If at the end of this period
all necessary works are not establish completed, ECOPETROL shall determine in
completion and will proceed as set forth in Clause 25 (subparagraph 25.3).
25.2 In the event of a declaration of unilateral termination, THE
ASSOCIATES rights hereunder shall cease both as Interested Party of the contract
and as Operator, if at the time of such declaration of unilateral termination
THE ASSOCIATE is acting in both capacities.
25.3 ECOPETROL may only unilaterally terminate this contract after a
sixty (60) day written notice to THE ASSOCIATE or its assignees, clearly
specifying the reasons invoked for declaring such termination, and provided that
the other Party has not presented satisfactory
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<PAGE>
explanations to ECOPETROL, or that THE ASSOCIATE has not corrected the default
in the performance of the contract, without prejudicing to THE ASSOCIATE'S right
to file any such legal remedies as it may deem advisable.
CLAUSE 26 - OBLIGATIONS IN CASE OF TERMINATION
26.1 Upon termination of the contract pursuant to Clause 24, in
either the Exploration or Exploitation phase, THE ASSOCIATE will leave in
production those wells currently producing and will hand over the buildings,
pipelines, transference lines and other real properties belonging to the Joint
Account (located in the Contracted Area), all of which will become the property
of ECOPETROL at no charge, together with the rights-of-way and property acquired
for the benefit of the contract, including those located outside the Contracted
Area.
26.2 If this contract terminates for whatever reason after
expiration of the first seventeen (17) years of the Exploitation Period, all of
THE ASSOCIATE'S interest in the machinery, equipment or other assets or personal
property used or acquired by THE ASSOCIATE or by the Operator for the
implementation of this contract shall pass to ECOPETROL on a free-of-charge
basis.
26.3 If this contract is terminated before the seventeen (17) years
of the Period of Exploitation, it will be given fulfillment as stipulated in the
Clause 22 (subparagraph 22.10).
26.4 In case that this contract is terminated by a unilateral
completion statement, at any time, all the furniture assets and acquired real
estate (exclusive enrichment of the Joint Account) will be passed gratuitously
to the power of ECOPETROL.
26.5 Upon termination of this contract for whatever reasons and at
whatever time, the Parties are obligated to satisfactorily fulfill their legal
obligations between each other and with third parties and those contracted
hereunder.
CHAPTER VII - MISCELLANEOUS DISPOSITIONS
CLAUSE 27 - RIGHTS OF ASSIGNMENT
27.1 THE ASSOCIATE shall be entitled to assign or transfer all or
any of its interests, rights and obligations under the association contract to
another person, company or group, with the prior approval of the Minister of
Mines and Energy and the President of "Empresa Colombiana de Petroleos",
ECOPETROL.
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Consequently, THE ASSOCIATE shall, through a certified writing,
notify both the Minister of Mines and Energy and the President of "Empresa
Colombiana de Petroleos," ECOPETROL, of any proposed transaction involving
assignment or transfer of all or any of the interests, rights, and obligations
under the contract and shall indicate the essential elements thereof, such as
prospective assignee, amount, interests, rights, and obligations to be assigned,
scope of the operation, etc. Within the subsequent thirty (30) business days,
the Minister of Mines and Energy and the President of Empresa Colombiana de
Petroleos", ECOPETROL, shall exercise their discretionary power to analyze the
qualifications of the prospective assignees, after which they will make a
decision, without having to give the reasons therefor. In any event, the
criteria used by the Minister of Mines and Energy shall prevail.
27.2 If THE ASSOCIATE has not received any reply after thirty (30)
days following the date on which the Minister of Mines and Energy received the
request, it is understood to all the applications has been approved.
27.3 The transfers that are effected during the Period of
Exploration between companies legally established in Colombia, will not be held
to the previously authorized processing and are formalized through the written
authorization of the Empresa Colombiana de Petroleos, ECOPETROL, and to the
subscription of the respective document.
27.4 The changes or modifications in THE ASSOCIATE'S contractual
relations with "Empresa Colombiana de Petroleos" ECOPETROL shall also be subject
to the approval by the Minster of Mines and Energy and the President of "Empresa
Colombiana de Petroleos", ECOPETROL, if such changes or modifications are the
result of total or partial direct negotiations in respect of interests, quotas
or shares in THE ASSOCIATE.
27.5 However, in the following cases such changes and modifications
shall not require approval by the Minister of Mines and Energy and "Empresa
Colombiana de Petroleos", ECOPETROL:
27.5.1 When the transactions are carried out at the stock exchange
or in an open securities market.
27.5.2 If it is considered transfers or resulting transfers in fact
detached from the will of THE ASSOCIATE or the companies that control it or
direct, such as decisions of control judicial judgments, partition and assets
and public auctions.
27.5.3 When the negotiations are carried out within the companies
that control or direct THE ASSOCIATE, or the subsidiaries of subsidiaries of
these, or within companies that certify
31
<PAGE>
a same economic group, it will suffice to timely inform the Mines and Energy
Minister and the Empresa Colombiana de Petroleos, ECOPETROL.
27.6 Except for the aforementioned cases, if any assignment,
transfer, negotiation, transaction or operation referred to in this clause is
carried out without the prior consent or approval by the Minister of Mines and
Energy and the President of "Empresa Colombiana de Petroleos", ECOPETROL, when
such is needed the contents of Clause 25 of the Association Contract will be
applicable.
27.7 The transactions that are carried out in accordance with this
Clause and that, in keeping with Colombian tax laws, are taxable, shall be
subject to applicable taxes.
CLAUSE 28 - DISAGREEMENTS
28.1 In the event of any discrepancies or inconsistencies between
the Clauses of this contract and those of Annex "B" entitled "Operating
Agreement" the provisions of the former shall prevail.
28.2 Any differences of a legal nature that might arise between the
Parties hereto regarding the interpretation and implementation of this contract,
and that cannot be settled amicably, shall be referred for the knowledge and the
final decision of the jurisdictional branch of the Colombian public power.
28.3 Any technical or de facto difference that may arise between the
Parties hereto by reason of the interpretation or implementation of this
contract, and that cannot be settled amicably, shall be referred for the final
decision of experts, appointed as follows: one by each Party, and a third one or
mediator appointed by mutual agreement of the two experts so designated. Should
an agreement not be reached as to the appointment of the third expert, the
latter shall be designated, upon request of either Party, by the Board of
Directors of the Colombian Association of Petroleum Engineers (ACCEPT) with
headquarters in Santa Fe de Bogota.
28.4 All accounting differences that may arise between the Parties
with motive of the interpretation and execution of the contract and that could
not be arranged in amicable shape, will be submitted to the experts judgment,
who will have to be public accountants designate as follows: One by each Party,
the mediator, by the two principal experts and for shortage of agreement between
these and to petition of anyone of the Parties, said third will be appointed by
the Central Connection of Accountants of Bogota.
28.5 Both Parties declare that the judgment of the experts will have
the full effect of transaction and, consequently, such judgment will be
definite.
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28.6 In case of disagreement between the Parties as to the technical
accounting or legal nature of the dispute, same shall be considered to be legal
and Clause 28 (subparagraph 28.2) shall be applied. CLAUSE 29 - LEGAL
REPRESENTATION
Without prejudice to THE ASSOCIATE'S legal rights as a consequence
of legal regulations or of the Clauses of this contract, ECOPETROL shall
represent the Parties before Colombian authorities in matters concerning the
exploitation of the Contracted Area, whenever applicable to do so, and shall
furnish government officials and agencies with any data and reports that may be
legally required. The Operator shall be obliged to prepare and furnish ECOPETROL
with the pertinent reports. Any expenses incurred by ECOPETROL to attend to any
matter referred to in this Clause shall be charged to the Joint Account, and
where such expenses exceed two thousand five hundred dollars of the United
States of America (US$25,000) or its equivalent in Colombian currency, the
Operator's approval shall be required. The Parties declare, any relation with
third parties, that neither what was established in this clause nor in any other
contract, implies grants of general power neither what was established in this
clause nor in any other contract, implies grants of general power neither that
the Parties may have constituted commercial or civil society or other relation
which, anyone of the Parties could be considered as solely responsible by the
acts or omissions of the other Party or to have the authority or the command
that can compromise the other Party in respect to obligation. This contract has
related to the operations within territory of the Republic of Colombia and
though ECOPETROL is a commercial and industrial company of the Colombian State,
the Parties are in agreement in which THE ASSOCIATE, arrived the case, could
choose to be excluded of the application of all the dispositions of sub-chapter
K entitled PARTNERS and SOCIETIES (Partners & Partnerships) of the Internal
Revenue Code of the United States of America. THE ASSOCIATE will make such
election in appropriate manner.
CLAUSE 30 - CONTRACT ADJUDICATION AND PURCHASE ORDERS
30.1 The Operator shall carry out the operations subject matter of
this Contract in an efficient and adequate manner, and in accordance with the
oil industry practices which are internationally accepted for this type of
operations, being understood that the Operator shall at no time be liable for
errors of judgment or losses or damages that are not due to Operator's gross
mistake.
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30.2 The responsibilities that contract ECOPETROL and THE ASSOCIATE
in relation with third parties will not be joint and, consequently, each Party
will be separately responsible for its participation in the expenses, reversals
and obligations that result of these consequences.
30.3 Of the value of the expenses incurred and the contracts that
execute the Operator shall be the only responsible before third parties for
amounts exceeding forty thousand dollars of the United States of America (US
$40,000) or its equivalent in Colombian pesos, which have not been authorized by
the Executive Committee, except the assumptions regulated in the Clause 11
(subparagraph 11.7); the only one responsible before third parties will be the
Operator, who will assume the whole corresponding value. When the expense in
question is accepted by the Executive Committee, the Operator will be paid for
the value of the work, study or purchase, according to norms that will be
defined by the Executive Committee. In case that the expense or asset is not
accepted by the Executive Committee, the Operator, if possible, will be able to
withdraw the asset in question refunding to the partners any cost that its
withdrawal could cause to the operation. When it will not be possible that the
Operator withdraws such assets, or declines to make it, the enrichment or
resulting patrimonial increase of these expenditures or contracts, will belong
to the Parties in proportion to its Interest in the Operation.
30.4 Ecological Control. THE ASSOCIATE, in development of all the
activities of the contract, will have to comply with provisions of the National
Code of Renewable Natural Resources and of Protection of the Environment and
other legal dispositions on the matter. Such, THE ASSOCIATE is compelled to
execute a persistent plan of preventive character to guarantee the conservation
and restoration of the natural resources within the areas in which are
accomplished the Exploration Works, exploitation and transportation object of
this contract. Said plans and schedules will have to be divulged by THE
ASSOCIATE with the communities and entities of the regional and national order
related with this matter. Equally, they will have to established specific
contingency plans to attend the emergencies that they could be presented and
advanced the share of relevant remedial action. THE ASSOCIATE will have to
coordinate said plans and shares with the competent entities. The respective
schedules and budget may be prepared by the Associate conforming to clauses set
forth in this contract. All costs caused will be assumed by the Associate. In
the Period of Exploration and by Both Parties, chargeable to the Joint Account
during the Exploitation period.
CLAUSE 31 - TAXES, CHARGES AND OTHERS
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Any taxes and charges accrued after the establishment of the Joint
Account and before the Parties receive their production share, chargeable to Oil
exploitation, shall be charged to the Joint Account. Revenue, net worth
(patrimony) and supplementary taxes shall be for the sole account of each Party
as applicable to each of them.
CLAUSE 32 - PERSONNEL
32.1 THE ASSOCIATE shall designate the Operator's Manager after
consultation with ECOPETROL.
32.2 Pursuant to the terms of this contract and subject to the norms
to be established, the Operator shall have autonomy in appointing the personnel
required for the operations thereunder, being able to fix their remuneration,
duties, rank, number and conditions. The Operator shall adequately and
diligently train such Colombian personnel as may be required to replace the
foreign personnel that the Operator considers necessary to perform the
operations hereunder. In any case, the Operator shall comply with the legal
regulations on the proportion of national and foreign employees and laborers.
32.3 Technological Transfer - THE ASSOCIATE, at his own cost, must
provide a supervised training program in contract-related activities for
ECOPETROL's professional personnel. To comply with this obligation in the
Exploration Period, the supervised training can cover area such as: geology,
geophysics and similar, reserve calculation and characterization of reservoirs,
drilling and production. Supervised training shall be carried out throughout the
initial Exploration Period and extensions thereto and shall integrate
professional personnel appointed by ECOPETROL to the work group THE ASSOCIATE
organizes for the Contracted Area or for other similar activities handled by THE
ASSOCIATE.
On the resignation set forth in Clause 5 of this contract, THE
ASSOCIATE must have given previous compliance to the programs of capacity here
contemplated.
In the period of exploitation, the range, duration, place,
participants, training, conditions and other aspects will be established by the
Executive Committee of the Association. All directed capacity costs, with
exception with the labors caused in favor of the professionals who receive it,
will be assumed by the Associate in the period of exploration and by both
parties in charge to the Joint Account in the period of Exploitation.
PARAGRAPH (subject to agreement): To comply with obligations over
technological transfer according to the afore set here, during the first three
(3) years of exploration and for each
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<PAGE>
year THE ASSOCIATE agrees to organize and pay a course of training directed by
specialized companies for ECOPETROL professionals in the areas of geology,
geophysics or petroleum engineering which costs may not exceed thirty thousand
dollars (U.S. $30,000) per year. The course will be approved by ECOPETROL and
THE ASSOCIATE. In the event that the period of exploration is extended, the
capacity directed will consist of similar program as set forth here.
32.4 According to this contract, the Operator during the Period of
Exploitation, will have the right of executing whatever works by means of
contractors, subject to the faculty that has the Executive Committee of
approving the contracts whose value exceeds forty thousand dollars of the United
States of America (US$40.000) or its equivalent in Colombian currency.
CLAUSE 33 - INSURANCE
The Operator shall provide all insurance required by Colombian Law.
Also, it will demand to each contractor that performs any work in development of
this contract, the obtainment and maintenance in force of the insurance that the
Operator considers necessary. Equally, the Operator shall provide any other
insurance considered convenient by the Executive Committee.
CLAUSE 34 - GREATER FORCE OR ACCIDENTAL CASE
Unforeseen acts that constitute greater force or act of God, such as
strikes, shutdowns, wars, earthquakes, floods or other catastrophes, laws or
governmental bylaws or decrees that prevent the obtainment of the essential
materials and, as a rule, any other non-financial motive that actually prevents
the work, even if it may not have been listed previously, but that affects the
Parties and that is not under their control. If one of the Parties could by
greater force or act of God, comply with the obligations of this contract, it
will have to notify it immediately to the other Party, for its consideration,
specifying the reasons for said impediment. In no case shall the greater force
occurrences or act of God extend the total period of exploration and
exploitation beyond the twenty-eight (28) calendar years counted as of the
effective date according to it stipulated in the Clause 23, but any greater
force impediment during the six (6) years of exploration indicated in the Clause
5, and lasting for more than thirty (30) consecutive days, shall extend such six
(6) year period by the same length of time as the duration of the impediment.
The obligations referred in this Contract will be suspended during any time a
party is unable to comply totally or partially due to its condition of Party or
Operator has have prompt all the resources and half of action that, pursuant to
the Colombian laws, they could be used before the jurisdictional branch of the
public power.
36
<PAGE>
CLAUSE 35 - APPLICATION OF COLOMBIAN LAWS
For all purposes hereunder, the Parties set the city of Santa Fe de
Bogota, Republic of Colombia, as their domicile. This contract is governed
throughout by Colombian law, and THE ASSOCIATE submits to the jurisdiction of
Colombian Courts and waives any diplomatic claim in respect to its rights and
obligations hereunder, except in the case of denial of justice. It is understood
that denial of justice shall not be deemed to exist when THE ASSOCIATE in its
condition as a Party or Operator has had access to the resources and means of
action which under Colombian Law may be used before the jurisdictional branch of
public power.
CLAUSE 36 - NOTICES
Any notices or communications between the Parties hereto, in
relation with this contract, shall require for their validity mention of the
pertinent Clauses, and shall be sent to the Parties at the following addresses:
TO ECOPETROL: Carrera 13 No. 36-24, Santa Fe de Bogota, Colombia. TO THE
ASSOCIATE: Calle 98 No. 9-03, Oficina 1002, Santa Fe de Bogota, Colombia. Any
change of address shall be made known in advance to the other Party.
CLAUSE 37 - VALUE OF OIL
The payments or reimbursements referred to in Clause 9 (subparagraph
9.2 and 9.4) and 22 (subparagraph 22.5) shall be made in dollars of the United
States of America or in Petroleum, on the basis of the price in effect and with
the limitations set forth in Colombian legislation for the sale of the portion
payable in dollars of the Petroleum or Natural Gas originating from the
Contracted Area and destined for refining in the National territory.
CLAUSE 38 - PRICE FOR OIL
38.1 Petroleum belonging to THE ASSOCIATE hereunder and destined for
internal use or refining will be paid against delivery at the Refinery where the
crude is to be processed or at the reception Station agreed upon by the Parties,
as follows:
38.1.1 Gas will be paid pursuant to Resolution No. 061 of 1983,
issued by the Petroleum and Natural Gas Pricing Commission and Decree 0196 of
17th of January/86 issued by the President of the Republic, or governmental
regulations replacing same.
38.1.2 Crude will be paid pursuant to Resolution 013 of 14th of
December, 1992, issued by the National Commission of Energy, or by governmental
regulations replacing same.
37
<PAGE>
38.2 The differences that arise from the application of this clause
will be declared void under the systems established in this Contract.
CLAUSE 39 - GUARANTEE
In order to guarantee the performance of the exploratory works to
the first year according to the Clause 5, THE ASSOCIATE is compelled to submit
an irrevocable Letter of Credit in favor ECOPETROL equivalent to five hundred
thousand dollars (US $500,000.00) within the sixty (60) following days to date
of signature of this contract.
38
<PAGE>
CLAUSE 40 - VALIDITY
For validity, a subsidiary must be established by the GHK Company in
Colombia within one hundred twenty (120) calendar days following the date of
signature of document and approval by the Minister of Mines and Energy. In
witness whereof, it is signed in Santa Fe de Bogota, before witnesses, on the
22nd day of January, Nineteen Ninety Three (1993).
EMPRESA COLOMBIANA DE THE GHK COMPANY
PETROLEOS
ECOPETROL
JUAN MARIA RENDON GUTIERREZ RUSS D. CUNNINGHAM
PRESIDENTE LEGAL REPRESENTATIVE
PETROLINSON, S.A.
----------
NORMAN R. ROWLINSON
APODERADO GENERAL
39
<PAGE>
CHAPTER I
GENERAL DISPOSITIONS
CLAUSE 1.
Object of this contract
CLAUSE 2.
Application of the contract
CLAUSE 3.
Contracted Area
CLAUSE 4.
Definitions
CHAPTER II
EXPLORATION
CLAUSE 5.
Terms and conditions
CLAUSE 6.
Information supply during exploration
CLAUSE 7.
Budget and Exploration schedules
CLAUSE 8.
Return of areas
CHAPTER III
EXPLOITATION
40
<PAGE>
CLAUSE 9.
Terms and Conditions
CLAUSE 10.
Technical Control of the Operations
CLAUSE 11.
Schedules and cost estimates of Exploitation
CLAUSE 12.
Production
CLAUSE 13.
Royalties
CLAUSE 14.
Distribution and availability of Petroleum
CLAUSE 15.
Utilization of the gas
CLAUSE 16.
Unitization
CLAUSE 17.
Information and inspection supply during exploitation
CHAPTER IV
EXECUTIVE COMMITTEE
CLAUSE 18.
Constitution
41
<PAGE>
CLAUSE 19.
Functions
CLAUSE 20.
Decision in the event of disagreement in the Operation
CLAUSE 21.
Operations under risk of one of the Parties
CHAPTER V
JOINT ACCOUNT
CLAUSE 22.
Handling
CHAPTER VI
LIFE OF THE CONTRACT
CLAUSE 23.
Maximum life
CLAUSE 24.
Completion
CLAUSE 25.
Causative of unilateral completion
CLAUSE 26.
Obligations in the event of completion
CHAPTER VII
VARIABLE DISPOSITIONS
42
<PAGE>
CLAUSE 27.
Rights of transfer
CLAUSE 28.
Disagreements
CLAUSE 29.
Legal representation
CLAUSE 30.
Responsibilities
CLAUSE 31.
Taxes, charges and others
CLAUSE 32.
Personal
CLAUSE 33.
Insurance
CLAUSE 34.
Greater force or accidental case
CLAUSE 35.
Application of the Colombian Laws
CLAUSE 36.
Notices
CLAUSE 37.
Assessment of Petroleum
43
<PAGE>
CLAUSE 38.
Prices of the Petroleum
CLAUSE 39.
Guaranty
CLAUSE 40.
Validity
44
<PAGE>
***EMPRESA COLOMBIANA DE PETROLEOS***
DIVISION OF EXPLORATION, GEOPHYSICAL GROUP
PROGRAM EX-012
CALCULATING OF COORDINATES "GAUSS" FROM DATA AND DISTANCE
AND CALCULATION OF AREAS FROM COORDINATES
ORIGIN BOGOTA
TABLE OF DATA AND RESULTS
FROM DINDAL ASSOCIATION
<TABLE>
<CAPTION>
===========================================================================================================================
POINT CITY: MUNICIPIOS THE DIFFERENCE DIFFERENCE COORDINATES POINT
DE DEPARTAMENTO(S) CUNDINAMARCA IN IN -------------------------
RUMBO DEPARTMENT LATTITUDE LONGITUDE
LATTITUDE LONGITUDE
NORTH EAST
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
A N.0.0.0.0E 4,100.000 4,100.000 0.0 1,065,900.0 947,615.0 A
- ---------------------------------------------------------------------------------------------------------------------------
B S90.0.0.0W 13,615.000 0.0 -13,615.000 1,070,000.0 947,615.0 B
- ---------------------------------------------------------------------------------------------------------------------------
C N28.4.20.953E 34,000.000 30,000.000 16,000.000 1,070,000.0 934,000.0 C
- ---------------------------------------------------------------------------------------------------------------------------
D N90.0.0.0E 18,000.000 0.0 18,000.000 1,100,000.0 950,000.0 D
- ---------------------------------------------------------------------------------------------------------------------------
E S28.4.20.953W 34,000.000 -30,000.000 -16,000.000 1,100,000.0 968,000.0 E
- ---------------------------------------------------------------------------------------------------------------------------
F S7.7.30.059E 16,124.515 -16,000.000 2,000.000 1,070,000.0 952,000.0 F
- ---------------------------------------------------------------------------------------------------------------------------
G S15.42.31.096W 16,620.770 -18,000.000 -4,500.000 1,054,000.0 954,000.0 G
- ---------------------------------------------------------------------------------------------------------------------------
H S90.0.0.0W 5,800.000 0.0 -5,800.000 1,038,000.0 949,500.0 H
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
I N.0.0.0.0E 27,900.000 27,900.000 0.0 1,038,000.0 943,700.0 I
- ---------------------------------------------------------------------------------------------------------------------------
J N90.0.0.0E 3,915.000 0.0 3,915.000 1,065,900.0 943,700.0 J
- ---------------------------------------------------------------------------------------------------------------------------
SUMA #0.0 SUMA #0.0 1,065,900.0 947,615.0
- ---------------------------------------------------------------------------------------------------------------------------
AREA TOTAL BY "POLIGONO" = 80,154.85 HECTARES
===========================================================================================================================
</TABLE>
46
<PAGE>
FINAL TRANSLATION (MARCH 15,1993)
ANNEX B
OPERATION AGREEMENT
ANNEX TO THE ASSOCIATION CONTRACT OF THE SECTOR "DINDAL".
Celebrated between the Colombian Company of Petroleum - ECOPETROL
and THE GHK COMPANY and PETROLINSON, S.A. with Effective Date 23 of March,
Nineteen Hundred Ninety Three (1993), that from now on, is designated The
Contract.
PART I - TECHNICAL ASPECTS
FIRST SECTION - EXPLORATION
CLAUSE 1 - INFORMATION SUPPLY DURING THE EXPLORATION
The geophysical and geological information that THE ASSOCIATE must
deliver to ECOPETROL, will have to be supplied continuing the international
procedures accepted by industry, compatible with the procedures accepted by
industry, compatible with the procedures used by ECOPETROL, to permit regional
evaluations of the sedimentary basins. As complements of what was established in
the Clause 6 (subparagraph 6.2) of The Contract, the Operator will send to
ECOPETROL, as they are obtained, the following related information with the
exploratory activities carried out by THE ASSOCIATE.
1.1 Programs and Budgets to develop, before they are carried out.
1.2 Processed Seismic Sections for each line, obtained in two (2)
scales, together with an interpretation report that contains used information,
background,
<PAGE>
seismic programs, geological information and geophysical considerations,
geological and economics that support the conclusions and technical
recommendations.
1.3 Two (2) sets of magnetic tapes corresponding to the seismic
lines, one with the de multiplexed information and another with the stacked
information, with its back-up information and processing reports. In case
vibrators are used, a copy of the field tape should be sent instead of the de
multiplexed tape.
1.4 Map of shot points of the seismic programs, in a reproducible
sepia and copy, with the coordinates and elevation information. This information
must also be delivered on magnetic tape.
1.5 Profile magnetics, gravimetric, and residual maps in original
reproducible, copies and magnetic tapes with all the support information
generated.
1.6 Report of Seismic, gravimetric and magneto metric interpretation
with all sections, profiles and maps, interpreted and submitted in keeping with
ECOPETROL's norms in this respect.
1.7 Maps of the Contracted Area - geological, structural, isopach,
isolithic, facies, seismic, etc. - in reproducible sepias and copies using the
scales established by ECOPETROL for each basin.
1.8 For well drilling: before drilling of the well commences:
notices of intent to drill (Form 4 CR), drilling program, well location map, and
geological prognosis, duly approved by the Ministry of Miles and Energy. The
location of Exploration Wells must refer to the seismic maps used to define the
prospect. Each Exploration or stratigraphic Well drilled in the Contracted Area
must materialize a checkpoint of geodesic
2
<PAGE>
precision accepted by "Instituto Geografico Agustin Codazzi" - "IGAC" and
obtained via satellite together with its azimuth line.
1.9 Daily drilling reports: These reports should preferably be sent
via telefax, giving basic well information, drilling conditions, drilling fluid
properties, results as they are obtained, and daily and accrued costs.
1.10 Copy of the half-monthly reports sent to the Ministry of Mines
and Energy (Form 5 CR).
1.11 Daily Geological Reports: They shall be received daily by the
Exploration Geology Department and can be communicated by telephone or telefax.
1.12 Final Geological Report: This report is compulsory for any
exploratory, stratigraphic or development well drilled in Colombia and must be
submitted in Spanish by a duly licensed geologist within ninety (90) days
following completion or abandonment of the well; it shall contain the following
information divided by chapters:
1.12.1 Summary of all activities performed during drilling.
1.12.2 Well location and maps on a scale of 1:250.000.
1.12.3 Stratigraphy: it should include a stratigraphic column,
determination of environments and age of each formation drilled.
1.12.4 Biostratigraphy: Should submit the dispersion charts,
analyses realized and possible correlations.
1.12.5 Geochemistry: Should include all analyses made of both ditch
samples and each core recovered.
3
<PAGE>
1.12.6 Electric logs: Must include all calculations made to
determine RW, SW. The analyses of speed register should be included in this
chapter.
1.12.7 Formation Tests: Should include all the results of each test,
as well as the analyses of water and crude analyses performed in the laboratory.
1.12.8 The report must have the following attached documents: ANNEX
A: Description of ditch samples taken every ten (10) feet. ANNEX B: Detailed
description of cores and sidewall samples. ANNEX C: All laboratory analyses
performed on cores and sidewall samples. ANNEX D: Composite graphic register in
reproducible sepias and a copy on scale of 1:500. The American Association of
Petroleum Geologists (AAPG) symbols must be used for the various lithologies
included in the composite log. ANNEX E: Final report by the company that logged
the well, including the "Grapholog".
1.13 Reproducible sepias with copies of all logs run in the well,
including the velocity log, at scales of 1:200 and 1:500. Magnetic tapes of all
logs together with their computer listing must be submitted using the forms
established by ECOPETROL for these cases.
1.14 Report of the training tests and/or accomplished production,
including bottom hole pressure analyses (closed and open well).
1.15 A set of unwashed ditch samples must be delivered to ECOPETROL
for every ten (10) feet drilled, with their detailed lithological description.
1.16 When there has been coring, a report containing a detailed
description thereof as well as all analyses performed. With this report, THE
ASSOCIATE must send ECOPETROL photographs and fifty percent (50%) of the core.
4
<PAGE>
1.17 Report on all materials used during drilling.
1.18 Biostratigraphic analyses with their dispersion chart. These
analysis should be accomplished in the Exploration and Stratigraphic Wells,
since this information is used to establish the sedimentary environments and the
age of each one of the formation drilled. This sort of analysis must also be
made on the different core samples recovered.
1.19 Geochemical analysis of ditch, side wall and core samples.
1.20 Official Report of completion, plugging, or abandonment of the
well (Form 6 CR or 10 A CR).
1.21 Final report of the well. It must include all the engineering
information and a summary of the final geological report. It should be presented
in Spanish, no later than ninety (90) days after the completion or abandonment
date of the well, with the approval of a duly licensed petroleum Engineer.
1.22 During the first contract year, a quarterly report on planned
and executed geological and geophysical works, estimates of short and long term
work, and the budget programmed and executed.
1.23 Copy of the technical annual report submitted to the Ministry
of Mines and Energy, with supporting documents.
1.24 At the end of each calendar year, total investments and direct
expenses incurred, differentiated by concept of seismic, geology and drilled
wells.
1.25 Any engineering or geological study made.
5
<PAGE>
CLAUSE 2 - RETURN OF AREAS
The areas THE ASSOCIATE shall return to ECOPETROL in lots of at
least five thousand (5,000) hectares each one, as far as possible, shall be
regular polygon-shaped lots, in order to facilitate boundary marking, without
prejudice to commercial areas.
SECOND SECTION - EXPLOITATION
CLAUSE 3 - EXTENSIVE PRODUCTION TESTS
The following is the procedure established for the execution and
managing of the crude in extended production tests, prior to the acceptance of
commercial value of hydrocarbon-producing field:
3.1 For the handling and transfer of the obtained volumes, the tests
must be duly authorized by the Ministry of Mines and Energy and accepted by
ECOPETROL.
3.2 The production obtained during the tests shall be shared
according to the proportions established in The Contract, Clause 14
(subparagraph 14.2) deducting twenty percent (20%) of the royalties fund.
ECOPETROL shall be responsible for payment of such royalties.
3.3 The volumes produced in these tests will be recovered from the
well during the maximum test time approved by the Mines and Energy Ministry, in
the applicable permit, deducting any volume of crude consumed in operations.
6
<PAGE>
3.4 THE ASSOCIATE will be responsible for one hundred percent (100%)
of the disbursements incurred during the production test. ECOPETROL shall refund
THE ASSOCIATE fifty percent (50%) of all expenses, including those of the
production tests with the percentage of the production that corresponds to them.
It is understood that the Reimbursement of costs incurred in Colombian pesos and
reimbursed with production, shall be applied in dollars at the rate of exchange
on the date that ECOPETROL declares commerciality (Clause 9, subparagraphs 9.2.3
and 9.2.4 of The Contract).
3.5 THE ASSOCIATE or the Operator, will have to celebrate with the
carrier the necessary agreements for transportation of the crude produced in
extensive tests until the Barrancabermeja refinery, Cartagena or receipt site
that is determined. ECOPETROL will pay for the transport of its crude plus
royalties upon receipt of invoices and supporting documents.
3.6 ECOPETROL must be aware in advance of the draft contract for
crude oil transportation and shall approve it before the beginning of production
tests.
3.7 THE ASSOCIATE or the Operator, shall provide timely data to
ECOPETROL on the development program of production tests and send the permits
granted by the Ministry of Mines and Energy as well as any other information, as
soon as it is obtained.
3.8 In the event that the refund is made in crude oil, invoices
shall be presented each month, starting at the beginning of the exploitation of
the well.
7
<PAGE>
CLAUSE 4 - COMMERCIAL FIELD
4.1 Once it has obtained sufficient information on field
development, THE ASSOCIATE shall conduct a study to define criteria on
petrophysical parameters, better delimitation of the producing area and
estimated reserves. THE ASSOCIATE will conduct this study using technical
methods available in Colombia or abroad; when required by the circumstances, the
necessary reviews shall be carried out.
4.2 The basic production and detailed engineering designs for new
facilities, extensions or changes, shall be submitted to the Technical
Sub-Committee's consideration.
4.3 The engineering services for production facilities must be
contracted with Colombian companies unless the Technical Sub-committee considers
the technical complexity thereby requires a foreign company, preferably in
association with a National company.
4.4 Final mechanical completion of wells, passing to the Joint
Account's property must be agreed upon by the Technical Sub-Committee, shall be
an indispensable requisite for the well to begin optimum production.
Reimbursement for completion of Exploration Wells (Wildcats) shall be made as
provided for in Clause 9 (subparagraphs 9.2.2., 9.2.3 and 9.2.4) of The
Contract.
CLAUSE 5 - SOLE RISK
5.1 The Refund of the two hundred percent (200%) of the investment
shall only be for the investments directly related to each producing well and
8
<PAGE>
production facilities as described in Clause 9 (subparagraph 9.5) of The
Contract. for this purpose, ECOPETROL shall conduct an audit to fix the amount
of reimbursements.
5.2 As a field is being developed under the Sole Risk Clause, the
Operator shall send ECOPETROL all the technical, economic, legal and
administrative information such as: making and execution of contracts,
completion of wells, flow lines, production facilities, measurement systems,
storage capability, producing wells, chokes, production reports, economic
studies, etc. It is understood that the different clauses of The Contract and
the explanations of the present document have full applicability in the case of
Clause 21, of The Contract "Operations under the Risk of One of the Parties" for
the purposes of timely information, technical control of reserves and other
administrative aspects.
CLAUSE 6 - OPERATION INSPECTIONS
ECOPETROL shall be entitled to send its representative to the
Commercial Fields for their control and inspection. The Operator shall furnish
the same living conditions as those of his engineers, for ECOPETROL's
officer(s).
CLAUSE 7 - PRODUCTION
7.1 The Operator shall also deliver to the Parties any information
on improved production techniques it may develop during the Exploitation Period.
7.2 For the control and prevention Oil loss and damages to the
environment, the Operator and ECOPETROL shall take the measures, with the
methods
9
<PAGE>
generally accepted in the Petroleum industry, to prevent the loss or spills of
Oil in any kind during the drilling operations, production, transportation and
storage.
7.3 The Operator shall carry on a daily control of crude Oil used in
the operation and submit a monthly report thereon.
CLAUSE 8 - OIL DISTRIBUTION AND AVAILABILITY
Pursuant to Clause 14 (subparagraph 14.1) of The Contract, crude Oil
shall be measured as follows:
8.1 Temperature and pressure corrections: Crude Oil volumes shall be
determined as sixty degrees Fahrenheit (60(degree)F) and at atmospheric
pressure, regardless of the pressure and temperature at which they are measured.
Correction shall be made in keeping with the Petroleum Measurement Tables Volume
I Table 5A, Generalized Crude Oils Correction of Observed API gravity to API
gravity at 60(degree)F. (ASTMD-1250-80) and Table 6A Generalized Crude Oils
Correction of Volume to 60(degree)F against API gravity at 60(degree)F. For
crude pressure correction, Table 2 Compressibility Factors per Pound per Square
Inch, of API Standard 1101, shall be used.
8.2 Measurement: The crude volumes that the Operator accepts for its
transportation, will be determined by the measures that for such effect the
Operator will have installed in the station or delivery points and, in absence
of these, by the direct measurement of the level of the respective tanks,
according to the appraisal approved by the Ministry of Mines and Energy and API
standard 1101.
10
<PAGE>
For the liquidation of the net volumes of crude oils received and
delivered, the Operator shall perform the analysis of water and sediment
contents, using the method Water by Distillation (ASTM D-95) (API 2560) for
water content, and to determine the sediments, the method Sediments by
Extraction, Methods ASTM D-473 latest revision, according to provisions of
Resolution No. 002297 of October 21, 1983, issued by the Ministry of Mines and
Energy.
CLAUSE 9 - CRUDES SUPPLY FOR EXPORT
Pursuant to Clause 14 of The Contract, in order to proceed to the
export of crude oil, THE ASSOCIATE will give priority the internal needs of the
country before exporting crude, according to the legal arrangements that govern
on the matter.
PART II - ACCOUNTING AND FINANCIAL ASPECTS
SECTION ONE - PROGRAMS AND BUDGETS
CLAUSE 10 - BUDGET AND EXPLORATION PROGRAMS
10.1 Before the beginning of each calendar year, THE ASSOCIATE will
have to present the Budgets and exploration programs, itemized in: geology,
seismic and drilling of Exploration Wells, with the indication of the currency
in which work costs are incurred.
10.2 THE ASSOCIATE must present a quarterly report with a comparison
between the Budget and the actual Expenses.
11
<PAGE>
CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS
11.1 For the purposes of Clause 11 of The Contract, the Operator
shall submit the development plan and the work Budget and program, broken down
into quarters in order to facilitate control.
11.2 THE ASSOCIATE shall submit the Organization Chart for the
Commercial Field Operation to ECOPETROL, which chart should be agreed upon by
the Technical Sub-Committee and approved by the Executive Committee.
CLAUSE 12 - BUDGET MANUAL
The regulations and procedures shown below constitute the Budget
Manual to be used in preparing, presentation and controlling the budgets
required to perform The Contract. Such Manual has three (3) parts:
12.1 Income Budget
12.2 Expenditure Budget
12.3 Other provisions
CLAUSE 13 - INCOME BUDGET
This Budget is in turn broken down into two sections: current income
and capital contributions:
13.1 Current Income: All funds which regularly accrue in the Joint
Account and which the Operator can forecast. Such income includes the following
items, when applicable:
12
<PAGE>
13.1.1 Product Sales: Income from crude Oil or gas sales made by the
Operator, on behalf of the Association, to one of the Parties or to third
parties (it must be understood that such sales are different from those
corresponding to each Party's share in the Association).
13.1.2 Services Furnished: All services furnished by the Operator to
one of the Parties or to third parties in accordance with the rates established
by the Sub-Committee and approved by the Executive Committee.
13.1.3 Sales of Assets or Materials: Sales of equipment or materials
which the Operator makes to the Parties or to third parties as provided for in
Clause 20 (subparagraph 20.2) of this Agreement.
13.1.4 Other Income: All other moneys earned by the Operator
destined to the Joint Account coming from yield on temporary investments.
13.2 Capital Contributions: All funds received by the Operator from
each partner as an advance for its share in the Budget approved by the
Association. This income is called a "cash call" and are handled pursuant to
Clause 15 (subparagraph 15.5) of this Agreement.
CLAUSE 14 - EXPENSE BUDGET
The expense or appropriation Budget consists of the operating
expenses Budget and the investment Budget. Each such Budget is prepared
according to the monetary origin of its disbursement in pesos and dollars, and
is presented classified by programs and projects. The programs, in numerical
order within each Budget, represents the different
13
<PAGE>
groups of similar activities which the Operator will perform for the
Association. The projects in continuous and numerical order within each program
presented will detail the exact expense item, duly supported and explained.
14.1 Preparation Procedures: The Operator shall prepare the
Operating Expense Budget in keeping with the policies established by the
Association's Executive Committee in this regard (Clause 19 of The Contract) and
based upon the economic parameters and indices defined by the Association as the
most representative ones for the Budge term.
14.1.1 Preparation Procedures: The Operator must present Operating
Expense Budget identifying the needs of the Association and detailing the
various kinds of expense by using the classification method provided for in
Clause 14 (subparagraph 14.1.2) of this Agreement.
Cost factors used to assess Budget activities shall correspond to
the actual figures known at the time of preparation or with the best information
available.
In all cases, the Operating Expense Budget will be calculated on the
costs required by the facilities directly serving the Joint Operation and which
must therefore be assumed one hundred percent (100%) by the Joint Account and
charged to the Parties pursuant to Clause 22 (subparagraph 22.6.1 of the
Contract). Indirect costs to be paid from the Joint Account will be calculated
and charged to The Parties, determined as set forth on Clause 22 (subparagraph
26.2) of the Contract. Operating expenses will be appraised in the currency in
which the disbursement is planned (dollars of the United States of America or
Colombian pesos).
14
<PAGE>
For control purposes, the Budget must be submitted in three columns
namely: Dollar-origin expenses; Peso-origin expenses; and Consolidated total in
dollars, using the projected exchange rate for the respective year.
14.1.2 Classification for Expenses
14.1.2.1 Employee Expenses, Salaries, Benefits
14.1.2.2 Material and supplies
o Repair and maintenance
o Tools
o Other material and supplies
14.1.2.3 Third party services
o Technical services for the field
o Public service
o Other services
14.1.2.4 General Expenses
o Equipment and offices lease
o Other general expenses
14.1.2.5 Services of the Operator
o Indirect Expenses
o Other services lent by the Operator
14.1.2.6 Other disbursements
o Housing loans
o Assistance to the community
15
<PAGE>
14.1.3 Calculation Base: Calculation for the Operating Expense
Budget shall be based on the following:
The budget of wages and social benefits will be calculated according
to organization charts approved for the Association worked out in accordance
with Clause 18 (subparagraph 18.1.1) of this Agreement.
The calculation of salaries, social benefits, and other additional
special voluntary bonuses for Colombian and foreign employees shall be shown
separately, according on the origin of the disbursement, for the information of
the Association's Sub-Committees and Executive Committee.
Material and Supplies will be estimated on the basis of actual
prices or updated quotations and, in general, based on the best available
information.
Importation expenses shall be calculated on FOB prices for the
materials and/or equipment to be imported, with due provision for the following
factors: freight, insurance, dues for utilization of Colombian ports, import
dues, and other importation expenses.
The value of maintenance and operation services shall be estimated
on contracts formalized or to be formalized by the Association at the time of
Budget preparation.
Indirect expenses chargeable to the Joint Account for services that
are or may be provided by the Operator shall be calculated in accordance with
Clause 22 (subparagraph 22.6.2) of the Contract.
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General Expenses shall be calculated by taking into account the
specific needs of the Joint Operation in the normal course of its activity.
Community Assistance will be budgeted on both the requests made by interested
parties and the Executive Committee policies on such matters. In special
duly-justified circumstances, the Operator may deal with requests in its
customary manner, after first advising each of the Parties.
14.1.4 Budget Execution: The operating Expense Budget shall be
performed as follows:
14.1.4.1 All services, purchases or contracts charged to the Joint
Account as operating expenses must be both budgeted and fully justified.
14.1.2 When the cost of the service or activity to be contracted is
within the limits established for the Association, the Operator shall have full
autonomy to sign contracts pursuant to its own internal authority and
responsibility.
14.1.4.3 Purchases, contracts or any other action whose costs exceed
established limits either partially or totally must be submitted to the
Association's Technical Sub-Committee for study and recommendation.
14.1.5 Budget Execution Control: The Operator is responsible for
controlling the Expense Budget execution and must see that expenses are properly
charged. The Operator must prepare a quarterly report on Budget performance
including:
14.1.5.1 Expenses accrued to date, itemized as per expense
categories shown in Clause 14 (subparagraph 14.1.2).
14.1.5.2 Special comments on items which deviate significantly from
Budget average or quarterly estimate.
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14.1.5.3 Estimated expenses per quarter for the rest of the year.
14.1.5.4 Justification of possible budget additions, adjustments or transfers
proposed by one of the Parties or which the Operator considers suitable.
14.2 Investment Budget: This constitutes the basic tool for the
planning, execution and control of each investment project and program planned
by the Joint Operation, and serves as a means of estimating funds required for
the execution of the various programs approved by the Executive Committee.
First, the Executive Committee, through the respective
Sub-Committees, will fix the general parameters and policies to be considered by
the investment plan.
14.2.1 The investment Budget is composed of items allotted for the
following:
14.2.1.1 Acquisition of durable goods, materials and services
required for the different Association projects.
14.2.1.2 Acquisition of equipment and major maintenance tools for
the Association's workshops in order to guarantee normal operation's
development.
14.2.1.3 Provision of social amenities and other constructions
and/or building extensions required by the operation, including facilities for
the Joint Account workers.
14.2.2 Classification of the Investment Budget: For all presentation
purposes, the investment Budget shall be grouped into programs and projects as
follows: Development wells, production facilities, civil works, other assets,
special studies warehouse and other projects. These in turn will be broken down
into the following projects:
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14.2.2.1 Development Wells: Surface or Pumping Equipment and
Workover; Producing Wells; Locations.
14.2.2.2 Production facilities: System of crudes collection; Storage
system; System of crude treatment; Improved recovery system; Pumping stations;
Transfer lines; Other.
14.2.2.3 Civil works: Highways; Bridges; Constructions (camps,
workshops, warehouses and offices).
14.2.2.4 Other Assets: Vehicle Fleet; Fire-fighting equipment;
Communications equipment; Electromechanical Maintenance Equipment; Major tools;
Cleaning or Workover Equipment.
14.2.2.5 Special Studies: Environmental impact; Reservoir studies,
Simulation studies; Interference tests.
14.2.2.6 Warehouses: Fluctuation of material stock.
14.2.2.7 Each one of these projects can be broken down into sub-
projects as needed, maintaining a uniform identification. Final presentation
shall be made on a project-by-project basis, according to the classification
given above and using Forms two (2) and four (4). These forms may be modified by
agreement between the Parties at the Financial Sub-Committee. For greater
clarity in preparation of the investment Budget, the following considerations
should be taken into account.
14.2.2.7.1 Maintenance Projects: All investments made in equipment,
materials, and construction for the purpose of keeping facilities in good
operating condition as per their original capacity and performance limits.
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14.2.2.7.2 Enlargement Projects: These are investments designed to
increase facilities capacity, the authorized size of the vehicle fleet, office
equipment, etc.
14.2.2.7.3 Special Projects: All those projects which deserve being
classified as special due to their size, industrial importance, or social or
ecological impact.
14.2.3 Budget Preparation and Presentation: Each project in the
investment Budget must be fully justified and analyzed before being included in
the general Budget. To this end, the Operator must therefore draw up a
preliminary investment report containing the following general information:
Analysis of requirement/needs; Justification of the project; General project
description; Estimated amount of investment; Time required for execution;
Economic appraisal. The report showing the aforementioned data, as well as
anything else deemed necessary for appraisal purposes, shall be studied jointly
by the SubCommittees, Association's Sub-Committees, who will either recommend or
object to the viability of the project in keeping with the policies established
by the Executive Committee.
Once such Sub-Committee recommends the execution of a specific
project, it will be included in the General Budget to be approved by the
Association's Executive Committee.
All the general information used to justify each project will be
compiled in a Technical-Financial Annex which will serve as a support when
presenting the Budget for the approval of the Executive Committee.
14.2.4 Consolidation of the investments budget: Once the Joint
Operator's requirements have been defined, the Operator will consolidate the
investment Budget according to the classification in Clause 14 (subparagraph
14.2.2) of this Annex and
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shall present it to the Association's Executive Committee for final approval.
The expense Budget, as well as the program investment Budget, will be submitted
in three columns: Dollar-origin disbursements, pesos-origin disbursements, and
consolidated total in dollars.
For information purposes, the Operator will also prepare a
disbursement schedule, specifying quarterly cash requirements, currency thereof,
the program when it is a case of investments, and total expenses when it is for
operating expenses.
14.2.5 Budget Performance: The Operator, through its various
facilities, will execute the investment Budget according to previously
established schedules.
A pre-defined code will be used to identify the appropriations
assigned to each project and will be used in all documents derived from Budget
Performance.
14.2.6 Budget Control: The Operator shall be responsible for the
performance of each investment program and project and will be responsible for
their execution under the conditions approved therefor.
Likewise, the Operator shall make sure that procedures needed to
effect the projects are taken in due time and in the proper way. Should the
Operator encounter any difficulty impeding the normal progress of such projects,
it shall immediately advise each Party in writing in order to seek a solution.
The Operator, as the Party in charge of the projects, shall prepare
quarterly technical and Budget progress reports, submitting them to each Party
sufficiently in advance of the next ordinary meeting of the Executive Committee.
The quarterly report that should be made by the Operator through his
own facilities should include the following information:
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o Period covered by the report
o Code and description of the project
o Total Budget of the project
o Financial advances from its start up to cut off date
o Investments per current year project, accumulated to date
o Technical progress of work
o Quarterly projection of work to be executed up to year-end for
information purposes
CLAUSE 15 - OTHER PROVISIONS
15.1 Budget Additions: In all cases, the Operator has authority to
incur in all operating expenses and make all investments as may be required by
the Joint Operation within the approved Budget, without exceeding ten percent
(10%) of the appropriates made for each project for the respective term (Clause
11, subparagraph 11.5 of The Contract). However, if during Budget performance,
additions to the value of the appropriations approved by the Executive
Committee, need to be made the applicable changes can be requested.
From time to time, requests for additions to or carry-overs in
expense or investments budgets can be submitted, analyzed and approved at each
ordinary meeting of the Executive Committee. However, the Executive Committee
can also hold special meetings to discuss budgetary matters whenever a special
situation so requires.
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In consequence, each time a Budget revision is requested, the
Operator must initiate the corresponding proceedings in due time by submitting
applications to the respective Subcommittee for study and subsequent
recommendation to the Executive Committee.
In any case, applications for additional funds must be fully
justified by explaining the reasons that cause such variation of the sums
allocated, with the respective technical and financial annexes as contemplated
in Clause 14 (subparagraph 14.2.3) of this Agreement.
15.2 Carry-Overs: Budgetary carry-overs shall be those movements
made from one year to the next for such projects that could not be finished in
the year for which they had been budgeted (due to unavailability of equipment,
importation procedures, bad weather, etc.)
The value of a project which has not been totally performed will be
carried over to the next year's Budget and submitted to the Executive Committee
for ratification purposes. Each sub project shall be expressly identified in the
Budget and shall be taken into account at the time of preparing the disbursement
schedule mentioned in Clause 15 (subparagraph 15.4) of this Agreement.
Furthermore, carry-overs shall give rise to an attachment explaining the reasons
therefor and how they will be performed in the next period.
If a project was left more than eighty percent (80%), such must be
included again into the Budget as a new project. Therefore, it must be
accompanied by the information contemplated in Clause 14 (subparagraph 14.2.3)
of this ANNEX.
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15.3 Approvals: The Executive Committee will be the body in charge
of approving the Budget recommended by the Association Sub-Committees and of
authorizing the Operator to purchase or contract on behalf of the Association
all assets and services required by the Joint Operation.
15.4 Disbursement Schedule: When approving the Budget recommended by
the Association Sub-Committees, the Executive Committee shall approve the
quarterly Budget submitted by the Operator and which will be the basis for the
monthly cash calls.
15.5 Cash-Calls: Requests for advance payments or cash-calls shall
be made by the Operator to each Party on the basis of the obligations contracted
by the Association for the month immediately following the month of the call,
with due reference to both Budget approved by the Executive Committee and the
projected cash flow. The preparation and submissions of such calls shall meet
the following requirements:
15.5.1 Preparations: On the basis of both the approved Budget and
the obligations contracted by the Association for the following month, the
Operator shall prepare cash-calls taking into account the following conditions:
15.5.1.1 The Operator shall make separate cash calls for expenses
and investments, each one in pesos and dollars depending on the currency in
which the disbursement is to be made.
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15.5.1.2 Cash calls must distinguish between programs and projects
in the case of investments, and between cost centers and expense times in the
case of expenses as appearing in the Budget approved by the executive Committee.
15.5.1.3 Each one of the projects mentioned in the request for
advance must appear in the Budget, in order to be considered; otherwise, the
whole value requested shall be discounted.
15.5.1.4 Projects must have an adequate Budget. However, in extreme
cases, the amount appropriated for a budget term may be exceeded by ten percent
(10%), pursuant to Clause 11 (subparagraph 11.5) of The Contract.
15.2 Presentation: All cash-calls request shall be submitted on the
form previously accepted by the Parties in the Financial Sub-Committee, showing
actual and estimated charges for investment and expenses, and such request shall
be made up of the following documents:
15.5.2.1 Letter of application
15.5.2.2 Application form showing the updated financial status for
each program or project on the date of the request.
15.5.2.3 When necessary, general technical comments showing how
funds will be used.
SECTION TWO
ACCOUNTING PROCEDURES
CLAUSE 16 - ACCOUNTING PROCEDURE
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The following shall serve as a basis to effect the credits and
charges incurred among the interested parties, all of which cover the operation
concerning the properties which have been defined in The Contract.
All charges shall be made to the Joint Account that shall be opened
according to the provisions of Clause 22 of The Contract. The Joint Account
defined in Clause 4 (subparagraph 4.5) of The Contract shall be divided into
three main records, as follows:
16.1 Joint Account (Explanation, charges and credits/entries): This
account shall be affected by all movements, as detailed below, and shall be
fully distributed on a monthly basis, fifty percent (50%) to ECOPETROL and fifty
percent (50%) to THE ASSOCIATE for investments and in the proportion indicated
in Clause 22 (subparagraphs 22.6.1 and 22.6.2) of The Contract for direct and
indirect expenses, that is, shall serve as the basis for monthly invoicing as
established in this procedure and shall have a zero (0) balance every month. All
accounting operations related to the Joint Account will be recorded by the
Operator in Colombian pesos, according to Colombian law, however, the Operator
may in turn keep auxiliary records showing disbursements incurred in other
currencies.
16.2 Joint Operation Current Account: The advances received from the
Parties and the charges or credits shown in their invoicing shall be carried in
this account, which shall at all times show a balance for or against each Party,
as the case may be. This account shall be divided into two sub accounts, one of
dollars and one for pesos, depending on the monetary origin of the transactions.
16.3 Joint Property Records: Through the Joint Account, the Operator
shall keep a record of all assets acquired and subject to inventory, with
details of
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type of asset, date of acquisition and the original cost. The accounts mentioned
in Clause 16 (subparagraph 16.1, 16.2 and 16.3) shall form part of Operator's
official accounting records, but shall not be mixed with accounting records
other than those of the Joint Account. All three shall be subject to Clause 22
of this Agreement.
CLAUSE 17 - CASH CALLS, INVOICING AND ADJUSTMENTS
17.1 Cash-Calls. Although the Operator will in the first instance
pay and discharge all costs and expenses incurred under The Contract and charge
each Party for the percentage that corresponds to its share, it is agreed that
to finance such share each Party, upon the Operator's request and as established
below, shall make advance payments to the Operator form the time the Parties
accept the existence of a Commercial Field, within the first five (5) calendar
days of each month at the latest, the proportion of the expenses estimated for
the operations of the respective month. The cash call must include details as
provided for in Clause 15 (subparagraph 15.5.1.2) herein. Such advance payments
shall be made in dollars of the United States and in Colombian pesos, as
established in the Budget and the cash-calls made by the Operator. The Operator
shall make such cash-call within the first twenty (20) calendar days of the
month preceding that in which the advance payment is to be made. Should the
Operator have to make special disbursements not foreseen in the monthly cash
call, it shall request non-Operators in writing for special cash calls to cover
their share of such disbursements. Each participant shall make the advance
payment of its share within the fifteen (15) calendar days following the
Operator's request.
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17.2 Invoicing
17.2.1 The Operator shall prepare an initial invoice for ECOPETROL
after the acceptance of a Commercial Field, by fifty percent (50%) of the
expenses and costs of the Exploration wells that resulted producing. These costs
will include all the expenses caused by the drilling, such as the tests, the
completion and the equipment of the well, as well as the flow lines, separating
and costs of the extensive production tests. Said invoice will also include
fifty percent (50%) of the cost of the additional projects referred in Clause 9
(subparagraph 9.3) of The Contract and is paid according to such clause. This
billing will include a summary of the costs, broken down into currency, in which
expenses have been made, that is, in Colombian pesos or in dollars of the United
States of America.
17.2.2 Of the date of the initial invoice in forward, the Operator
invoiced to the Parties, within the thirty (30) calendar days following the last
day of each month, its proportional participation in the costs and expenses
during that month. Invoices shall contain details available from the Operator's
accounting procedures, including a detailed summary of accounts, separately
recording the costs and expenses incurred in pesos and in dollars.
17.3 Adjustments: Invoices among Parties and Operator will be
settled after deducting dollar and peso cash-call. Should the advance payments
made by any Party differ from its share in the actual costs for each period, the
difference in pesos and/or dollars will be adjusted in the following month's
invoices.
17.4 Acceptance of Invoices: Payment of invoices shall not affect
the rights of the parties to object to or question their accuracy as set out in
Clause 22 (subparagraph 22.7) of The Contract.
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CLAUSE 18 - CHARGES
Subject to the limitations set forth below, the Operator shall
charge the following expenses to the Joint Account and invoice each Party
therefor, in keeping with the percentages established in Clause 16 (subparagraph
16.1) of this Agreement:
18.1 Labor
18.1.1 Colombian and foreign employees
18.1.1.1 The salaries of Operator's employees or workers directly
engaged in the Joint Operation, including overtime, night shift charge, Sunday
and holiday payment plus the respective compensation in time and, in general,
all payments that constitute salary.
18.1.1.2 Social benefits, indemnities, insurance, subsidies, bonuses
and, in general, any non-salary benefit paid to the workers and/or to their
families or dependents, whether provided on an individual or collective basis,
or by virtue of employment contracts, legal regulations, collective bargaining
agreements and/or arbitration decisions, except for housing plans, which shall
require special agreements. As examples of the foregoing, we may mention
severance payment, vacation retirement and disability pensions, benefits
extended to retired personnel and their families, benefits and allowance
resulting from illness and accidents occurring at work or outside, service
premiums, life insurance, indemnities on contract termination, union subsidies,
all kinds of bonuses, subventions and assistance for savings, health and
education and, in general, for social security as well as contributions to the
Family Welfare Institute (ICBF), the National Apprenticeship Service (SENA) the
Social Security Institute (ISS) and other similar institutions that may be
established.
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18.1.1.3 All expenses incurred for the benefit of the Joint
Operation in connection with the camp maintenance and operation, field office
and service facilities owned by the Joint Operation. Such expenses also include,
but are not limited to, the ones defined below, whether such services be
provided free of charge ow with compensation paid to workers or their dependents
or families, on a voluntary or compulsory basis.
Such services include the following:
18.1.1.3.1 Medical, pharmaceutical, surgical and hospitable.
18.1.1.3.2 Camp and full services therefor, including repairs and
sanitation.
18.1.1.3.3 Training expenses
18.1.1.3.4 Worker entertainment
18.1.1.3.5 Maintenance of schools for workers, their children and
dependents.
18.1.1.3.6 Safety or social work and camp surveillance plans.
18.1.1.1.4 It is understood that the expenses and services provided
for in Clause 18 (subparagraphs 18.1.1.1, 18.1.1.2 and 18.1.1.3) above shall
belong to the Joint Account when, by virtue of legal regulations, collective
bargaining agreements and/or of arbitrator's awards or, voluntarily, such
expenses are directly or severally and joint applied contractors,
subcontractors, intermediates and/or their workers engaged in the Operation.
18.1.1.5. As regards to retirement and disability pensions, upon
receiving Operator's recommendation, the Executive Committee is fully empowered
to decide
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on whether to affiliate workers to the Social Security Institute, to an
Insurance Company or an entity legally authorized to assume such risks or to set
up a fund to be directly handled by the Operator under the Executive Committee
control. The Operator shall pay one hundred percent (100%) of the amount charged
by the Entity selected or the fund, as the case may be, and their respective
amounts shall be charged to the Joint Account. This does not prevent the
Operator from directly providing health care service.
18.2 Materials, Equipment and Supplies: Materials and supplies
needed for the operations shall be charged to the Joint Account. Such materials
and supplies shall be purchased for warehouse stock when convenient to the
operation and credited thereto at book cost as they are released for use.
Capital equipment units will be charged directly to the Joint Account. The book
cost is defined as follows:
18.2.1 Cost in books: Book cost is understood to mean the most
recent average price of warehouse stocks, based upon the cost obtained in the
import liquidation sheets or local price as follows.
18.2.1.1 For imported materials, equipment and supplies, book cost
shall include the net invoice value of the manufacturer or supplied (after
deduction of all discounts), purchasing costs, freight and delivery charges from
the place of supply to port of shipment, freight to port of entry, insurance,
import duties or any other tax, handling from ship to customs warehouse and
transport to the operation site.
18.2.1.2 For local purchased materials, equipment and supplies, book
cost shall include the seller's net invoice (after deducting any discount), plus
sales taxes,
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purchasing expenses, transport, insurance and other similar costs paid to third
parties from the place of purchase to the operation site.
18.2.1.3 Materials shall be charged to the Joint Account in the
currency in which they were purchased and then similarly charged to each Party.
18.2.2 Return of materials to the Joint Operation's warehouse:
Materials, equipment and supplies returned by the operations to the Joint
Operation's warehouse shall be assessed as follows:
18.2.2.1 New Materials, at book cost
18.2.2.2 Serviceable second-hand materials in good condition and
equipment that may be subsequently used without repair can be returned to the
Association's warehouse for seventy-five percent (75%) of the book cost thereof,
crediting the pertinent Joint Account project.
18.2.2.3 The materials and secondhand equipment that could be
serviceable after repair and returned by the Operator to the Associations's
warehouse for fifty percent (50%) of its book cost.
18.2.3 Sales by the Parts. The materials, equipment and supplies
sold by the Parties to the Joint Operation are appraised to the price of
replacement agreed by the Parties. Corresponding transportation costs will be
charged to the account of Joint Operations. In the cases of sale by the Joint
Operation to one of the Parties, such materials, equipment and supplies shall be
appraised at the replacement cost agreed upon by the Parties and transport costs
shall be payable by the purchasing party.
18.2.4 Local Transport of Materials
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18.2.4.1 For those materials delivered through an external carrier,
at the cost appearing on the carrier's invoice.
18.2.4.2 For materials delivered in vehicles belonging to the
Parties, using rates calculated to cover actual costs, as per the provisions of
Clause 18 (subparagraph 18.4) and 23 (subparagraph 23.1.1) of this Agreement.
18.2.5 Materials canceled, postponed or changed projects. When there
is an increase in warehouse stock due to changes, postponement, or cancellation
of projects approved by the Parties, the cost thereof shall be charged to the
warehouse account. Such materials may be sold to third parties under the terms
of Clause 20 (subparagraph 20.2.1) of this Agreement, and the proceeds shall be
credited to the Joint Account.
18.3 Travel Expenses: All travel expenses incurred on behalf of the
Joint Operation for Colombian or foreign personnel such as transport, hotels,
food, etc.
18.4 Service Units and Facilities: The services provided by
equipment and facilities owned by any of the Parties shall be charged to the
Joint Account at reasonable rates, as set forth in Clause 23 of this Agreement.
Such rates shall be applicable until changed by mutual agreement.
18.5 Services: Services furnished by third parties to the Joint
Operation, including contractors, at their actual cost.
18.6 Repairs: Expenses incurred in repairing equipment or items
owned by any of the Parties and used in the Joint Operation, unless such costs
have already been charged through rentals or otherwise.
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18.7 Litigation: Joint Operation expenses as regards possible
effective litigation (including investigation and collection of evidence)
lifting attachments, decisions or sentences, legal claims and claim proceedings,
accident compensation, settlement in the event of death and burial expenses,
provided that such charges have not been assumed by an insurance company or
covered by the proportional surcharges mentioned in Clause 18 (subparagraphs
18.1.1) of this Agreement. Should legal services on such matters be provided by
in-house or external attorneys, whose compensation is wholly or partially
included in the indirect expenses, no additional charge will be made therefor,
but Direct Expenses incurred in these proceedings shall be charged.
18.8 Damages and Losses of Joint Operation Property and Equipment:
All costs and expenses necessary to replace or repair damage or loss caused by
fire, flood, storm, theft, accident, or any similar event. The Operator shall
give written notice to the Parties of the damage or loss as soon as possible.
18.9 Taxes and Rentals: The amount of all the taxes paid or accrued
to the Joint Account shall be charged thereto, as will sums paid for rental,
rights-of-way, and indemnifies for improvements, land occupation, etc.
18.10 Insurance
18.10.1 The premiums paid for insurance taken for the benefit of the
operations referred to in the Contract, together with all expenses and
indemnities incurred and paid, and all losses, claims and other expense that are
not covered by the insurance companies, including the legal services mentioned
in clause 18 (subparagraph 18.7) of this Agreement, shall be charged to the
Joint Account.
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18.10.2 When there is no insurance, actual expenses incurred as
mentioned above and paid by the Operator shall also be charged to the Joint
Account.
CLAUSE 19 - CREDITS
19.1 The Operator shall credit to the Joint Account the income
resulting from:
19.1.1 Joint Operation insurance reimbursements when the premiums
have been charged thereto.
19.1.2 Sale of geological information, when duly authorized by the
Parties, provided that the collection of such information was charged to the
Joint Operation.
19.1.3 Sale of property, plants, equipment and materials owned by
the Joint Operation.
19.1.4 Rental payments received, reimbursement of claims for Custom
duties, transport, etc. shall be credited to the Joint Operation if they pertain
thereto.
19.1.5 Any other operating or contractual income approved by the
Executive Committee.
19.2 Warranty: In the event of defective equipment, when the
Operator has received the corresponding adjustment from the manufacturer or its
agents, credit shall be made to the Joint Operation. CLAUSE 20 - DISPOSAL OF
EXCESS MATERIALS AND EQUIPMENT
20.1 Excess Materials and Equipment: The Operator shall inform
ECOPETROL in writing of any excess materials or equipment belonging to the Joint
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Operation. Each Party shall appoint a representative to review the condition
thereof and determine what may be sold. For the purchase or usable materials or
equipment, ECOPETROL shall have the first option and THE ASSOCIATE shall have
the second one. Such options to be exercised within sixty (60) days following
notification. If the Parties elect not to purchase usable materials or
equipment, the Operator shall so inform in writing and the items will be
auctioned.
20.2 Disposal of Materials and Capital Equipment:
20.2.1 Sales by the Operator to third parties of major materials and
capital equipment which have been charged to the Joint Account, shall only be
made upon the approval of the Executive Committee. The proceeds shall be
credited to the Joint Account. For this purpose, major materials are defined as
any asset having estimate sale value exceeding five thousand United States
Dollars (US $5,000) or its equivalent in Colombian currency.
20.2.2 Minor materials, charged to the Joint Account and not
required in the Operation or which are returned to the warehouse, may be sold by
the Operator and the proceeds shall be credited to the Joint Account.
20.2.3 For any abandoning or dismantling of assets having a cost or
value estimated at five thousand United States Dollars (US $5,000) or more, or
its equivalent in Colombian currency, prior authorization of the Executive
Committee is required.
20.2.4 Neither of the Parties is committed to purchase the interest
of the other Party in surplus materials, whether new or second-hand. Withdrawal
of important surplus items such as towers, tanks, engines, pumping units, and
pipes require prior approval
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by the Executive Committee. However, the Operator shall have the right to
dispose of damaged or unserviceable materials in any matter.
CLAUSE 21 - INVENTORY
At ECOPETROL's request, the Operator will submit the data needed to
take warehouse inventories and the Parties shall agree upon joint participation
in inventory control. The Operator shall furnish the facilities required by
ECOPETROL for a physical list of fixed assets on Association premises, following
agreement with the Finance Sub-Committee on the date, time and number or persons
to perform such inventory.
21.1 Inventory and Audit: The Operator shall, at reasonable
intervals, take inventories of all Joint Operation assets.
21.2 The Operator shall deliver the Parties written notice to take
inventory at least one (1) month before the date in which it is due to begin in
order to enable the Parties to send a representative. Failure to send a
representative does not invalidate Operator's inventory or make it less
effective.
21.3 The Operator will supply the Parties with a copy of each
inventory, with a copy of the reconciliation.
21.4 Inventory adjustments due to surpluses and missing items shall
be submitted to the Executive Committee of its consideration and approval.
21.5 At midnight on the last day of year twenty-two (22) of the
Exploitation Term, the Parties shall take an inventory of all Joint Account
warehouse stock, plus all products in the well head tanks/batteries, pipelines
connecting these tanks to the storage tanks, or in storage tanks, all this
within the exploitation fields and, after deduction
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of royalties, these inventories shall be divided between the Parties as provided
for in Clause 13 of The Contract.
CLAUSE 22 - AUDIT
Subject to Clause 17 (subparagraph 17.4) of this Agreement, the
Parties may use their own auditors to examine and control Operator's books on
joint assets and operation. However, to facilitate the check of costs and
expenses of the Exploration Wells mentioned in Clause 17 (subparagraph 17.2) of
this Agreement, once the Operator has notified nonOperator of the closing date
of any producing well inventory, the Operator shall allow ECOPETROL auditors,
with timely prior notice to periodically examine well drilling accounts made in
the best time and site conditions. In addition to representatives of the
Parties, audits as established in this Agreement may be witnessed by
representatives of the Contraloria General de La Republica, if it deems
necessary. Audit costs shall be charged to the interested Party. CLAUSE 23 -
RATES
23.1 Subject to the above limitations, the services furnished to the
Joint Operation by facilities owned exclusively by ECOPETROL or THE ASSOCIATE
shall be charged at pertinent rates so as to recover actual costs. Such costs
shall include normal work rates, salaries, social benefits, depreciation and
other operating expenses, taking into account the following:
23.1.1 The rate for transport equipment, which is normally
calculated on the basis of operating time, must include loading and unloading
time plus the waiting time
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when loading and unloading. Charges for transport equipment assigned to the
Operation shall include Sundays and holidays unless the equipment is down for
repair.
23.1.2 When materials for the mentioned operation are transported
together with other material by river or by land in units owned exclusively by
ECOPETROL or by THE ASSOCIATE, a charge shall be made based on the tonnage
transported, at rates which may not be higher than commercial rates.
23.2 Tool and Equipment Rental Rates: The procedure to calculate the
rental rate for equipment and tools belonging to the Parties, excluding drilling
rights and major items whose rates will be calculated separately and approved by
the Executive Committee, shall include a depreciation value and a maintenance
value, as follows:
23.2.1 Description, model, number, date of purchase and original
cost of the equipment.
23.2.2 Location where equipment is to be used, reasons for rental
and estimated time of use.
23.2.3 Annual depreciation of equipment based on depreciated book
value and estimated remaining life span (the minimum book value taken into
consideration shall be ten percent (10%) of the original cost, that is salvage
value).
23.2.4 The annual maintenance cost will be a percentage of original
cost, varying from five percent (5%) for new equipment to fifteen percent (15%)
for depreciated equipment, depending on depreciation time, for example.
o EQUIPMENT A: (FIVE [5] YEAR LIFE).
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o Time (years) 1,2,3,4,5:
Equipment depreciated One
hundred Percent (100%).
o Maintenance: 5,6,7,8,9: Fifteen percent (15%)
o EQUIPMENT B: (TEN [10] YEAR LIFE).
o Time (years) 1,2,3,4,5,6,7,8,9,10: Equipment depreciated One
hundred percent (100%).
o Maintenance: 5,6,7,8,9,10,11,12,13,14,15: 15%
NOTE: Useful life span and depreciation shall be those of
oil-industry accounting norms.
23.2.5 The annual rental is equal to that stated in Clause 23
(subparagraph 23.2.3) of this Agreement plus the amount determined in
(subparagraph 23.2.4) of the same Clause.
23.2.6 The monthly or daily equipment rental rates shall be that
established in Clause 23 (subparagraph 23.2.5) of this Agreement divided by 12
or 365, as appropriate.
23.2.7 No stand-by rates shall apply except for rentals to third
parties.
23.2.8 The foregoing rental rates do not include transport costs,
installations, operation, lubricants and fuel, which shall be charged to the
pertinent Operation.
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<PAGE>
23.2.9 The foregoing rental rates shall apply to equipment and tools
used in operations performed one hundred percent (100%) by THE ASSOCIATE or
Operator and vice versa.
23.10 In each case, the Technical Sub-Committee shall make
recommendations to the Executive Committee on the need for equipment rental and
the Financial Sub-Committee may apply the rate system established herein.
23.2.11 The equipment rental rate shall be calculated in United
States dollars, but shall be invoiced in pesos for its collection at the rate
agreed by the Parties.
23.3 Rental of Warehouses and Fixed Assets: The Financial Sub-
Committee shall agree on a procedure to calculate the rental of warehouses owned
by one of the Parties or by the Joint Operation for total or partial use.
CLAUSE 24 - CONTRIBUTIONS IN KIND
ECOPETROL or THE ASSOCIATE shall contribute in kind any such
materials considered suitable by the Parties and will enter into agreements to
this end.
PART III -ADMINISTRATIVE ASPECTS AND OTHER
PROVISIONS
SECTION ONE - EXECUTIVE COMMITTEE
CLAUSE 25 - FUNCTIONING CONDITIONS
In order to fulfill its functions, the Executive Committee shall
comply with the conditions stated in Clause 19 of The Contract, as follows:
41
<PAGE>
25.1 The Executive Committee shall be alternately chaired by the
Parties, beginning with ECOPETROL and THE ASSOCIATE.
The chairman and Secretary must be of the same Party.
25.3 The Executive Committee shall hold ordinary meetings in March,
July and November, and special meetings whenever the Parties and/or the Operator
consider it necessary. The exploitation program being executed by the Operator,
and future plans shall be reviewed at each meeting. Each Party may invite the
advisers it deems appropriate, it being understood that each company will invite
as few as possible.
25.4 At ordinary meetings of the Executive Committee, the
representative who is due to chair the next meeting shall give the
representatives (principal and their deputies) of the other Party and the
Operator, ten (10) calendar days advanced notice of the date, place and agenda
of such meeting.
25.5 Pursuant to Clause 18 (subparagraph 18.3) of The Contract, both
for ordinary special meetings of the Executive Committee, any matter not
included on the agenda may only be discussed if previously accepted by the
Parties representatives through the sub-committees.
SECTION TWO - SUB-COMMITTEES
CLAUSE 26 - CREATION OF SUB-COMMITTEES
In order to perform the functions provided for in Clause 19
(subparagraph 19.3.8) of The Contract, the Executive Committee can create such
advisory sub-
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committees as it deems necessary. In any case, the Executive Committee shall
appoint a Technical SubCommittee and Financial Sub-Committee.
The sub-committee shall be the bodies constituted to control and
define technical, financial and legal recommendations of The Contract for the
Executive Committee, and shall be governed by The Contract and this Agreement.
Each sub-committee shall draw up its own internal regulations as approved by the
Executive Committee.
SECTION THREE - OPERATOR
CLAUSE 27 - RIGHTS AND OBLIGATIONS
27.1 Under this Agreement, the Operator has the right to carry out
Joint Operations directly or through contractors, under the general direction of
the Executive Committee. In any case, the Operator shall be responsible for the
Joint Operation as set forth in The Contract.
27.2 The Operator's obligations include the following:
27.2.1 Preparing, presenting implementing Budgets and programs for
exploration and exploitation, and Authorization for Expenditure (AFE's).
27.2.2 Directing and controlling all statistical and accounting
services.
27.2.3 Planning and obtaining all materials and services as required
for the efficient performance of the Joint Operation.
27.2.4 Providing technical and advisory services as required for the
efficient performance of the Joint Operation.
27.3 The Operator cannot cause burden to the properties of the Joint
Operation.
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27.4 Resignation or removal of the Operator must be effected without
prejudice to any right, liability or responsibility acquired during the time in
which Operator acted as such. If the Operator resigns or is removed before
performing the obligations established in The Contract, it may not charge the
Joint Account with the costs and expenses incurred as a result of such change.
However, if the Executive Committee approves them, such costs and
expenses may be charged to the Joint Account.
27.5 Upon notice of removal or acceptance of Operator's resignation,
and to facilitate the transfer of obligations, ECOPETROL shall audit the Joint
Account and take an inventory of the Joint Operation's assets. The inventory
will be used for purposes of relinquishment and accounting responsibility
transfer's procedure. All costs and expenses incurred in connection with such
audit and inventory shall be charged to the Joint Account.
27.6 The Operator shall not be responsible for any loss or damage
suffered by the Joint Operation unless such results from the following:
27.6.1 Serious fault of Operator.
27.6.2 Failure to obtain and maintain any insurance cover required
by Clause 33 of The Contract, except when the Operator has made all possible
efforts to
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obtain and maintain them and the results of such efforts have been fruitless, a
situation which the Operator must first communicate to the Parties in writing.
SECTION FOUR - CONTRACTING PROCEDURE
CLAUSE 28 - SUPPLIERS AND CONTRACTORS RECORD
28.1 The Operator must keep a Supplier and Contractor Register,
classified according to activities required for Oil exploration, exploitation
and transport.
28.2 ECOPETROL shall be acquainted with the list of suppliers and
contractors and offer justified and relevant comment, to the Operator, when
applicable.
28.3 The Register shall be reviewed every year, without prejudice to
the justified removal of individuals or organizations with The Associate's
consent.
28.4 In all cases in which a quotation has to be requested for a
purchase or contract, the corresponding record shall be consulted, provided
written evidence of such action on the corresponding document kept.
28.5 Individuals or organizations included in the Supplier and
Contractor Register must provide proof of good technical, ethical and economic
standing, and suitable experience for the services call for by the Joint
Operation. The experience of the company itself, that of its shareholders and
that of its permanent technicians will be considered in this respect.
45
<PAGE>
CLAUSE 29 - PURCHASING PROCEDURES
29.1 The Operator shall prepare a list of purchasing requirements,
after first checking they are not available in the Joint Account warehouses.
29.2 The Operator shall present to the Technical Subcommittee, with
sufficient advance notice, for study and approval, the analyses of the different
purchase applications, including, among others, the following aspects:
o Whether purchase is for stock or immediate use
o Item and budget code
o Currency of payment and warranties offered
o Possible financing
o Invitation of a minimum three (3) suppliers
o Cost Center or Authorization for Expenditure (AFE)
29.3 Award will be usually made on the basis or three (3)
quotations, except when the Technical Sub-Committee decides otherwise.
29.4 Purchase requisitions must be submitted with all supporting
documents and justification, duly signed.
29.5 The Minutes will record the requisitions studied and approved,
and those postponed, with a note stating the reasons for such postponement.
29.6 Requisitions for amounts exceeding forty thousand dollar of the
United States of America (US$40,000) or equivalent in Colombian pesos shall be
submitted to the approval of the Executive Committee.
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<PAGE>
29.7 During each ordinary meeting of the Executive Committee, a
report is to presented on the requisitions approved by the Technical
Subcommittee, for their ratification. Purchase bids shall also follow the
procedures set out in Clause 29 (subparagraph 29.4) hereof.
CLAUSE 30 - CONTRACTING PROCEDURE FOR WORK AND SERVICES
30.1 The Technical Sub-Committee shall appoint an appraisal
commission to consider proposals, if deemed appropriate.
30.2 The Technical Sub-Committee shall study the reports and award
recommendations, according to amount, within authorized limits.
30.3 For each contracted work or service, a Budget will be prepared
following any of these modes:
o Delegation of Administration
o Global or lump sum price
o Price per work unit
o Rates established by entities or professional bodies
o Turn key
30.4 Contracts for work or services exceeding forty thousand dollars
of the United States of America (US $40,000) shall be awarded on the basis of at
least three (3) written quotations from qualified bidders appearing on the
Operator's Register. If three (3) proposals are not received, a lesser number
will be acceptable but
47
<PAGE>
must be duly justified and recorded in the recommendations report to the
Technical Sub-Committee.
30.5 Original bids must be kept in Operator's files for future
review.
30.6 A contracting request shall be declared "not awarded" when the
Technical Sub-Committee considers such decision justified and the bids are not
in line with true costs.
30.7 In the event of any change which increases the price by over
twenty percent (20%), all bidders will be advised so they may revise their bids,
and these will be reconsidered as if a new bid process has been opened.
30.8 The results of the award shall be communicated in writing.
CLAUSE 31 - BIDDING PROCEDURES
31.1 The Technical Sub-Committee shall recommend when bids should be
opened and who should be invited.
31.2 Foreign firms invited to participate must be legally
established in Colombia.
31.3 The Operator shall prepare the bid documents and submit them to
the Technical Sub-Committee for consideration.
31.4 Bids received after the closing date will not be considered.
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<PAGE>
31.5 Bids shall be appraised jointly, following guidelines set out
in each bid document.
31.6 Any additional technical information or explanation may be
requested from bidders, preferably by telefax. When a general clarification is
required, such requests will be sent to all bidders. Any clarification shall be
duly notified to each Party.
31.7 The Operator shall submit a written award recommendation to the
Technical Sub-Committee, supported by communications and relevant documentation,
and a comparison chart of the different bids.
CLAUSE 32 - INSURANCE
Pursuant to Clause 33 of The Contract, with regard to insurance, the
Operator must submit the following information to ECOPETROL's Vice-President of
Operations, so that ECOPETROL may insure fifty percent (50%) of the Commercial
Field assets.
32.1 Description of the assets, when possible broken down as
follows:
32.1.1 Offices, camp facilities, and other non-industrial assets.
32.1.2 Collection stations, specifying tanks (number and capacity)
and other equipment.
32.1.3 Various warehouses and other facilities.
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<PAGE>
NOTE: Outside pipelines and wells are not insured under the fire
policy, since ECOPETROL assumes this risk directly.
32.2 Value of assets stating only the value of the part belonging to
ECOPETROL and stating to which percentage of the total value it corresponds.
32.3 Geographical information.
32.4 Date of receipt, from which time the risk passes to the Joint
Operation.
CLAUSE 33 - FORCE MAJEURE OR FORTUITOUS CIRCUMSTANCES
Clause 34 of the Contract only suspends performance of specific
obligations whose execution become impossible due to reasons of Force Majeure or
Act of God. Likewise, it only suspends the obligations of the goods, property,
production facilities, etc., affected by such circumstances. The Operator must
notify conclusions of the event of Force Majeure, detailing the extent of any
damage and corrective actions taken.
CLAUSE 34 - REVIEW OF THE OPERATING AGREEMENT
This Operating Agreement shall be revised when the Parties may
consider it suitable, on request of any of them; the Executive Committee has all
necessary authority to effect such review and modification. This Operating
Agreement shall remain in force until one of the following events occurs:
34.1 Termination of the Contract.
34.2 Written agreement between the parties.
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34.3 Signature of a new Agreement.
In witness whereof, the Parties sign this Operating Agreement on
ECOPETROL Contract Paper this Twenty Second (22nd) day of January, nineteen
hundred and ninety three (1993).
EMPRESA COLOMBIANA DE THE GHK COMPANY
PETROLEOS
ECOPETROL
-------------------- --------------------
JUAN MARIA RENDON RUSS D. CUNNINGHAM
GUTIERREZ LEGAL REPRESENTATIVE
PRESIDENTE
PETROLINSON, S.A.
------------------
NORMAN R. ROWLINSON
APODERADO GENERAL
51
<PAGE>
TABLE OF CONTENTS
ANNEX B
OPERATING AGREEMENT
PART I - TECHNICAL ASPECTS
SECTION ONE - EXPLORATION
Clause 1. Information Supply during Exploration
Clause 2. Return of Areas
SECTION TWO - EXPLOITATION
Clause 3. Extensive Production Tests
Clause 4. Commercial Field
Clause 5. Sole Risk
Clause 6. Operation Inspections
Clause 7. Production
Clause 8. Oil Distribution and Availability
Clause 9. Crude Supply for Export
PART II - ACCOUNTING AND FINANCIAL ASPECTS
SECTION ONE - PROGRAMS AND BUDGETS
Clause 10. Budgets and Exploration Programs
Clause 11. Budgets and Exploitation Programs
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Clause 12. Budget Manual
Clause 13. Income Budget
Clause 14. Expense Budget
Clause 15. Other Provisions
SECTION TWO - ACCOUNTING PROCEDURES
Clause 16. Accounting Procedure
Clause 17. Cash-Calls, Invoicing and Adjustments
Clause 18. Charges
Clause 19. Credits
Clause 20. Disposal of Excess Materials and Equipment
Clause 21. Inventory
Clause 22. Audit
Clause 23. Rates
Clause 24. Contributions in Kind
PART II - ADMINISTRATIVE ASPECTS AND OTHER PROVISIONS
SECTION ONE - EXECUTIVE COMMITTEE
Clause 25. Operation Conditions
SECTION TWO - SUB-COMMITTEES
Clause 26. Creation of Sub-Committees
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<PAGE>
SECTION THREE - OPERATOR
Clause 27. Rights and Obligations
SECTION FOUR - CONTRACTING PROCEDURE
Clause 28. Suppliers and Contractors Record
Clause 29. Purchasing Procedures
Clause 30. Contracting Procedure for Work and Services
Clause 31. Bidding Procedures
Clause 32. Insurance
Clause 33. Force Majeure or Fortuitous Circumstances
Clause 34. Review of the Operating Agreement
54
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OTROSI CONTRACT MODIFICATION: CHANGE OF OBLIGATION BECAUSE OF THE GIVING
BACK OF AREAS
CONTRACT: ASSOCIATION TYPE
SECTOR: DINDAL
ASSOCIATED COMPANY: GHK COMPANY COLOMBIA AND PETROLINSON S.A.
The parties:
On one part, EMPRESA COLOMBIANA DE PETROLEOS "ECOPETROL", created via Law 165 of
1948, whose reform was approved by Decree 1209 of June 15, 1994 represented by,
represented by JUAN MARIA RENDON GUTIERREZ, of age, domiciled in Santa Fe of
Bogota, identified with citizenship number 17,125.100 issued in Bogota, who
manifests hereby that he is acting in his condition of President of ECOPETROL;
And the other party:
1. GHK COMPANY COLOMBIA, Colombian subsidiary of GHK COMPANY COLOMBIA,
organized in accordance with the laws of the State of Oklahoma.
Constituted by Public Act number 118, January 21, 1993 at the Notary
number Sixteen (16) of Bogota inscribed in the Chamber of Commerce of this
city, with number 36065, in the sixth book with a mercantile registry
number 531101, represented by ENRIQUE VARGAS RAMIZEZ, identified with
citizenship number 5,680.285, who manifests that he is duly able to
celebrate the following contract.
2. PETROLINSON, S.A., Colombian subsidiary of Petrolinson, S.A., of Panama,
constituted by Public Act number 4489 of July 6, 1964 in the Fifth Notary
of Bogota, inscribed in the Chamber of Commerce of this city, under number
20326, of the respective book, with mercantile registry number 017785,
represented by NORMAN R. ROWLINSON, identified with foreign registration
number 73192 of Bogota, who manifests that he is duly able to celebrate
the following contract.
These two companies described will be called for all the effects, THE ASSOCIATED
COMPANY.
In the conditions noted here, ECOPETROL and THE ASSOCIATED COMPANY agree that
the agreement which they have reached has the following considerations:
<PAGE>
FIRST: That the 22 of January, 1993, ECOPETROL and THE ASSOCIATED COMPANY
celebrated the contract of Association for the sector "DINDAL", from now on
called THE CONTRACT, which was protocolized by Public Act number 270 of 9
February, 1993 in the Sixteenth Notary of Bogota.
SECOND: In the development of this contract, THE ASSOCIATED COMPANY drilled the
exploratory well Escuela - 1 with which it fulfilled partially the corresponding
contractual obligations of the first of the first year.
THIRD: That the 10th of June, 1994 a technical presentation of THE ASSOCIATED
COMPANY was done in which the COMPANY showed the results obtained with the
drilling of the Escuela - 1 well, and it was requested from ECOPETROL the
reconsideration of the obligation of THE CONTRACT.
FOURTH: That by communication DTE-0373 of 13 July, 1994 ECOPETROL requested from
THE ASSOCIATED COMPANY the formalization of its request for a change of
obligations.
FIFTH: That by communication dated 7 July, 1994 THE ASSOCIATED COMPANY presented
its proposal on the following manner:
o Return of the northern part of the Dindal Block
o Adding the Block of Rio Seco
o Restructuring the exploratory obligations as such:
-First year: Exploratory well Escuela - 1
-Second year: Reprocessing of the available
seismic with the goal of determining a
prospect and perforation of one well to
6,000'.
SIXTH: That the Committee of Exploration and Contracting of ECOPETROL in Session
number 17 on the 18th of July, 1994 decided to not accept the modifications to
the areas of the contracts of Association.
SEVENTH: That by the communication VOP-0387 of 9 August, 1994, ECOPETROL
proposed to THE ASSOCIATED COMPANY the following alternative in order to
continue the development of THE CONTRACT.
First year: THE ASSOCIATED COMPANY gives back the northern part of the Dindal
Block; the Escuela - 1 well is accepted of fulfilling the obligations; THE
ASSOCIATED COMPANY is exempted from drilling a second exploratory well which was
stipulated in the fifth clause of THE CONTRACT.
Second year: Termination date, March 23, 1995; drilling of one exploratory well
to 6,000'.
-2-
<PAGE>
Third to sixth years: Perforation of one well per year.
EIGHTH: That by communication of 16 September, 1994 THE ASSOCIATED COMPANY
manifested its agreement with a proposal presented by ECOPETROL.
NINTH: That the Board of Directors of ECOPETROL, as is evidenced in Act number
2082 of the 24th of October, 1994, authorized management to accept the request
of THE ASSOCIATED COMPANY in the following way: "1) Accept the giving back or
return of fifty-four thousand (54,000) hectares of the northern part of the
Dindal Block; 2) Accept the change of obligations within the Dindal Contract
within the following terms: First year a) Return of the northern part of the
Dindal Block; b) Accept the exploratory well Escuela - 1 as fulfilling the
obligations; c) THE ASSOCIATED COMPANY is expected from drilling the second
exploratory well stipulated in the fifth clause of THE CONTRACT. Second year a)
Expiration or termination date 23 March, 1995; b) Perforation of an exploratory
well to 6,000'. Third to sixth years a) Perforation of one exploratory well per
year."
TENTH: That by communication VOP-519 of 16 November, 1994, ECOPETROL notified
THE ASSOCIATED COMPANY of the acceptance of the change to the obligations
contained in the ninth point of this modification Otrosi.
In accord with the above, ECOPETROL and THE ASSOCIATED COMPANY agree:
FIRST: To modify the third clause denominated "Contracted Area", which would now
read in this way:
CLAUSE 3 - CONTRACTED AREA
The Contracted Area is called "DINDAL", it consists of an extension of
twenty-six-thousand- one-hundred-fifty-four (26,150) hectares with
eight-thousand-five-hundred (8,500) square meters and is located within the
townships of Chaguani, Viani, Villeta, Quebrada Negra, Guaduas, Caparrapi and
Utica in the Cundinamarca Department.
The description of this area follows here and also appears on the map which is a
next here as Annex "A", which forms part of this Contract, as does the chart of
corresponding calculation: it has been taken as a reference point the Geodesic
Vertex "CINTA-24" of the Geographical Institute of Agustin Codazzi whose Gauss
plane coordinates with origin Santa Fe of Bogota are: N-1,063,470.38 meters,
E-951,466.09 meters which correspond to the geographic coordinates Latitude
05(degree) 10'22".276 to the north of the equator, Longitude
74(degree)31'07".154 to the west of Greenwich. From this vertex, you continue on
a northern direction to north N 57(degree) 45'09".072 West for a distance of
4,553.45 meters until you reach point "A" which this point's coordinates are:
N-1,065,900.0 meters, E-947,15.00 meters. From this point "A" continue in a
northern direction for a distance of 4,100.00 meters until you reach point "B"
whose coordinates are: N-1,070,000.00 meters, E-
-3-
<PAGE>
947,615.00 meters. From this point "B" continue in an eastern direction for a
distance of 4,385.00 meters until you reach point "C" whose coordinates are:
N-1,070,000.00 meters, E-952,000.00 meters. From this point "C" continue the
direction S 7(degree) 7'30".059 E for a distance of 16,124.51 meters until
reaching point "D" whose coordinates are: N-1,054,000.00 meters, E-954,000.00
meters. From this point "D" continue with a direction S 15(degree) 42'31".096 W
for a distance of 16,620.77 meters until reaching point "E" whose coordinates
are: N-1,038,000.00, E-949,500.00 meters. From this point "E", continue with a
western direction for a distance of 5,800.00 meters until reaching point "F"
whose coordinates are: N-1,038,000.00 meters, E-943,700.00 meters. From this
point "F", continue with a northern direction for a distance of 27,900.00 meters
until reaching point "G" whose coordinates are: N-1,065,900.00 meters,
E-943,700.00 meters. From this point "G" continue in an eastern direction for a
distance of 3,915.00 meters until reaching point "A" which was the departure
point and the closing of the delimitation of the boundaries.
SECOND: Modify Clause 5, points 5.1.1., 5.1.2., and 5.1.3., which will now read
in this fashion:
CLAUSE 5 - TERMS AND CONDITIONS
5.1.1. During the first year counting as of the effective date of this contract,
THE ASSOCIATED COMPANY obligates itself to drill one (1) exploratory well until
it reaches and penetrates the formations which can produce petroleum in the
area. During the second year, THE ASSOCIATED COMPANY will undertake the drilling
of one exploratory well until it reaches formations that may produce petroleum
in the area, or to a minimum depth of 6,000'. At the end of the second year, THE
ASSOCIATED COMPANY will have the option to resign from the Contract as long as
it has fulfilled its respective obligation.
5.1.2. During the third year, THE ASSOCIATED COMPANY will drill one (1)
exploratory well until it reached and penetrates the formations which may
produce petroleum in the area. At the end of this year, the Contract will end if
its extension has not been requested and authorized as set out in number 5.2 of
this Clause or a commercial field has not been found.
In accordance with the obligations contracted, the number 5.1.3 of THE CONTRACT
is now taken out.
This is signed in Santa Fe of Bogota on the _______ day of ______, 1994.
EMPRESA COLOMBIANA DE PETROLEOS
"ECOPETROL"
JUAN MARIA RENDON GUTIERREZ
-4-
<PAGE>
President
GHK COMPANY COLOMBIA PETROLINSON, S.A.
ENRIQUE VARGAS R. NORMAN R. ROWLINSON
Legal Representative Legal Representative
-5-
<PAGE>
EMPRESA COLOMBIANA DE PETROLEOS
"ECOPETROL"
Calculation of Areas, Directions and Distances as of the
Gauss Coordinates with Origin Bogota
Table of Numbers and Results for the Dindal Sector
The different talents of Chaguani, Viani, Villeta, Quebrada, Negra, Guaduas,
Caparrapi and Utica.
Cundinamarca Department
<TABLE>
<CAPTION>
Northern Eastern Dif. Dif.
Point Coordinate Coordinate Distance North East Direction
<S> <C> <C> <C> <C> <C> <C>
A 1,065,900 947,615 4,100.00 4,100.00 0.00 North
B 1,070,000 947,615 4,385.00 0.00 4,385.00 East
C 1,070,000 952,000 16,124.51 -1,000.00 2,000.00 7(degree)7'30".059 SE
D 1,054,000 954,000 16,620.77 -1,000.00 -4,500.00 15(degree)42'31".096 SW
E 1,038,000 949,500 5,800.00 0.00 -5,800.00 West
F 1,038,000 943,700 27,900.00 2,900.00 0.00 North
G 1,065,900 943,700 3,915.00 3,915.00 3,915.00 East
A 1,065,900 947,615
</TABLE>
Area of the Polygon: 26.154 Hectares: 8,500MT2
Geodesic Vertex "Cinta-24" I.G.A.C.
Gauss N-1,063,470.38 meters Geographics Lat. 05(degree) 10'22".276
E- 951,466.09 meters Long: 74(degree) 31'07".154
-6-
Exhibit 10(C)
ASSOCIATION CONTRACT
ASSOCIATE: THE GHK COMPANY COLOMBIA
SECTOR: RIO SECO
EFFECTIVE DATE: ________________________
The contracting Parties, to wit: the Colombian Oil Company, henceforth referred
to as ECOPETROL, a governmental commercial and industrial company authorized by
Law 165 of 1948 and currently governed by its provisions as amended and approved
by Decree 1209 of June 15, 1994, with principal offices in Santa Fe de Bogota,
represented by JUAN MARIA RENDON GUTIERREZ, of legal age, identified with
citizenship identification card No. 17.125.100 issued in Santa Fe de Bogota,
residing in Santa Fe of Bogota, who states: 1. That in his position as President
of ECOPETROL his job is to represent this Company, and 2. That in order to
execute this contract, he has authorization in the form of power attorney from
the Board of Directors of ECOPETROL, according to Resolution No. of , 19 and,
for the other Part, THE GHK COMPANY COLOMBIA organized according to the laws of
the State of Oklahoma, United States of America, with principal offices in Santa
Fe de Bogota henceforth referred to as THE ASSOCIATE, with a branch office in
Colombia and principal offices in Santa Fe de Bogota, in accordance with Charter
118 dated January 21, 1993, given by Public Notary Sixteen (16) for the District
of Santa Fe de Bogota, represented by Enrique Vargas Ramirez, of legal age, a
Colombian citizen, identified by citizen's identification card number 5,680,285,
who states: 1. That he is the Legal Representative of the GHK COMPANY COLOMBIA,
and 2. That in order to formalize this Contract he has been fully authorized, as
verified by an affidavit of incorporation of the power of attorney issued by the
Chamber of Commerce of Santa Fe de Bogota. Based upon these facts ECOPETROL and
THE ASSOCIATE have formalized a contract containing the following clauses:
CHAPTER 1 - GENERAL PROVISIONS
CLAUSE 1 - PURPOSE OF THIS CONTRACT
1.1 The purpose of this contract is the exploration of the Contracted Area and
the exploitation of said nationally owned oil as may be found therein, as
described in Clause 3.
1.2 In accordance to Article I of Decree No. 2310 of 1974 the exploration and
exploitation of nationally-owned hydrocarbons is entrusted to ECOPETROL, which
may carry out said activities directly or through contracts with private
parties. Based upon this legislation ECOPETROL has agreed with THE ASSOCIATE to
exploit the Contracted Area and to exploit whatever oil that could be found in
this Contracted Area under the terms and conditions indicated herein in this
document, and in Annex "A" and Annex "B" (Operating Agreement) which form an
integral part of this contract.
1.3 Without prejudicing the stipulations of this contract, it is understood that
THE ASSOCIATE shall have the same rights and obligations in respect to the Oil
produced in the Contracted Area and to its share of said oil as are granted
under Colombian law to anyone exploiting nationally-owned Oil in this country.
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1.4 ECOPETROL and THE ASSOCIATE agree that they will carry out exploration and
exploitation work in lands within the Contracted Area, that they will divide
costs and risks in the same proportions and terms stated in this contract and
that the properties they acquire and the Oil produced and stored will belong to
each Party in the agreed upon proportions.
CLAUSE 2 - EXTEND OF THIS CONTRACT
This contract applies to the Contracted Area, whose boundaries are described in
Clause 3, or to any portion thereof, subject to the conditions of this contract
whenever Clause 8 is applicable.
CLAUSE 3 - CONTRACTED AREA
The Contracted Area is known as "RIO SECO", and comprises an area of seventeen
thousand four hundred and sixty five (17,465) hectares with fifteen hundred
1,500 square meters and is located within the municipal jurisdictions of
Caparrapi, La Palma, Chaguani, Guaduas, and San Juan de Rio Seco in the
Department of Cundinamarca. This area is described herein below and, as shown in
the map enclosed as Annex "A" of this Contract, which also includes the
corresponding calculations. As frame of reference the Geodesic Vertex "COCO -
217" is utilized, from the Agustin Codazzi Geographic Institute, whose GAUSS
flat coordinates originating in Santa Fe de Bogota are: N-1,065,143.80 065,
143.80, E-938,570.41, corresponding with the geographic coordinates: Latitude
5(degree) 11' 16.42" North of the Equator, Longitude 74(degree) 38'
05.9" West of Greenwich. From this point of reference one continues in a
Northeasterly course 21(degree) 40' 12.66" for a distance of 5,225.51 meters
until arriving at point "A", the departing point for the marking of the
boundaries, which coordinates are: N-1,070,000.00, E-940,500.00. The straight
line "A-B" runs Eastbound and is 7,115 meters in length. Point "B" coincides at
a point with one point of the Dindal Contract. From point "B" one continues
Southbound to point "C" which coordinates are: N-1'065.000.00, E-947.615.00.
The straight line "B-C" has a length of 4,100 meters. From point "C" Westbound
one arrives at point "D" which coordinates are: N-1'065.900.00,
E-943,700.00. The straight line "C-D" has a length of 3,915 meters. From this
point one continues to point "E", having coordinates N-1'038.000.00, E-
943.700.00. The straight line "D-E" is Southbound and has a length of 27,900
meters. Lines "B-C", "C-D", "D-E" border along their entire length with those of
the Dindal Contract entered into by G.H.K. COMPANY and PETROLINSON INC. From
point "E" one continues Westbound to point "F" having coordinates
N-1'038.00.00, E-932.400.00. Straight line "E-F" has a length of 11,300
meters. From this point one continues to point "G" which coordinates are
N-1'040.000.00, E-932.400.00. Straight line "F-G" is Northbound and has a
length of 2,000 meters. From point "G" one continues Eastbound to point "H",
having coordinates N 1'040.000.00, E-938.500.00. From point "H" Northbound
one gets to point "I" with coordinates N-1'060.000.00, E-938.500.00.
Straight line "H-I" has a length of 20,000 meters. From that point one continues
to point "J", with coordinates N- 1'060.000.00, E-940-500.00. Straight line
"I-J" is Eastbound and has a length of 2,000 meters. From point "J" one
continues Northbound to point "A", with coordinates N-1"070.000.00,
E-940-500.00, which was our departure point and closes the markings of the
boundaries. Straight line "J-A" has a length of 10,000 meters.
PARAGRAPH 1
Whenever a person files a claim asserting that he/she is the owner of the
mineral rights within the Contracted Area, ECOPETROL will assume handling of the
case and the legal duties thereto pertaining.
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PARAGRAPH 2
CLAUSE 4 - DEFINITIONS
For purposes of this Contract, the terms indicated below shall have the
following meanings:
4.1 CONTRACTED AREA: Is the land previously described in Clause 3, subject to
Clause 8.
4.2 COMMERCIAL FIELD: It is that portion of the Contracted Area that is be able
to produce Oil in economically feasible quantities and quality.
4.3 EXECUTIVE COMMITTEE: Is the committee that is set up within thirty (30) days
following the acknowledgement of a Commercial Field, to supervise, control and
approve all the operations and actions that are put forth during the term of the
contract.
4.4 DIRECT EXPLORATION COSTS: Are those expenses which THE ASSOCIATE incurs due
to seismic operations, the drilling of Exploratory Wells, as well as for
location of the wells, closing, equipping and testing of said wells, flow lines
and separators. Direct Exploration Costs do not include administrative or
technical support from the head office or central offices of the Company.
4.5 JOINT ACCOUNT: Are the accounting record books, kept accordance with
Colombian law for crediting or debiting the parties for their participation in
the Joint Operation.
4.6 BUDGETARY COMPLIANCE: The resources actually spent and/or committed for each
of the programs and projects approved for a given calendar year.
4.7 EFFECTIVE DATE: Is the calendar day in which the sixty (60) calendar days'
term expires; the day in which all covenants entered upon in said contract
become valid, subject to the enforceability of said contract itself.
4.8 CASH FLOW: Is the physical movement of money itself (income and
disbursements) that the Joint Account must make in order to take care of the
various obligations the ASSOCIATION has incurred from its normal operations.
4.9 NATURAL GAS: Hydrocarbons mixture in gaseous state, made out of the most
volatile members of the hydrocarbon paraffinic series.
4.10 DIRECT EXPENDITURES: Are all expenditures debited to the Joint Account as a
result of direct labor costs attributed to personnel directly working for the
Association, purchase of materials and supplies, service contracts made with
third parties and any overhead expenses required by the Joint Operation in the
normal course of business.
4.11 INDIRECT Expenditures: Are those disbursements debited to the Joint Account
for administrative and/or technical support which the Operator may eventually
furnish to the Joint Operation through his own organization.
4.12 COMMERCIAL INTEREST: When referring to Colombian Pesos, the current
interest rate as certified by the Bank Superintendency for a particular period;
in the case of United States dollars, it shall be the prime rate as determined
by CITYBANK of New York.
4.13 INTEREST IN THE OPERATION: The share in the obligations and rights acquired
by each Party in the exploration and exploitation of the Contracted Area.
4.14 DEVELOPMENT INVESTMENTS: Refers to money invested in assets and equipment
that are capitalized as assets for the Joint Operation in a Commercial Field,
once the Parties have Acknowledged said field.
4.15 PRODUCTION OBJECTIVES: Are the formations, strata or sands having possible
deposits of hydrocarbons.
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4.16 JOINT OPERATION: The activities and completed jobs or in process of
execution on behalf of the Parts and by account of these.
4.17 OPERATOR: The person nominated by the Parties so that, on their behalf,
he/she may carry out the operations necessary to explore and exploit the Oil
found in the Contracted Area.
4.18 PARTIES: On the Effective Date, ECOPETROL and THE ASSOCIATE. Thereafter
and, at any time, ECOPETROL on the one part and THE ASSOCIATE and/or its
assignees on the other part.
4.19 PERIOD OF EXPLORATION: It is the length of time available to THE ASSOCIATE
in order to comply with the obligations agreed upon in Clause 5 of this contract
and that shall not exceed six (6) years starting on the Effective Date, except
as pertains to the possible situations indicated in Clause 9 (numeral 9.3 and
9.8) and Clause 34.
4.20 PERIOD OF EXPLOITATION: The time elapsed from the end of the Period of
Exploration, until the expiration of this contract.
4.21 Oil: The natural mixture of hydrocarbons in liquid or gaseous state under
normal conditions, as well as those substances that accompany them or are
derived from them with exception of helium and rare gases.
4.22 EXPLORATORY WELLS: Any well designated as said by THE ASSOCIATE to be
drilled or deepened on their own in the Contracted Area in search for Oil. For
the purpose of fulfilling the covenants agreed to in Clause 5 of this contract,
said exploratory well shall be previously qualified by ECOPETROL and THE
ASSOCIATE.
4.23 EXPLOITATION WELL (OR DEVELOPMENT WELL): Any well previously selected by
the Executive Committee for Oil production within the Commercial Area.
4.24 BUDGET: The basic planning instrument used to assigned resources for
specific projects to be implemented within a calendar year, or part of the year,
in order to accomplish the goals and objectives proposed by THE ASSOCIATE or by
the Operator.
4.25 EXTENSIVE TEST OF PRODUCTION: The operations that are carried out in one or
various producing exploratory wells, in order to evaluate the conditions of
production and behavior of the oil field.
4.26 REFUND: The fifty per cent (50%) payment for the Direct Cost of Exploration
incurred by THE ASSOCIATE.
4.27 EXPLORATION WORK: Those operations completed by THE ASSOCIATE regarding the
search and discovery of Oil within the are of the contract.
CHAPTER II - EXPLORATION
CLAUSE 5 - TERMS AND CONDITIONS
5.1.1 During the first year starting on the effective date of this Contract THE
ASSOCIATE shall be obligated to reprocess seventy five (75) kilometers of
seismic available, bring forth geochemical studies of the area, including gas
measurements throughout three (3) transverse lines East to West bound, the
acquisition of Landsat with interpretation and verification of the field (N:1010
to N:1070), structural interpretation including the balancing of at least two
(2) sections and incorporating an integrated geologic interpretation of the
area. During the second year THE ASSOCIATE shall carry out the drilling of one
(1) Exploratory Well until reaching penetration of the formations that could
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produce Oil in the area. At the end of the first year THE ASSOCIATE shall have
the option of abandoning the contract, provided that it has fulfilled its
previously stated obligations.
5.1.2 During the third year THE ASSOCIATE shall drill one (1) Exploratory Well
until reaching penetration of the formations that could produce Oil in the area.
The contract shall expire at the end of this one year term, unless its extension
has been requested and approved in accordance with numeral 5.2 of this Clause or
unless no commercial field has been discovered.
5.2 If THE ASSOCIATE has fulfilled its obligations agreed upon in Clause 5,
ECOPETROL, at the request of THE ASSOCIATE, shall extend annually for up to
three (3) additional years the period of exploration and during each annual
extension THE ASSOCIATE shall be obligated to carry out exploration work in the
Contracted Area, consisting in the drilling of one (1) exploratory well until
penetrating a formation that could produce Oil in the area.
5.3 If, during any one (1) year of the Period of Exploration, THE ASSOCIATE
decides to undertake jobs that were really budgeted for the following year, it
can request approval from ECOPETROL for said work. If the request is approved by
ECOPETROL, ECOPETROL shall determine in which manner and quantity would the said
budgeted obligations be transferred.
5.4 During the term of this contract, THE ASSOCIATE shall be able to carry out
Exploration Jobs in areas that are reserved in accordance with Clause 8 and THE
ASSOCIATE shall be solely responsible for the risks and costs of these
activities and, therefore, shall have exclusive and complete control of said
activities, without these activities modifying the maximum term of this
contract.
CLAUSE 6 - SUPPLY OF INFORMATION DURING EXPLORATION
6.1 ECOPETROL shall fully disclose to THE ASSOCIATE, whenever requested, all the
information it has in its possession regarding the Contracted Area. The costs
incurred for reproduction and disclosure of said information shall be charged to
THE ASSOCIATE.
6.2 During the Period of Exploration THE ASSOCIATE shall deliver to ECOPETROL,
all geological and geophysical information, as it is obtained, edited magnetic
tapes, processed seismic sections and all supporting field information, magnetic
and gravimetric logs, all in reproducible originals, copies of geophysical
reports, reproducible originals of all logs as wells are drilled by THE
ASSOCIATE, including the final composite graph for each well and copies of the
final drilling report, including core sample analyses, results of production
tests and any other information relating to the drilling, study, or
interpretation of any type performed by THE ASSOCIATE in the Contracted Area
without limitation. ECOPETROL is entitled, at any time and through any procedure
it may consider appropriate, to witness any operations and to verify the
previously indicated information.
6.3 The Parties agree that during the term of this contract al the information
obtained in the development of the same is confidential. The Parties also agree
that each shall be able to carry out exchanges with companies that may or may
not be associated with ECOPETROL. It is understood that this agreement does not
prejudice the duty to furnish the Ministry of Mines and Energy with any
information it may request under current legal and regulatory provisions.
Nevertheless, it is understood and agreed that the parties may provide, at their
own discretion, information requested by their affiliates, consultants,
contractors, and financial institutions, as required by the appropriate
authorities having jurisdiction over the parties of their affiliates, or by
regulations of any stock exchange in which shares of the capital stock of
parties or related corporations are listed.
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CLAUSE 7 - BUDGET AND EXPLORATION SCHEDULES
THE ASSOCIATE shall have the obligation to prepare, keeping in mind the
provisions of this contract, the programs and budget estimates necessary to
carry out the exploration of the Contracted Area. Said programs and budget
estimates shall be presented in a timely manner to ECOPETROL.
CLAUSE 8 - RETURN OF THE AREAS
8.1 Upon completion of the initial period of exploration, or upon completion of
the extensions obtained by THE ASSOCIATE, or at the latest at the end of the
sixth (6) year, if a Commercial Field has been discovered in the Contracted
Area, said area shall be reduced by fifty percent (50%) of the Contracted Area;
two (2) years later, the area shall be reduced to the seize of the Commercial
Field or Fields area which are in production or development, plus a five (5)
kilometer wide reserve zone surrounding each field. The Commercial Fields, plus
the zone surrounding each field, shall be called the Exploitation Area, and
shall be called the exploitation area, and this area shall be the only portion
of the Contracted Area that shall remain subject to the terms of this contract.
8.2 The ASSOCIATE shall determine the areas that shall be returned to ECOPETROL
in lots having a minimum area of five thousand (5,000) hectares each, unless THE
ASSOCIATE shows evidence that said is not possible. Notwithstanding the
requirement to relinquish those areas indicated in Clause 8 (numeral 8.1), THE
ASSOCIATE is not obliged to return development or production areas, including
the 5 kilometer wide reserve belt surrounding them, unless development or
production operations are suspended continuously for longer than a year, without
just cause and for reasons attributable to THE ASSOCIATE, in which case the
areas shall be returned to ECOPETROL, thus terminating the contract for said
areas or parts of areas. These stipulations are also applicable to exploitation
under the sole risk mode.
CHAPTER III - EXPLOITATION
CLAUSE 9 - TERMS AND CONDITIONS
9.1 To initiate Joint Operations under the terms of this contract, it is
stipulated that the exploitation work would begin on the date the Parties
realize the existence of a commercial field or when the provisions of Clause 9
(numeral 9.5) are met. THE ASSOCIATE shall ascertain the existence of a
Commercial Field by drilling, in the proposed Commercial Field, a number of
wells sufficient to reasonably define the area and commercial viability of said
field. In this situation, THE ASSOCIATE shall notify ECOPETROL in writing the
finding of said commercial field, furnishing the studies which have led to this
conclusion. Within ninety (90) calendar days from the date THE ASSOCIATE hands
over all supporting information, ECOPETROL must acknowledge or challenge the
existence of the Commercial Field. ECOPETROL may request additional information
it deems necessary within the thirty (30) days following the date of submission
of the first supporting information.
9.2.1 If ECOPETROL acknowledges the existence of the Commercial Field, it shall
give notice of this to THE ASSOCIATE within ninety (90) calendar days as
provided in Clause 9 (numeral 9.1) and it shall then enter to participate, under
the terms of this contract, into the development of the Commercial Field,
discovered by THE ASSOCIATE.
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9.2.2 ECOPETROL shall reimburse to THE ASSOCIATE fifty percent (50%) of the
Direct Exploration Costs of:
9.2.2.1 The drilling of Exploratory Wells drilled by THE ASSOCIATE which result
in commercial production,
9.2.2.2 Seismic acquisition and the drilling of stratigraphic wells done prior
to de date on which ECOPETROL notifies of the existence of each Commercial
Field.
9.2.2.3 The drilling of A-1 Exploratory Wells, in accordance with the Lahee
classification, which turn out dry, drilled by THE ASSOCIATE prior to the date
on which ECOPETROL notifies of the existence of each Commercial Field.
9.2.2.4 The drilling of Exploratory Wells, which turned out dry, drilled by THE
ASSOCIATE prior to the initial discovery well for each Commercial Field.
9.2.3 The amount of these costs is determined in United States of America
dollars, taking as date of reference that in which THE ASSOCIATE made said
disbursements; therefore, the costs incurred in Colombian pesos are settled at
the prevailing market exchange rate for that date as certified by the Banco de
la Republica.
9.2.4 Reimbursement for the Direct Costs of Exploration in accordance to the
provisions of Clause 9 (numeral 9.2.2) shall be made by ECOPETROL to THE
ASSOCIATE, starting at the moment in which the well is placed in production by
the Operator, in the sum of money in dollars equivalent to fifty percent (50%)
of its direct participation in the total production of the respective field,
after deducting the appropriate percentage for royalties.
9.3 If ECOPETROL does not acknowledge the existence of the Commercial Field as
referred to under Clause 9 (numeral 9.1) it shall indicate to THE ASSOCIATE the
additional work that it considers necessary to demonstrate the existence of a
Commercial Field, work whose cost shall not exceed TWO MILLION DOLLARS (US
$2,000,000.00), nor shall it be able to require for its completion a term of
time greater than one (1) year, in which case the Period of Exploration for the
Contracted Area shall be extended automatically by the length of time agreed to
by the Parties as being the length of time necessary to perform the additional
work requested by ECOPETROL in this clause, but without prejudicing the
covenants of Clause 8 (numeral 8.1) pertaining to the reduction of the area.
9.4 If ECOPETROL, after performing the additional jobs required in accordance
with Clause 9 (numeral 9.3), acknowledges the existence of the Commercial Field
referred to in Clause 9 (numeral 9.1), then it shall enter as a participant in
operations to develop said field under the terms of this contract and shall
refund to THE ASSOCIATE, in the manner agreed upon in Clause 9 (numeral 9.2.3
and 9.2.4), fifty percent (50%) of the cost of the additional work requested, as
indicated in Clause 9 (numeral 9.3) and the completed jobs shall became property
of the Joint Account.
9.5 If ECOPETROL does not acknowledge the existence of a Commercial Field, after
completion of the additional work referred to in Clause 9 (numeral 9.3), THE
ASSOCIATE shall have the right to perform the work it considers necessary for
the exploitation of said field and be refunded two hundred percent (200%) of the
total cost of the work completed on its own risk, and up to fifty percent (50%)
of the Direct Exploration Costs performed by THE ASSOCIATE prior to discovery,
in accordance with the provisions of Clause 9 (numeral 9.2.2). and for purposes
of this clause disbursement shall be made upon the value of the Oil produced,
less royalties as provided by Clause 13, deducting costs of production,
gathering, transportation and sales. If THE ASSOCIATE chooses the sole-risk
mode, it
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shall be understood that the exploitation term starts on the date ECOPETROL
advises THE ASSOCIATE that it does not acknowledge commercial development. For
purposes of settlement, the dollar equivalent of the disbursements made in pesos
shall be calculated utilizing the exchange rate on the date THE ASSOCIATE made
said disbursements. For the purpose of this clause, the value of each barrel of
Oil produced in said field during a calendar month shall be the average price
per barrel that THE ASSOCIATE receives from the sales of its share in the Oil
produced in the Contracted Area during said month. When THE ASSOCIATE has been
reimbursed for the percentage established in this clause, all the drilled wells,
the installations and all assets acquired by THE ASSOCIATE for the exploitation
of the field and paid as indicated in this clause, shall become property of the
Joint Account free of charge, after agreement by ECOPETROL to participate in the
development of said field.
9.6 ECOPETROL may at any time decide to participate in the operations at the
field discovered and developed by THE ASSOCIATE, without prejudicing THE
ASSOCIATE'S right to reimburse itself for the investments made on its own, in
the manner and percentage stated in Clause 9 (numeral 9.5). Once THE ASSOCIATE
has been reimbursed, ECOPETROL shall start to participate in the financial
results of the developed wells entirely at expense of THE ASSOCIATE.
9.7 To define the limits of a Commercial Field all the geological and
geophysical information shall be considered as well as that pertaining to the
drilled wells within said field or those related to said field.
9.8 If upon expiration of the six (6) year Exploration Period referred to in
Clause 5 (numeral 5.2), THE ASSOCIATE has drilled one or more Exploratory Wells
which indicate the possible existence of a Commercial Field, ECOPETROL, at the
ASSOCIATE'S request, shall extend the Exploration Period for the time needed,
not to exceed one (1) year, for THE ASSOCIATE to demonstrate the existence of
said Commercial Field, without prejudice to that which is set out in Clause 8.
CLAUSE 10 - TECHNICAL CONTROL OF OPERATIONS
10.1 The parties agree that THE ASSOCIATE is the Operator and as such, within
the limitations set forth in this contract, shall have control of all the
operations and activities it may consider necessary for a technical, efficient
and economic exploitation of the Oil existing within the area of the Commercial
Field.
10.2 The Operator has the duty to accomplish all the development operations and
production in accordance with generally known industrial standards and
practices, using the best technical methods and systems required for the
economical and efficient exploitation of Oil, and fulfilling the pertinent legal
and regulatory provisions on the subject.
10.3 For purposes of this contract, the Operator shall be considered a distinct
entity from the Parties hereto, as well as for purposes of civil, labor and
administrative legislation and for purposes of the Operator's relationship with
the personnel it employs, pursuant to Clause 32.
10.4 The Operator shall have the right to resign his position, by giving written
notice to the Parties six (6) months in advance of the effective date of said
resignation. The Executive Committee shall then appoint a new Operator pursuant
to Clause 19 (numeral 19.3.2).
CLAUSE 11 - EXPLOITATION SCHEDULES AND BUDGET
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11.1 Within three (3) months following acknowledgement of a Commercial Field in
the Contracted Area, the Operator shall present to the Parties a schedule of
activities and a Budget for the remaining portion of said the calendar. Should
there be less than six and one-half (6 1/2) months remaining in said year, the
Operator shall prepare and present the Budget and schedules for the following
calendar year within a term of three (3) months. Future Budgets and schedules
shall be presented to the Parties during the regular meetings of the Executive
Committee held in July of the previous year. Within twenty (20) days following
receipt of the Budgets and schedules, the Parties shall advise the Operator in
writing of the changes they wish to propose. At the time this takes place, the
Operator shall take into account the observations and amendments proposed by the
Parties in the preparation of the Budget and schedules, which shall be submitted
for final approval by the Executive Committee, at the ordinary meeting held each
November; except if there are less than six and one-half (6 1/2) months left
before the end of the year in which the existence of the Commercial Field was
acknowledged. Should the total Budget not be approved before November, those
items of the Budget on which agreement has been reached shall be approved by the
Executive Committee, while the items on which no agreements has been reached
shall be immediately submitted to the Parties for their subsequent review and
final decision, in the manner provided for in Clause 20.
11.2 The Parts shall be able to propose additions or revisions to the Budget and
to the approved schedules, but, except in emergency situations, they shall not
have to be formulated less frequently than every three (3) months. The Executive
Committee shall come to a decision regarding the additions and revisions
proposed for consideration at the meeting; said meeting is to be held within
thirty (30) days following presentation of said additions and revisions.
11.3 The schedules and Budgets are mainly for the purpose of:
11.3.1 Determining what operations are to be carried out during the following
calendar year.
11.3.2 Determining the expenditures and investments that the Operator is
authorized to undertake.
11.4 The terms SCHEDULE and BUDGET mean the proposed work plan and the estimated
expenses and investments that the Operator shall carry out in the different
aspects of the operation, such as:
11.4.1 Capital investments in production: Drilling for the development of
reserves, well workover or recovery, and construction specifically for
production.
11.4.2 General construction and equipment: Industrial and camp facilities,
transportation and building equipment, drilling and production equipment, other
construction and equipment.
11.4.3 Maintenance and operating expenses: production expenses, geological
expenses and administrative overhead for the operation.
11.4.4 Working capital requirements.
11.4.5 Contingency funds (unforeseen occurrences).
11.5 The Operator shall make all the expenditures and investments and carry out
the development and production operations in accordance with the schedules and
Budgets referred to in Clause 11 (numeral 11.1), without exceeding the total
Budget for each year by ten percent (10%), except by authorization of the
Parties in special situations.
11.6 The Operator shall be willing voluntarily
not initiate any project, nor charge to the Joint Account any expenses not
approved in the Budget exceeding the sum of forty thousand dollars of United
States of America currency (US $40,000) or its equivalent in Colombian currency,
per project or per quarter.
11.7 The Operator shall be authorized to incur expenditures that are chargeable
to the Joint Account without previous authorization of the Executive Committee
whenever emergency measures must be taken in order to maintain security for the
staff, or because of emergency expenditures incurred
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because of fire, floods, storms or other disasters; unavoidable emergency
expenditures for the operation and the maintenance of the production facilities,
including the maintenance of the wells in producing condition with maximum
efficiency; unavoidable emergency expenditures for the protection and
conservation of materials and equipment necessary for these operations. In these
situations the Operator must convene a special meeting of the Executive
Committee as soon as possible, to obtain their approval to continue with
emergency measures.
CLAUSE 12 - PRODUCTION
12.1 Whenever necessary and duly approved by the Executive Committee, the
Operator shall determine the Maximum Efficiency Rate of Production (MER) for
each Commercial Field. This Maximum Efficiency Rate of Production (MER) shall be
the maximum Oil production rate that can be extracted from a reservoir for the
purpose of maximizing final recovery of the reserves. Estimated production
should be diminished as necessary to compensate for real or anticipated
operating conditions, such as wells under repair which are not producing,
limited capacity of gathering lines, pumps, separators, tanks, pipelines and
other installations.
12.2 The Operator shall determine periodically, at least once a year, with the
consent of the Executive Committee, the area deemed capable of producing Oil in
commercial quantities in each field and shall propose a schedule and spacing for
drilling Exploitation Wells in an economical and efficient manner.
12.3 The Operator shall prepare and deliver to each one of the Parties, at
regular intervals of three (3) months, a schedule indicating participation in
production and another showing production distribution for each Party, for the
next six (6) months period. Production forecasting shall be made on the basis of
the Maximum Grade of Productive Efficiency (MER) as has been agreed upon in the
Clause 12 (numeral 12.1) and adjusted to the rights of each Party, in accordance
with this contract. The schedule of production distribution is determined upon
the periodic requests of each Party, and in accordance with Clause 14 (numeral
14.2) including the corrections that may be necessary to assure that none of the
Parties, when being able to remove, would receive less than the quantity he has
the right to receive, in accordance with the provisions of Clause 14 and without
prejudicing the provisions in Clause 21 (numeral 21.2) and 22 (numeral 22.5).
12.4 If any one of the parties foresees a reduction in its capacity to receive
Oil in relation to the forecast furnished to the Operator, it shall so advise
the Operator as soon as possible, and if said reduction is due to an emergency
situation, said Party shall advise the Operator within twelve (12) hours
following the occurrence causing said reduction. As a result, said Party shall
provide the Operator with a new receipt schedule, taking into consideration the
corresponding reduction.
12.5 The Operator may use the crude oil and gas consumed in the performance of
production operations in the Contracted Area, and said crude and gas be exempt
from the royalties referred to in Clause 13 (numeral 13.1 and 13.2).
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CLAUSE 13 - ROYALTIES
13.1 During the exploitation of the Contracted Area, and before sharing
production among the Parties, the Operator shall hand over to ECOPETROL as
royalty twenty percent (20%) of the value of the production of liquid
hydrocarbon production resulting from said area. On its own account and risk,
ECOPETROL shall take in kind said production percentage pertaining to royalties
from the tanks belonging to the joint account.
13.2 As a royalty, the Operator shall deliver to ECOPETROL twenty percent (20%)
of the gas production.
13.3 From the production percentage covering the royalty, ECOPETROL shall, in
the manner and under the terms set forth by Law, pay to the Nation, the
Departments and the Municipalities the appropriate royalties applicable from the
total production of the Commercial Field, and THE ASSOCIATE shall be liable for
any payments to those entities or persons pertaining to this royalties.
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF OIL
14.1 The produced Oil, except for that Oil which has been used to benefit the
operations under this contract and for that which inevitably is wasted in these
endeavors, shall be transported to the tanks commonly owned by the Parties or to
other measurement installation as agreed by the Parties. The Oil shall be
measured pursuant to the standards and methods accepted by the oil industry and,
based upon said measurements, the percentages referred to in Clause 13 shall be
determined. From that moment, the remaining Oil shall remain the property of
each Party in the proportions specified in this contract.
14.2 Production Distribution.
14.2.1 Having calculated the percentage corresponding to the royalty, the
remaining Oil and produced gas originating from the field shall be the property
of both Parties in the proportion of fifty percent (50%) for ECOPETROL and fifty
percent (50%) for THE ASSOCIATE until such time as the accumulated production of
the Contracted Area gets to be 60 million barrels of Oil.
14.2.2 Whenever accumulated production exceeds 60 million barrels of Oil, the
rest of the Oil and gas produced from the Contracted Area (after deducting the
appropriate percentage for royalty) shall be property of both Parties, at the
rate resulting from the application of the R factor as indicated in the
following table:
DISTRIBUTION OF PRODUCTION AFTER ROYALTIES
R FACTOR THE ASSOCIATE ECOPETROL
1.0 to 1.0 50 50
1.0 to 2.0 50/R 100 - 50/R
2.0 or more 25 75
14.2.3 For purposes of this table, the R factor is defined as follows:
IA
R = ------------------------
ID + A - B + GO
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Where:
IA (THE ASSOCIATE'S ACCUMULATED INCOME): Is the actual value of THE ASSOCIATE'S
accumulated income derived from the total production of hydrocarbons at the
reference price agreed to by the Parties, excluding hydrocarbons re-injected
into the Fields of the Contracted Area, those consumed in the operation and
burnt gas.
The average reference price for hydrocarbons shall be determined pursuant to
mutual agreement between the Parties.
In order to determine Accumulated Income, one should take as base the Monthly
Income, which in turn shall be determined by multiplying the average reference
monthly price by the monthly production, in accordance with MME's Form 9.
ID (ACCUMULATED DEVELOPMENT INVESTMENTS): Consist of fifty percent (50%) of the
accumulated development investment approved by the Association's Executive
Committee.
A: Consists of the Direct Exploration Costs THE ASSOCIATE has incurred, in
accordance with Clause 9 (numerals 9.2.2, 9.2.3 and 9.2.4) of this Contract.
B: Is the accumulated reimbursement of the previously indicated Direct
Exploration Costs, in accordance with Clause 9 (numerals 9.2.2, 9.2.3 and 9.2.4)
of this Contract.
GO (ACCUMULATED OPERATIONAL COSTS): Consist of the accumulated operational
costs, as approved by the Association's Executive Committee, in the proportion
corresponding to THE ASSOCIATE, plus THE ASSOCIATES accumulated transportation
costs. Transportation costs are understood to be the investment and operational
costs incurred for the transportation of hydrocarbons produced in the commercial
fields located in the Contracted Area, from this Area to the exporting port of
the reference price at a certain site which the Parties have agreed to utilize
for purposes of calculating the IA income. Said transportation costs shall be
determined jointly by the Parties by mutual agreement once the exploitation
stage begins on those fields whose commercial feasibility has been acknowledged
by ECOPETROL.
Operational Costs shall include Special Contributions or similar contributions
having direct application on hydrocarbon exploitation in the Contracted Area.
All values included in the determination of the R Factor shall be given in
current dollars. For this purpose expenses given in pesos shall be converted
into dollars at the Prevailing Exchange Rate as certified by the Bank of the
Republic effective on the date said disbursements took place.
14.2.4 Factor R Calculations: The distribution of production based upon Factor R
shall commence on the first day of the third calendar month following the month
in which the accumulated production in the Contracted Area reaches 60 million
barrels of Oil.
Factor R shall be calculated based upon the closing of the accounting books for
the calendar month in which accumulated production reached 60 million barrels of
Oil. The resulting production distribution shall be applicable until the 30th
day of June of the following year. From that moment, the Factor R distribution
of production shall be carried out annually (from July 1st to June 30th),
settlement being based upon the accumulated value from December 31st of the
previous year in accordance with the corresponding closing of the accounting
books.
14.2.5 Should a field produce crude oil and gas at the same time, in
order to apply the above distribution table, the total accumulated production to
be taken into account shall be that of the principal hydrocarbon, in keeping
with the authorization granted by the Ministry of Mines and Energy
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for the exploitation of said field. In order to determine the total accumulated
production, the measurement standard for the equivalent in gas shall the amount
of 7,000 cubic feet of gas per barrel of oil.
14.3 In addition to the jointly owned tanks and other facilities each Party
shall have the right to build its own production facilities in the Contracted
Area for its own and exclusive use in compliance with legal dispositions. The
transport and delivery of each Party's Oil to the pipeline and to other storage
facilities not jointly owned, shall be the sole responsibility and risk of the
receiving Party.
14.4 If production is obtained in localities not connected by pipelines,
chargeable to the Joint Account, the Parties could agree on the pipeline to be
used until the Oil can be sold, or to a locality location connecting with the
pipeline. If the Parties agree to the construction of said pipelines, they must
execute the contracts they consider pertinent and designate the Operator in
accordance with current legal dispositions.
14.5 Each Party shall own the oil produced, stored and made available to the
Party as a result of the operation herein indicated, pursuant to the provisions
of this contract, and each Party must receive said Oil in kind at each Party's
expense or sell it or dispose of it separately, pursuant to Clause 14 (numeral
14.3).
14.6 If any of the Parties, for any reason, can not separately have or withdraw
from the tanks of the Joint Account all or part of the Oil that corresponds to
it in accordance with this contract, the following procedure shall be followed:
14.6.1 If ECOPETROL is the Party that is unable to withdraw in whole or in part
its quota of Oil (in other words, share plus royalty) pursuant to Clause 12
(numeral 12.3), the Operator may continue production and delivery from said
field to THE ASSOCIATE, in addition to the portion representing THE ASSOCIATE'S
quota in the operation on the basis of one hundred percent (100%) of the MER,
all said Oil as THE ASSOCIATE chooses and is able to withdraw up to the limit of
one hundred percent (100%) of the MER, crediting ECOPETROL for subsequent
delivery, the volume of Oil ECOPETROL was entitled to withdraw but failed to
withdraw. But with respect to the volume of Oil not withdrawn equivalent to one
month in royalties to ECOPETROL, THE ASSOCIATE at the request of ECOPETROL,
shall pay in United States of America dollars, the difference between the
quantity of Oil withdrawn and the quantity of Oil that belonging to it on
account of the royalty referred to in the Clause 13 (numerals 13.1 and 13.2),
provided that it is understood that any Oil withdrawn made by ECOPETROL shall be
applied in the first place to royalty payment in kind, and subsequently, any
additional Oil withdrawals shall be applied to ECOPETROL'S share under Clause 14
(numeral 14.2)
14.6.2 In the event that THE ASSOCIATE is the Party that is unable to withdraw
any Oil, in whole or in part, its portion assigned under the Clause 12 (numeral
12.3), the Operator shall deliver to ECOPETROL, based on one hundred percent
(100%) of the MER, not only its participation and the corresponding, but also
the Oil that ECOPETROL is able to withdraw until a limit from one hundred
percent (100%) of the MER, accrediting with THE ASSOCIATE subsequent delivery,
the part that corresponds and that may not have been able to withdraw.
14.7 When both Parties are able to receive the Oil allocated under Clause 12
(numeral 12.3), the Operator shall deliver to the Party which had been
previously unable to receive its production quota, upon said Party's request, in
addition to its share in the operation, a minimum of ten percent (10%) per month
of the monthly production corresponding to the other Party every month and, by
mutual
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agreement, up to one hundred percent (100%) of the quota not received, up to the
time when the total amounts credited to the Party that had been unable to
receive its Oil are met.
14.8 Without prejudicing the legal provisions regulating this matter, each Party
shall be free, at any time, to sell or export its quota of the Oil obtained, in
accordance with this contract, or to dispose of said Oil in any manner.
CLAUSE 15 - UTILIZATION OF GAS
In the event one or more liquid Oil fields with associated gas are discovered,
the Operator shall, within the two (2) years following commencement of
commercial production from the field, submit a proposal on the use of natural
gas for the benefit of the Joint Account. The Executive Committee shall approve
the proposal and decide on the schedule therefor. If the Operator fails either
in presenting said proposal within the two (2) years term or in performing the
approved project within the time limits agreed upon by the Executive Committee,
ECOPETROL may take possession at no cost of all available gas from the
reservoirs in exploitation required for the efficient exploitation of the field.
CLAUSE 16 - UNIFICATION
Whenever an economically exploitable reservoir extends continuously to a
structure located in the Contracted Area and into another adjoining area or
areas, the Operator shall implement, in agreement with ECOPETROL and any other
interested parties, upon approval of the Ministry of Mines and Energy, a unitary
exploitation schedule, which must be designed in accordance with generally
accepted Oil production engineering technology.
CLAUSE 17 - FURNISHING OF INFORMATION AND INSPECTION DURING
EXPLOITATION
17.1 The Operator shall furnish to the Parties, as they are obtained,
reproducible originals (sepia), and copies of the electric, radio-active and
sonic logs for the drilled wells, historical data, core analyses, production
tests and all routine reports made or received regarding the operations and
activities developed in the Contracted Area.
17.2 Each one of the Parties, at its own expense, and on its own account and
risk, shall have the right, by means of its authorized representatives, to
survey the wells and the installations in the Contracted Area and the activities
related to it. Said representatives shall have the right to examine cores,
samples, maps, records of the drilled wells, surveys, books and all other
sources of information related to the development of this contract.
17.3 To enable ECOPETROL to comply with the provisions of Clause 29, the
Operator shall prepare and deliver to ECOPETROL all reports required by the
National Government.
17.4 All information and data related to exploitation operations shall be
treated as confidential data in the manner set forth in Clause 6 (numeral 6.3)
of this contract.
CHAPTER IV - EXECUTIVE COMMITTEE
CLAUSE 18 - BYLAWS
18.1 Within the thirty (30) calendar days following acknowledgment of a
Commercial Field, each Party must appoint a representative as well as his first
and second alternates who shall form the
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Executive Committee and shall inform the other Party in writing of the names and
addresses of their representatives and alternates. Each Party may replace its
representative or alternates at any time, but shall give written notice thereof
to the other Party. The vote or decision of the representative of each Party
shall be binding upon said Party. If the principal representative of any of the
Parties is unable to attend a Committee meeting, he shall designate in writing
the alternate who is to attend the meeting, and said alternate shall have the
same authority as the principal representative.
18.2 The Executive Committee shall hold ordinary meetings during the months of
March, July and November, to review the Operator's exploitation schedule and his
immediate plans. Annually, during the ordinary meeting in the month of July, the
Operator shall present to the Executive Committee the annual operations schedule
and the expenditures and investment Budget for the next calendar year, which
shall be reviewed and approved in the ordinary meeting of the month of November.
18.3 The Parties and the Operator shall be able to request a special meetings of
the Executive Committee to analyze conditions pertaining to the operation. The
Chairman of the Committee shall notify the representatives of said meeting
within ten (10) calendar days prior to the date of the meeting and of the
subjects to be discussed. Any subject not having been included in the agenda of
the meeting may be discussed during said meeting, but only after acceptance by
the representatives of the Parties in the Committee.
18.4 The representative of each Party shall have, in regard to any issues
discussed by the Executive Committee, a vote equivalent to the percentage of its
total Interest in the Joint Operation. Any resolution or decision made by the
Executive Committee, in order to be valid, must have the affirmative vote of
over fifty percent (50%) of the total Interest. In accordance with this
procedure, any decisions made by the Executive Committee shall be binding and
final upon the Parties and for the Operator.
CLAUSE 19 - FUNCTIONS
19.1 The Executive Committee shall be formed by the representatives of the
Parties, and said Committee shall have full authority and responsibility to
establish and adopt exploitation, development, and operation schedules and
Budgets relating to this contract. A representative of the Operator shall attend
the Executive Committee meetings.
19.2 The Executive Committee shall name a
Secretary. The Secretary shall keep minutes and detailed/complete minutes of all
the meetings, as well as notes of all the discussions and decisions made by the
Committee. The copies of these minutes, in order to be valid, should be approved
and signed by the representatives of the Parties within the five (5) days
following adjournment of the meeting and shall be delivered to the Parties as
soon as possible.
19.3 Some Executive Committee functions include the following:
19.3.1 To adopt its own regulations.
19.3.2 To designate the Operator in case of resignation or removal.
19.3.3 To designate the External Auditor for the Joint Account.
19.3.4 To approve or disapprove the annual operations schedule and the
expenditures Budget, and any modifications or revisions thereto, and to
authorize extraordinary expenditures.
19.3.5 To determine policies and rules on expenditures.
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19.3.6 To approve or disapprove all expenditure recommendations made by the
Operator (which have not been included in the approval Budget), when said
expenditures exceed the amount of Forty Thousand United States of America
dollars (US $40,000) or its equivalent in Colombian currency.
19.3.7 To advise the Operator and to decide on matters referred for the
Committee's consideration.
19.3.8 To create such sub-committees as it deems necessary and to establish
their functions to be carried out under the direction of Executive Committee and
paid for from the Joint Account.
19.3.9 To define the type and frequency of reports on drilling, operation and
production, and any other information to be furnished by the Operator to the
Parties, paid for by this Joint Account.
19.3.10 To supervise the operation of the Joint Account.
19.3.11 Authorize the Operator to execute contracts on behalf of the Joint
Operation when the amount thereof exceeds forty thousand dollars in United
States of America currency (US $40,000) or the equivalent in legal Colombian
tender, and
19.3.12 In general, to carry out all the functions authorized in this contract
that are not the responsibility of any other entity or individual under a
specific clause hereof or under a legal or regulatory provision.
CLAUSE 20 - DECISION-MAKING PROCESS IN THE EVENT THERE IS DISAGREEMENT
ON THE OPERATION
20.1 Any project related to the joint operation that requires the approval of
the Executive Committee, as provided in this contract, and for which the
representatives of the Parties disagree, shall be directly presented to the
highest executive of each Party, residing in Colombia, so that they may make a
joint decision. If within the sixty (60) calendar days following presentation of
said inquiry, the Parties arrive at a decision on said matter, they shall
communicate their decision to the Secretary of the Executive Committee who shall
call a meeting within fifteen (15) calendar days following the receipt of the
information, and the members of the Committee are obligated to ratify said
agreement or decision arrived to in said meeting.
20.2 If the Parties fail to reach an agreement on the matter under discussion
within sixty (60) calendar days following the presentation of said matter, the
operations may be carried out in accordance with Clause 21.
CLAUSE 21 - OPERATIONS AT THE RISK OF ONE OF THE PARTIES
21.1 If at any time any one of the Parties wishes to drill an Exploitation Well
not approved under the operation schedule, it shall give the other Party written
notice not less than thirty (30) calendar days in advance of the next meeting of
the Executive Committee of its desire to drill said well, and shall provide data
as location, recommendations to drill, depth and estimated costs. The Operator
shall include said proposal in the agenda of issues to be discussed in the next
meeting of the Executive Committee. If said proposal is approved by the
Executive Committee, said well may be drilled and shall be chargeable to the
Joint Account. If the Executive Committee does not accept said proposal, the
Party interested in drilling the aforementioned well, hereinafter referred to as
the "Participating Party", shall have the right to drill, complete, produce, or
abandon said well at its sole expense and risk. The Party not wishing to
participate in the operation herein described shall be called the
NonParticipating Party. The Participating Party must start drilling said well
within one hundred eighty (180) days from rejection of its proposal by the
Executive Committee. If drilling is not commenced
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within this period of time, the matter shall again be submitted to the Executive
Committee's consideration. At the request of the Participating Party, the
Operator shall drill the aforementioned well chargeable to the Participating
Party's own account and on its own risk, provided that, in the Operator's
opinion, this operation does not interfere with the normal progress of the
operations of the field, upon advance payment to the Operator by the
Participating Party of said amounts as the Operator may deem necessary in order
to drill. In the event that the Operator is unable to drill the well without
interfering with the normal progress of the operations, the Participating Party
shall have the right to drill said well directly or through a competent service
company, and in this case, the Participating Party shall be responsible for said
operation, without interfering in the performance of the normal field
operations.
21.2 If the well referred to in Clause 21 (numeral 21.1) is completed as a
producing well, said well shall be managed by the Operator and the production
from said well, after deducting the royalty as set forth in Clause 13, shall be
the property of the participating Party, which shall cover all the costs of the
operation of said well until the time when the net value of the production from
said well, after deducting production costs, costs of collecting the Oil,
storage, transportation and other similar costs as well as sales costs, be equal
to two hundred percent (200%) of the drilling and completion cost of said well,
and from that moment on and for purposes of this contract shall be the property
of the Joint Account. For purposes of this clause, the value of each barrel of
Oil produced from said well, during a calendar month, before deducting the
previously stated costs, shall be the average price per barrel received by the
participating Party for the sales of its participation in the Oil produced in
the Contracted Area during said month.
21.3 If at any time either Party wishes to workover, deepen or plug a well that
is not in commercial production or is dry well drilled by the Joint Account, and
if these operations have not been included in a schedule approved by the
Executive Committee, said Party shall give notice to the other Party of its
intention to workover, deepen or plug said well. If there is no equipment at the
location the procedure set forth in Clause 21 (numerals 21.1 and 21.2) shall be
applicable. If adequate equipment can be found at the well's location to carry
out the proposed operations, the Party receiving notice from the other Part
regarding the operations it wishes to carry out shall have a forty-eight (48)
hours starting from receipt of said notice, to approve or disapprove the
operation, and if no response is received during said period of time, it shall
be understood that the operation shall be performed at the Joint Account's
expense and risk. If the proposed work is performed on account and risk of one
participating Party, the well shall be managed pursuant to Clause 21 (numeral
21.2).
21.4 If at any time one of the Parties wishes to construct new installations for
gas liquids extraction and for the transportation and exportation of Oil,
hereinafter called additional facilities, said Party shall give written notice
to the other Party, which shall include the following information:
21.4.1 General description, design, specifications, and estimated costs of the
additional facilities;
21.4.2 Projected capacity.
21.4.3 Approximate date of commencement of construction operations and duration
of same. Within ninety (90) days starting from the day of notice, the other
Party, through written notice, has the right to decide to participate in the
projected additional installations. In the event said Party opts to not
participate in the additional installations, or does not reply to the proposal
of the participating Party, hereinafter referred to as the Construction Party,
and the latter shall proceed with the additional installations and may order the
Operator to construct, operate and maintain said installations at the
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sole expense and risk of the constructing Party, without prejudicing the normal
development of the Joint Operations. The Construction Party shall be able to
negotiate with the other Party the use of said installations for the Joint
Operation. During the time in which the installations are operated at cost and
risk of the Construction Party, the Operator shall charge to the Construction
Party all the operation and maintenance costs for the additional installations
in accordance with generally accepted accounting standards.
CHAPTER V - JOINT ACCOUNT
CLAUSE 22 - MANAGEMENT
22.1 Without prejudicing other provisions contained herein, expenditures
covering Exploration Operations shall be for THE ASSOCIATE'S account and risk.
22.2 From the time the Parties acknowledge the existence of a Commercial Field,
and subject to the provisions of Clause 5 (numeral 5.2) and Clause 13 (numeral
13.1 and 13.2), the ownership of the rights or Interest in the Operation of the
Contracted Area shall be divided as follows: ECOPETROL fifty percent (50%) and
THE ASSOCIATE fifty percent (50%). From then on, all expenditures, payments,
investments, costs and obligations carried out and contracted for the
performance of the operations, in accordance with this contract, as well as the
investments made by THE ASSOCIATE before and after a Commercial Field is
Acknowledged, in drilling and completing wells, which result in production
within the field, shall be charged to the Joint Account. Except as provided in
Clauses 14 (numeral 14.3) and 21, all property acquired or used thereafter for
the performance of activities of the Commercial Field operation shall be paid
and owned by the Parties in the proportions set forth in this Clause.
22.3 Within the first five (5) days of each month the Parties shall, in the bank
designated by Operator, pay the Operator their share of the Budget in accordance
with needs and in the currency in which the expenditures should be made, that is
to say, in Colombian pesos or in United States of America dollars, as requested
by the Operator in accordance with the schedules and cost estimates approved by
the Executive Committee. When THE ASSOCIATE does not have the necessary
Colombian pesos to cover its quota, in this currency, ECOPETROL shall have the
right to supply said pesos and to receive credit to its dollar obligations,
using the official exchange rate certified by the Central Bank on the day
ECOPETROL is to make said contribution, provided said transaction is permitted
by legal dispositions.
22.4 The Operator shall present monthly to the Parties, and within the thirty
(30) calendar days following the end of the month, a monthly statement showing
the total sums anticipated, actual expenses, pending obligations and a report of
all the charges and credits made to the Joint Account, and said report shall be
developed in accordance with Annex "B". If the payments as set forth in Clause
22 (numeral 22.3) are not made within the stated term and the Operator elects to
cover them, the delinquent Party shall pay the Commercial Interest in the same
currency in which payment is to be made, during the term of delinquency.
22.5 If either Party should fail to contribute on a timely basis to the Joint
Account the total sums that it owes, effective on that date, the Party shall be
considered a delinquent Party and, the other Party the prompt Party. If the
prompt Party has paid the delinquent Party's share, in addition to its own, the
former shall have the right, after a sixty (60) days waiting period, to have the
Operator deliver the Delinquent Party's total participation in the Contracted
Area, (excluding the royalty percentage), up to the amount of production which
permits the prompt Party realize a net income from sales equal to the
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sum not paid by the Delinquent Party plus an annual interest equal to the
Commercial Interest rate, beginning sixty (60) days after the date of
commencement of delinquency. "Net Income" is understood to mean the difference
between the sales price of the crude taken by the prompt Party, less cost of
transportation, storage, loading and other reasonable expenditures incurred by
the prompt Party in the sale of the products taken. The prompt Party shall have
thirty (30) days from the date of written notice to the Delinquent Party of its
intention to take all or a part of the Delinquent Party's share of production.
22.6.1 All Direct Expenditures of the Joint Operation shall be charged to the
Parties in the same proportion production was distributed at after royalties.
22.6.2 Indirect Expenses are charged to the Parties in the same established
proportion as Direct Expenditures as in the numeral 22.6.1 of this clause. The
amount of these expenditures shall be calculated by taking the annual total
value of the investments and expenditures (excluding administrative and
technical support) and applying the equation a+m (X-b); where X = total annual
investments and expenditures, and "a", "m" and "b", are constants whose value is
set out in the following chart in relation to the amount of annual investments
and expenditures:
================================================================================
AMOUNT INVESTMENTS AND EXPENDITURES CONSTANT VALUES
"X" (US$) "a" (US$) m(fract) "b" (US$)
================================================================================
1 0 25,000,000 0 0.10 0
- --------------------------------------------------------------------------------
2 25,000,001 50,000,000 2,500,000 0.08 25,000,000
- --------------------------------------------------------------------------------
3 50,000,001 100,000,000 4,500,000 0.07 50,000,000
- --------------------------------------------------------------------------------
4 100,000,001 200,000,000 8,000,000 0.06 100,000,000
- --------------------------------------------------------------------------------
5 200,000,001 300,000,000 14,000,000 0.04 200,000,000
- --------------------------------------------------------------------------------
6 300,000,001 400,000,000 18,000,000 0.02 300,000,000
- --------------------------------------------------------------------------------
7 400,000,001 and more 20,000,000 0.01 400,000,000
================================================================================
This equation shall be utilized once a year in each situation, applying the
constants that correspond to the total annual investments and expenditures.
22.7 The monthly account reports as set forth in Clause 22 (numeral 22.4) shall
be reviewed or objected to by any of the Parties from the moment they are
received and up to two (2) years after the end of said calendar year, specifying
clearly the objected or adjusted entries and the reason for such. Any account
not adjusted or objected to within this period of time, shall be considered
final and correct.
22.8 The Operator shall keep accounting records, vouchers and reports of the
Joint Account in Colombian pesos in accordance with all Colombian laws, and
every debit or credit to the Joint Account shall be made in accordance with the
accounting procedure established in Annex "B", which is part of this contract.
In the event of any discrepancy between said accounting procedure and the
provisions herein, the provisions of this contract shall prevail.
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22.9 The Operator can sell materials or equipment during the first twenty (20)
years of the Exploitation Period for the benefit of the Joint Account, provided
that the amount sold does not exceed five thousand United States of America
dollars (US$5,000) or its equivalent in Colombian currency. This type of
operations shall not exceed the amount of fifty thousand United States of
America dollars (US$50,000) or its equivalent in Colombian currency in any one
calendar year. Any sale in excess of these amounts or sales of real property
shall be approved by the Executive Committee. Said materials or equipment shall
be sold at a reasonable market price depending on their wear and tear condition.
22.10 Any machinery, equipment or other assets or property acquired by the
Operator for the performance of this contract and charged to the Joint Account
shall be owned by the Parties in equal shares. However, should any one of the
Parties decide to terminate its Interest under this Contract prior to the
expiration of the first seventeen (17) years of the Exploitation Period, except
as provided in Clause 25, said Party agrees to sell to the other Party all or
part of its Interest in the said property at a reasonable market price or at its
book value, whichever is lower. In the event the other Party does not wish to
purchase said assets within ninety (90) days following the formal sale offer,
the Party wishing to withdraw shall have the right to assign to a Third Party
his Interest in said machinery, equipment or property. Should THE ASSOCIATE
decide to withdraw after expiration of the seventeen (17) years of the
Exploitation Period, its interest in the Joint Operation shall pass to ECOPETROL
on a free of charge basis.
CHAPTER VI - LENGTH OF THE CONTRACT
CLAUSE 23 - MAXIMUM DURATION
This contract shall have a maximum duration of twenty-eight (28), divided as
follows: Up to six (6) years for the Exploration Period, pursuant to Clause 5,
without prejudicing the provisions of Clause 9 (numerals 9.3 and 9.8), and
twenty-two (22) years for the Exploitation Period, commencing from the date of
termination of the Exploration Period. It is understood that in the events
contemplated hereunder, in which the Exploration Period may be extended, the
total duration shall in no case exceed twenty-eight (28) years.
PARAGRAPH: THE ASSOCIATE shall continue fulfilling its duties in exploration, as
agreed to under Clause 5, and shall be able at the same time to proceed in the
exploitation of said fields before the Exploration Period defined in Clause 4,
numeral 4.19, ends, provided that the 22 year Exploitation Period shall commence
on the expiration date of the Exploration Period.
CLAUSE 24 - TERMINATION
This contract shall terminate in any of the following instances:
24.1 Due to expiration of the Exploration Period without THE ASSOCIATE having
discovered a Commercial Field, except as provided for in Clauses 9 (numerals 9.5
and 9.8) and 34.
24.2 Upon expiration of the term of duration of the contract, as set forth in
Clause 23.
24.3 At any time at the request of THE ASSOCIATE, upon fulfillment of its
obligations as set forth in Clause 5 and other provisions of this contract.
24.4 Due to the special causes as set forth in Clause 25.
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CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION
25.1 ECOPETROL may unilaterally terminate this contract, at any time before the
expiration of the period set forth in Clause 23, in the following instances:
25.1.1 Due to dissolution of THE ASSOCIATE and its assignees.
25.1.2 In the event THE ASSOCIATE and its assignees were to assign this contract
in whole or in part without complying with the requirements of Clause 27.
25.1.3 Due to the financial insolvency of THE ASSOCIATE and its assignees;
insolvency which is presumed to exist whenever a Court declares it in bankruptcy
or whenever a Court calls for the formation of the creditors committee.
25.1.4 Due to THE ASSOCIATES failure to comply with its obligations hereunder.
At the expiration of each one of the periods for the performance of the
exploration obligations, the Associate shall present a written report
demonstrating the fulfillment of the obligations for said. In the event that
they are not met, the operator shall have a period of sixty (60) days to
diligently complete them, in accordance with accepted industry standards. If
this is an insufficient amount of time, the Party shall agree to grant
additional time for said purposes. If at the end of this period all agreed to
jobs have not been completed, ECOPETROL shall declare non-fulfillment and shall
proceed as set forth in Clause 25 (numeral 25.3).
25.2 In the event of a declaration of unilateral termination, THE ASSOCIATE's
rights hereunder shall cease both as Party in Interest in the contract and as
Operator, provided that at the time of said declaration of unilateral
termination THE ASSOCIATE is acting in both capacities.
25.3 ECOPETROL may only unilaterally terminate this contract after a sixty (60)
day written notice to THE ASSOCIATE or its assignees, clearly specifying the
reasons invoked for declaring said termination, and provided that the other
Party has not presented satisfactory explanations to ECOPETROL, or that THE
ASSOCIATE has not corrected the default in the performance of the contract,
without prejudicing THE ASSOCIATE'S right to file any legal remedies as it may
deem advisable.
CLAUSE 26 - DUTIES IN CASE OF TERMINATION
26.1 Upon termination of the contract pursuant to Clause 24, of either the
Exploration or Exploitation phase, THE ASSOCIATE shall leave in production those
wells then producing and shall hand over the buildings, pipelines, transference
lines and other real properties belonging to the Joint Account (located in the
Contracted Area), all of which shall become the property of ECOPETROL free of
charge, together with the rights-of-way and property acquired for the benefit of
the contract, including those located outside the Contracted Area.
26.2 If this contract terminates for whatever reason after expiration of the
first seventeen (17) years of the Exploitation Period, all of THE ASSOCIATE'S
interest in the machinery, equipment or other assets or personal property used
or acquired by THE ASSOCIATE or by the Operator for the implementation of this
contract shall pass to the control of ECOPETROL on a free-of-charge basis.
26.3 If this contract is terminated before expiration of the seventeen (17)
years of the Period of Exploitation, the provisions of Clause 22 (numeral 22.10)
shall be implemented.
26.4 In the event that this contract is terminated by declaration of unilateral
termination at any time, all the personal assets real estate assets acquired for
the exclusive benefit of the Joint Account shall pass the control of ECOPETROL
free-of-charge.
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26.5 Upon termination of this contract for whatever reason and at whatever time,
the Parties shall be obligated to satisfactory fulfill their legal duties
between one another and with third parties as well as those acquired under this
contract.
CHAPTER VII - MISCELLANEOUS DISPOSITIONS
CLAUSE 27 - RIGHTS OF ASSIGNMENT
27.1 THE ASSOCIATE shall have the right to assign or transfer all or any of its
interests, rights and obligations under the association contract to another
person, company or group, with the prior approval of the Minister of Mines and
Energy and the President of "Empresa Colombiana de Petroleos", ECOPETROL.
Therefore, any project involving assignment or transfer of any interest, rights
or obligations under this contract, shall be brought to the attention, by means
of a certified notice from THE ASSOCIATE, to the Minister of Mines and Energy
and to the President of "Empresa Colombiana de Petroleos", ECOPETROL, and said
notice shall indicate the essential elements thereof, such as the prospective
assignee, the value of said property, interests, rights, and obligations to be
assigned, scope of the operation, etc. Within thirty (30) business days
following said notice, the Minister of Mines and Energy and the President of
"Empresa Colombiana de Petroleos", ECOPETROL, shall exercise their discretionary
power to analyze the qualifications of the prospective assignees, after which
they shall make a decision, without any obligation to explain the reasons
therefor. In any event, whatever decisions are made by the Minister of Mines and
Energy shall prevail.
27.2 If THE ASSOCIATE has not received any reply after thirty (30) days
following the date on which the Minister of Mines and Energy received said
notice, it shall be understood by all that the applications has been approved.
27.3 Transfers carried out during the Period of Exploration between companies
legally established in Colombia, are not required to obtain the previously
indicated authorization and can be done through written authorization form the
Empresa Colombiana de Petroleos, ECOPETROL, and the registration of the
respective document.
27.4 Changes or modifications in THE ASSOCIATE'S contractual relations with
"Empresa Colombiana de Petroleos", ECOPETROL shall also be subject to approval
by the Minster of Mines and Energy and the President of "Empresa Colombiana de
Petroleos", ECOPETROL, if said changes or modification are the result of total
or partial direct negotiations respecting interests, quotas or shares in THE
ASSOCIATE.
27.5 However, in the following situations said changes and modifications shall
not require approval by the Minister of Mines and Energy and "Empresa Colombiana
de Petroleos", ECOPETROL:
27.5.1 When the transactions are carried out at the stock exchange or in an open
market basis.
27.5.2 If it is a matter of assignments or transfers derived from situations
beyond the control of THE ASSOCIATE or the companies that it controls or
directs, such as governmental decisions, court judgments, division and
adjudication of assets and public auctions.
27.5.3 Whenever negotiations are carried out within the companies that control
or direct THE ASSOCIATE, or its affiliates or subsidiaries of subsidiaries of
the affiliates, or within companies forming an economic group, it shall be
sufficient to inform the Minister of Mines and Energy and the Empresa Colombiana
de Petroleos, ECOPETROL on a timely basis of said assignment or transfer.
27.6 Except as stated above, if any assignments, transfers, negotiations,
transactions or operations referred to in this clause are carried out without
the prior consent or approval by the Minister of
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Mines and Energy and the President of "Empresa Colombiana de Petroleos",
ECOPETROL, whenever necessary, may seek to apply the provisions of Clause 25 of
the Association Contract.
27.7 Those transactions carried out in accordance with this Clause and that, and
that are in keeping with Colombian tax laws, shall be taxable thereof.
CLAUSE 28 - DISAGREEMENTS
28.1 In the event of any discrepancies or inconsistencies between the Clauses of
this contract and those of Annex "B" entitled "Operating Agreement" the
provisions of the former shall prevail.
28.2 Any differences of a legal nature arising between the Parties hereto
regarding interpretation and implementation of this contract, and which cannot
be settled amicably, shall be brought for final decision of the jurisdictional
branch of the Colombian State.
28.3 Any technical or factual differences between the Parties hereto by reason
of interpretation or implementation of this contract, and that cannot be settled
amicably, shall be referred to experts for final decision, who shall be selected
as follows: one by each Party, and a third one chosen by mutual agreement of the
two experts so designated. Should an agreement not be reached as to the
appointment of the third expert, the latter shall be chosen, upon request of
either Party, by the Board of Directors of the Colombian Association of Oil
Engineers (ACCEPT), headquartered in Santa Fe de Bogota.
28.4 All accounting differences arising between the Parties resulting from
interpretation and execution of the contract which could not be settled
amicably, shall be submitted to experts for their decision, who shall be public
accountants chosen as follows: One by each Party, and the third one by the two
principal experts, and should agreement not be reached by these experts and at
the request of any of the Parties, said third expert shall be appointed by the
Board of Directors of Accountants in Bogota.
28.5 Both Parties declare that the decisions of the experts shall have be
binding between the Parties and consequently, said decisions shall be final.
28.6 In the event of disagreement between the Parties as to whether the dispute
is technical, accounting or legal in nature, said dispute shall be considered to
be legal and Clause 28 (numeral 28.2) shall be applied.
CLAUSE 29 - LEGAL REPRESENTATION
........clearly that:
29.8.1 Cost shall be one of the factors to be considered, but not the only one,
i the adjudication and administration of this contract;
29.8.2 All bids that are higher than the real cost for these activities shall be
disqualified.
29.8.3 Evaluation of bids shall include evaluation of other factors beside cost,
which shall be included in the performance work statement;
29.8.4 Offers must be presented in accordance with the terms of said bid, and
not fulfillment of this requirement may result in invalidation of the bid;
29.8.5 The invitation to bid shall include a table showing details of the prices
that must be considered by the offerors, so that proposal could be more easily
compared;
29.9 The bidders' list shall be reviewed and approved by Technical Sub-Committee
before being sent to bidders.
29.10 Once the performance work statement has been distributed, the
following rules shall be applicable:
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29.10.1 Any information, modifications or clarifications to the original
performance work statement shall be delivered to all bidders. The Operator's
Purchase and Procurement Department shall be responsible for these changes. All
changes must be justified in writing.
29.10.2 No new bidders could be added to the original bidders' list approved by
the Technical Sub-Committee.
29.10.3 Any bidder not following the bid's procedures and rules, or violating
the Operator's code of business ethics, shall be immediately disqualified.
29.11 The contents and format of all materials included in an invitation to bid
shall fulfill all procedural requirements set out in "Document Format for
Presentation to the Technical Sub- Committee" and must be presented for
consideration to the Technical Sub-committee.
29.12 Internal approval procedures required by the Operator and ECOPETROL would
depend on the estimated value of the contract, in accordance with each one's
internal procedure.
CLAUSE 30 - CONTRACT ADJUDICATION AND PURCHASE ORDERS
30.1 The
Operator shall be responsible of adjudicating bids for contract or purchase
orders. For this...
30.2 The liabilities contracted by ECOPETROL and THE ASSOCIATE through this
contract pertaining to third parties shall not be joint liability and,
consequently, each Party shall be separately responsible for its participation
in expenditures, investments and obligations resulting from these liabilities.
30.3 In as far as the value of the expenditures incurred and the contracts
executed by the Operator for amounts exceeding forty thousand United States of
America dollars (US $40,000) or its equivalent in Colombian pesos, not
previously authorized by the Executive Committee, except for the regulations in
the Clause 11 (numeral 11.7); the only one responsible to third parties shall be
the Operator, who shall assume responsibility for the entire value. When the
expenditure in question is accepted by the Executive Committee, the Operator
shall be paid for the value of the work, study or purchase, in accordance with
norms defined by the Executive Committee. In the event that the expense or asset
is not approved by the Executive Committee, the Operator, if possible, shall be
able to withdraw the asset in question and refund the partners any costs caused
the operation as a result of said withdrawal.
Whenever it is not possible for the Operator to withdraw said assets, or
whenever he refuses to do it, the benefit or increase in value resulting from
these expenditures or contracts, shall belong to the Parties in proportion to
their Interest in the Operation.
30.4 Ecological Control. THE ASSOCIATE, in
developing all activities under this contract, shall comply with all provisions
of the National Code of Renewable Natural Resources and Protection of the
Environment and other legal dispositions on this subject. To this end, THE
ASSOCIATE shall implement a permanent preventive plan to assure the preservation
and restoration of the natural resources within the areas in which the
exploration, exploitation and transportation work is realized as provided for in
this contract.
Said plans and schedules must be divulged by THE ASSOCIATE to the national and
regional communities and entities involved in this matter.
Likewise, specific contingency plans must be developed to respond to emergencies
and to implement remedial actions. THE ASSOCIATE shall coordinate said plans and
actions with the appropriate entities.
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Schedules and budget pertaining to said plans shall be prepared by the Associate
in accordance with pertinent clauses of this contract.
All costs thus generated shall be assumed by THE ASSOCIATE during the Period of
Exploration and by Both Parties, chargeable to the Joint Account, during the
Exploitation period.
CLAUSE 31743 TAXES, CHARGES AND OTHERS
Any taxes and charges accrued after the establishment of the Joint Account and
before the Parties receive their production share, related to Oil exploitation,
shall be charged to the Joint Account. Revenue, capital gains and related taxes
shall be payable by each Party as applicable to each one.
CLAUSE 32 - PERSONNEL
32.1 THE ASSOCIATE shall designate the Operator's Manager after consultation
with ECOPETROL.
32.2 Pursuant to the terms of this contract and subject to the norms to be
established thereof, the Operator shall have autonomy in appointing the
personnel required for the operations thereunder, and shall be able to determine
their remuneration, duties, rank, number and conditions. The Operator shall
adequately and diligently train said Colombian personnel as may be required to
replace foreign personnel, as Operator deems necessary to perform the operations
hereunder. Nevertheless, the Operator shall comply with all regulations of law
governing the proportion of national and foreign employees and laborers.
32.3 TECHNOLOGICAL TRANSFER - THE ASSOCIATE, at his own cost, must provide a
supervised training program in contract-related activities for ECOPETROL'S
professional personnel. To comply with this obligation during the Exploration
Period, supervised training can cover, among others, areas such as: geology,
geophysics and related sciences, calculation of reserves and definition of
reservoirs, drilling and production. Supervised training shall be carried out
throughout the initial Exploration Period and during extensions thereto and
shall integrate professional personnel appointed by ECOPETROL into the work
group organized by THE ASSOCIATE for the Contracted Area or for other similar
activities handled by THE ASSOCIATE.
In order to chose the resignation set forth in Clause 5 of this contract, THE
ASSOCIATE must have previously complied with the training program herein
described.
During the period of exploitation, the range, duration, place, participants,
training, conditions and other aspects of said training shall be established by
the Executive Committee of the Association. All supervising training costs, with
the exception labor costs caused due to training of the professional staff,
shall be assumed by the Associate during the period of exploration and by both
parties debited to the Joint Account during the period of Exploitation.
PARAGRAPH (subject to agreement): To comply with obligations regarding
technology transfer, as stated herein, during the first three (3) years of
exploration and each year THE ASSOCIATE agrees to organize and pay for a
supervised training course for ECOPETROL professionals not to exceed U.S.
$30,000 in annual cost. The course shall be previously approved by ECOPETROL and
THE ASSOCIATE. In the event that the period of exploration is extended, the
supervised training course shall consist of a program similar to such as set
forth herein.
32.4 In accordance with this contract, the Operator during the
Period of Exploitation, shall have the right to perform whatever jobs it desires
through contractors, subject to the power of the Executive Committee to approve
contracts exceeding forty thousand United States of America dollars (US$40.000)
in value, or its equivalent in Colombian currency.
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CLAUSE 33 - INSURANCE
The Operator shall provide all insurance required by Colombian Law. Also, it
shall demand of each contractor performing any work in the development of this
contract, that it obtains and keeps in force the insurance policies considered
necessary by the Operator. Likewise, the Operator shall carry any other
insurance considered necessary by the Executive Committee.
CLAUSE 34 - GREATER FORCE OR ACTS OF GOD
Unforeseen events or acts of God, such as strikes, shutdowns, wars, earthquakes,
floods or other catastrophes, laws or governmental bylaws or decrees that
prevent the obtainment of the essential materials and, in general, any other
non-financial causes that effectively impede work, even if not previously
listed, but affecting the Parties and not within their control. If one of the
Parties cannot, due to unforeseen events or acts of God, comply with the
obligations of this contract, it shall notify immediately to the other Party so
that it may evaluate this situation, specifying the reasons for said impediment.
Under no circumstances shall these unforeseen events or acts of God cause the
extension of the total period of exploration and exploitation beyond the
twenty-eight (28) calendar years commencing on the effective date of the
Contract, in accordance with the agreed-upon provisions of the Clause 23, but
however, any impediment caused by unforeseen events or acts of God during the
six (6) year period of exploration stated in Clause 5, and lasting for more than
thirty (30) consecutive days, shall extend said six (6) year period by the same
length of time as the duration of the impediment.
CLAUSE 35 - APPLICATION OF COLOMBIAN LAWS
For all purposes hereunder, the Parties set the city of Santa Fe de Bogota,
Republic of Colombia, as their main offices. This contract is governed in all
respects by Colombian law, and THE ASSOCIATE accepts jurisdiction of Colombian
Courts and waives any diplomatic claim respecting its rights and obligations
hereunder, except in the event of denial of justice. It is understood that
denial of justice shall not be deemed to exist when THE ASSOCIATE in its
capacity as a Party or Operator has had access to all the resources and means of
action which under Colombian Law may be used before the jurisdictional branch of
the government.
CLAUSE 36 - NOTICE
Any notice or communications, in order to be valid, between the Parties hereto,
relating to this contract, shall mention the pertinent Clauses, and shall be
sent to the Parties at the following addresses: TO ECOPETROL: Carrera 13 No.
36-24, Santa Fe de Bogota, Colombia. TO THE ASSOCIATE: Calle 100 No. 8A-49,
Oficina 705, Santa Fe de Bogota, Colombia. Any change of address shall be made
known in advance to the other Party.
CLAUSE 37 - VALUE OF OIL
Payments or reimbursements referred to in Clause 9 (numeral 9.2 and 9.4) and 22
(numeral 22.5) shall be made in United States of America dollars or in Oil, on
the basis of the price in effect at that time and within the limitations set
forth by Colombian legislation for the sale of the portion payable in dollars,
for Oil or Natural gas originating from the Contracted Area and destined for
refining within the National territory.
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CLAUSE 38 - PRICE FOR OIL
38.1 Oil belonging to THE ASSOCIATE hereunder and destined for internal use or
refining shall be paid against delivery at the Refinery where the crude is to be
processed or at the receiving Station agreed upon by the Parties, as follows:
38.1.1 Gas shall be paid pursuant to Resolution No. 61 of 1983, issued by the
Oil and Natural Gas Pricing Commission and Decree 196 of the 17th of January,
1986, as issued by the President of the Republic, or governmental regulations
replacing them.
38.1.2 Crude shall be paid pursuant to Resolution 13 of the 14th of December,
1992, issued by the National Commission of Energy, or by governmental
regulations replacing it.
38.2 Differences arising from the application of this clause shall be channeled
through the systems established in this contract.
CLAUSE 39 - AGENCY AND ADMINISTRATION
The PRESIDENT of the Empresa Colombiana de Petroleos - ECOPETROL - delegates to
the Vice- President for Associated Operations the administration of this
Contract, in accordance with the norms and regulations of ECOPETROL, and grants
him the power to carry out all the necessary activities to develop said
Contract.
CLAUSE 40 - VALIDITY
In order to be valid, this Contract requires the approval of the Ministry of
Mines and Energy. In witness whereof, it is signed in Santa Fe de Bogota, before
witnesses, on the _________ (__) day of the month of _________, Nineteen Hundred
and Ninety Five (1995).
EMPRESA COLOMBIANA DE THE GHK COMPANY
PETROLEOS
ECOPETROL
JUAN MARIA RENDON GUTIERREZ RUSS D. CUNNINGHAM
PRESIDENTE LEGAL REPRESENTATIVE
GHK COMPANY COLOMBIA
ENRIQUE VARGAS RAMIREZ
APODERADO GENERAL
Witnesses
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CHAPTER I
GENERAL DISPOSITIONS
CLAUSE 1.
Purpose of this contract
CLAUSE 2.
Application of the contract
CLAUSE 3.
Contracted Area
CLAUSE 4.
Definitions
CHAPTER II
EXPLORATION
CLAUSE 5.
Terms and conditions
CLAUSE 6.
Supply of Information During Exploration
CLAUSE 7.
Budget and Exploration schedules
CLAUSE 8.
Return of areas
CHAPTER III
EXPLOITATION
CLAUSE 9.
Terms and Conditions
CLAUSE 10.
Technical Control of Operations
CLAUSE 11.
Schedules and cost estimates of Exploitation
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CLAUSE 12.
Production
CLAUSE 13.
Royalties
CLAUSE 14.
Distribution and availability of Oil
CLAUSE 15.
Utilization of gas
CLAUSE 16.
Unification
CLAUSE 17.
Furnishing of Information and inspection during exploitation
CHAPTER IV
EXECUTIVE COMMITTEE
CLAUSE 18.
BY-LAWS
CLAUSE 19.
Functions
CLAUSE 20.
Decision-Making Process in the event of disagreement in the Operation
CLAUSE 21.
Operations at their risk of one of the Parties
CHAPTER V
JOINT ACCOUNT
CLAUSE 22.
Management
CHAPTER VI
LIFE OF THE CONTRACT
CLAUSE 23.
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Maximum life
CLAUSE 24.
Completion
CLAUSE 25.
Causes for unilateral termination
CLAUSE 26.
Duties in case of termination
CHAPTER VII
MISCELLANEOUS DISPOSITION
CLAUSE 27.
Right of transfer
CLAUSE 28.
Disagreements
CLAUSE 29.
Legal representation
CLAUSE 30.
Responsibilities
CLAUSE 31.
Taxes, charges and others
CLAUSE 32.
Personnel
CLAUSE 33.
Insurance
CLAUSE 34.
Unforeseen events or acts of God
CLAUSE 35.
Application of Colombian Laws
CLAUSE 36.
Notice
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CLAUSE 37.
Value of Oil
CLAUSE 38.
Prices for Oil
CLAUSE 39.
Agency and Administration
CLAUSE 40.
Validity
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EXHIBIT 10(d)
INTERNATIONAL OPERATING AGREEMENT
GHK COMPANY COLOMBIA
Operator
DINDAL AREA,
DEPARTMENT OF CUNDINAMARCA,
REPUBLIC OF COLOMBIA
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
I Definitions .......................................... 2
II Effective Date and Term ............................. 11
III Participating Interest ............................... 11
3.1 Participating Interest ........................ 11
3.2 Ownership, Obligations and
Liabilities .................................. 13
IV Operator . . . ....................................... 14
4.1 Designation of Operator ....................... 14
4.2 Rights and Duties of Operator ................ 14
4.3 Employees of Operator ........................ 17
4.4 Information Supplied by Operator .............. 17
4.5 Settlement of Claims and Lawsuits ............ 19
4.6 Liability of Operator.......................... 20
4.7 Insurance Obtained by Operator ................ 22
4.8 Commingling of Funds........................... 24
4.9 Resignation of Operator........................ 24
4.10 Removal of Operator............................ 24
4.11 Appointment of Successor ...................... 26
V Operating Committee .................................. 28
5.1 Establishment of Operating Committee........... 28
5.2 Powers and Duties of Operating
Committee ..................................... 28
5.3 Authority to Vote ............................ 29
5.4 Subcommittees ................................. 29
5.5 Notice of Meeting ............................. 30
5.6 Contents of Meeting Notice .................... 30
5.7 Location of Meetings .......................... 31
5.8 Operator's Duties for Meetings ................ 31
5.9 Voting Procedure .............................. 31
5.10 Record of Votes ............................... 32
5.11 Minutes ....................................... 32
5.12 Voting by Notice .............................. 32
5.13 Effect of Vote ................................ 34
VI Work Programs and Budgets ............................ 37
6.1 Exploration and Appraisal ..................... 37
6.2 Development ................................... 39
6.3 Production .................................... 41
6.4 Itemization of Expenditures ................... 41
6.5 Contract Awards ............................... 42
6.6 Authorization for Expenditure
("AFE") Procedure ............................. 44
6.7 Overexpenditures of Work Programs
and Budgets ................................... 46
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VII Operations By Less Than All Parties .................. 47
7.1 Limitation on Applicability ................... 47
7.2 Procedure to Propose Exclusive
Operations .................................... 47
7.3 Responsibility for Exclusive
Operations .................................... 50
7.4 Consequences of Exclusive Operations .......... 51
7.5 In-Kind Penalty................................ 52
7.6 Order of Preference of Operations ............. 56
7.7 Stand-By Costs ................................ 57
7.8 Special Considerations Regarding
Deepening and Sidetracking .................... 59
7.9 Miscellaneous ................................. 61
VIII Default .............................................. 63
8.1 Default and Notice ............................ 63
8.2 Operating Committee Meetings and
Data .......................................... 64
8.3 Allocation of Defaulted Accounts .............. 65
8.4 Transfer of Interest .......................... 66
8.5 Continuation of Interest ...................... 68
8.6 Abandonment ................................... 70
8.7 Sale of Hydrocarbons .......................... 70
8.8 No Right of Set Off ........................... 71
IX Disposition of Production ............................ 72
9.1 Right and Obligation to Take in Kind .......... 72
9.2 Offtake Agreement for Crude Oil ............... 72
9.3 Separate Agreement for Natural Gas ............ 76
X Abandonment of Wells ................................. 76
10.1 Abandonment of Wells Drilled as
Joint Operations .............................. 76
10.2 Abandonment of Exclusive Operations ........... 78
XI Surrender, Extensions and Renewals ................... 78
11.1 Surrender ..................................... 78
11.2 Extension of the Term ......................... 79
XII Transfer of Interest or Rights ....................... 80
12.1 Obligations ................................... 80
12.2 Rights ........................................ 82
XIII Withdrawal from Agreement ............................ 83
13.1 Right of Withdrawal ........................... 83
13.2 Partial or Complete Withdrawal ................ 84
13.3 Voting ........................................ 85
13.4 Obligations and Liabilities ................... 85
13.5 Emergency ..................................... 86
13.6 Assignment .................................... 87
13.7 Approvals ..................................... 87
13.8 Abandonment Security .......................... 87
13.9 Withdrawal or Abandonment by all
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Parties ....................................... 88
XIV Relationship of Parties and Tax ...................... 88
14.1 Relationship of Parties ....................... 88
14.2 Tax ........................................... 89
14.3 United States Tax Election .................... 89
XV Confidential Information -
Proprietary Technology ........................ 90
15.1 Confidential Information ...................... 90
15.2 Continuing Obligations ........................ 92
15.3 Proprietary Technology ........................ 92
15.4 Trades ........................................ 93
XVI Force Majeure ........................................ 93
16.1 Obligations ................................... 93
16.2 Definition of Force Majeure ................... 94
XVII Notices . . ......................................... 94
XVIII Applicable Law and Dispute Resolution ................ 96
18.1 Applicable Law ................................ 96
18.2 Dispute Resolution ............................ 97
XIX General Provisions ................................... 100
19.1 Conflicts of Interest ......................... 100
19.2 Public Announcements .......................... 100
19.3 Successors and Assigns ........................ 102
19.4 Waiver ........................................ 102
19.5 Severance of Invalid Provisions ............... 102
19.6 Modifications ................................. 103
19.7 Headings ...................................... 103
19.8 Singular and Plural ........................... 103
19.9 Gender ........................................ 103
19.10 Counterpart Execution ......................... 103
19.11 Entirety ...................................... 104
Signature Page ....................................... 105
Acknowledgment........................................ 106
Exhibit "A" - Accounting Procedure
Exhibit "B" - United States Tax
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OPERATING AGREEMENT
THIS AGREEMENT is made as of the Effective Date among GHK Company
Colombia, a company incorporated in under the laws of the State of Oklahoma,
U.S.A. (hereinafter referred to as "GHK");
Cimarrona Limited Liability Company, a company formed under the laws of
the State of Oklahoma, U.S.A. (hereinafter referred to as "Cimarrona");
Esmeralda Limited Liability Company, a company formed under the laws of
the State of Oklahoma, U.S.A. (hereinafter referred to as "Esmeralda");
Sociedad Internacional Petrolera S.A., a company formed under the laws of
the Republic of Chile (hereinafter referred to as "Sipetrol");
Seven Seas Petroleum Colombia, Inc., a company formed under the laws of
the Cayman Islands (hereinafter referred to as "Seven Seas"); and
Petrolinson S.A., a company formed under the laws of the Republic of
Panama (hereinafter referred to as "Petrolinson").
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The companies named above may sometimes individually be referred to as "Party"
and collectively as the "Parties".
WITNESSETH:
WHEREAS, GHK and Petrolinson have entered into an Association Contract
dated January 22, 1993, effective March 23, 1993, approved by Resolution No. 7
173 of July 28, 1993 of the Ministry of Mines and Energy of the Republic of
Colombia (the "Contract") with Empresa Colombiana de Petroleos (hereinafter
referred to as "Ecopetrol") covering certain areas located in the Dindal Area,
Cundinamarca Department, Republic of Colombia, referred to as the Contract Area;
WHEREAS, GHK, Petrolinson, and Ecopetrol have entered into an amendment
to the Contract on May 4, 1995 which re-defined the Contract Area and also
provided for changes to Clauses 5, 5.1, 5.12 and 5.13 of the Contract;
WHEREAS, the Parties desire to define their respective rights and
obligations with respect to their operations under the Contract, as amended.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements and obligations set out below and to be performed, the Parties
agree as follows:
ARTICLE I - DEFINITIONS
As used in this Agreement, the following words and terms shall have the
meaning ascribed to them below:
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1.1 ACCOUNTING PROCEDURE means the rules, provisions and conditions set forth
and contained in Exhibit A to this Agreement.
1.2 AFE means an authorization for expenditure pursuant to Article 6.6.
1.3 AFFILIATE means a company, partnership or other legal entity which
controls, or is controlled by, or which is controlled by an entity which
controls a Party. Control means the ownership directly or indirectly of
more than fifty (50) percent of the shares or voting rights in a company,
partnership or legal entity.
1.4 AGREED INTEREST RATE means interest compounded on a monthly basis, at the
rate per annum equal to the one (1) month term, LIBOR rate for U.S.
dollar deposits, as published by THE WALL STREET JOURNAL or if not
published, then by the FINANCIAL TIMES OF LONDON, plus four (4)
percentage points, applicable on the first Business Day prior to the due
date of payment and thereafter on the first Business Day of each
succeeding one (1) month term. If the aforesaid rate is contrary to any
applicable usury law, the rate of interest to be charged shall be the
maximum rate permitted by such applicable law.
1.5 AGREEMENT means this agreement, together with the Exhibits attached to
this agreement.
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1.6 APPRAISAL WELL means any well whose purpose at the time of commencement
of drilling such well is the determination of the extent or the volume of
Hydrocarbon reserves contained in an existing Discovery. APPRAISE and
other derivatives shall be construed accordingly.
1.7 BUSINESS DAY means a day on which the banks in The Republic of Colombia
are customarily open for business.
1.8 CALENDAR QUARTER means a period of three (3) months commencing with
January 1 and ending on the following March 31, a period of three (3)
months commencing with April 1 and ending on the following June 30, a
period of three (3) months commencing with July 1 and ending on the
following September 30, or a period of three (3) months commencing with
October 1 and ending on the following December 31 according to the
Gregorian Calendar.
1.9 COMMERCIAL DISCOVERY means any discovery of Hydrocarbons which is
sufficient to entitle the Parties to apply for authorization from the
Government to commence exploitation.
1.10 COMPLETE means an operation intended to complete a well through the
Christmas tree as a producer of Hydrocarbons in one or more Zones,
including, but not limited to, the setting of production casing,
perforating, stimulating the well and production testing conducted in
such operation.
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COMPLETION and other derivatives shall be construed accordingly.
1.11 CONSENTING PARTY means a Party who agrees to participate in and pay its
share of the cost of an Exclusive Operation.
1.12 CONTRACT means the instrument identified in the second paragraph of this
Agreement and any extension, renewal or amendment thereof.
1.13 CONTRACT AREA means as of the Effective Date the surface area which is
identified in the second paragraph of this Agreement. The perimeter or
perimeters of the Contract Area shall correspond to that area covered by
the Contract, as such area may vary from time to time during the term of
validity of the Contract.
1.14 CONTRACT YEAR means a period of one year commencing March 23.
1.15 DAY means a calendar day unless otherwise specifically provided.
1.16 DEFAULTING PARTY shall have the meaning ascribed in Article 8.1.
1.17 DEEPEN means an operation whereby a well is drilled to an objective Zone
below the deepest Zone in which the well was previously drilled, or below
the deepest Zone proposed
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in the associated AFE, whichever is the deeper. DEEPENING and other
derivatives shall be construed accordingly.
1.18 DEVELOPMENT PLAN means a plan for the development of Hydrocarbons from an
Exploitation Area covering all or a portion of the Contract Area.
1.19 DEVELOPMENT WELL means any well drilled for the production of
Hydrocarbons pursuant to a Development Plan. DEVELOP and other
derivatives shall be construed accordingly.
1.20 DISCOVERY means the discovery of an accumulation of Hydrocarbons whose
existence until that moment was unknown; provided Hydrocarbons are
recovered at the surface in a flow measurable by conventional production
test methods.
1.21 EFFECTIVE DATE means the date this Agreement comes into effect as stated
in Article II.
1.22 ENTITLEMENT means a quantity of Hydrocarbons of which a Party has the
right and obligation to take delivery pursuant to the Contract or, if
applicable, an offtake agreement, and shall be derived from that Party's
Participating Interest in the Hydrocarbons produced after adjustment for
overlifts and underlifts.
1.23 EXCLUSIVE OPERATION means those operations and activities carried out by
Operator, pursuant to this
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Agreement, the costs of which are chargeable to the account of less than
all the Parties.
1.24 EXCLUSIVE WELL means a well drilled pursuant to an Exclusive Operation.
1.25 EXPLOITATION AREA means that part of the Contract Area which is
established for exploitation pursuant to the Contract.
1.26 EXPLOITATION PERIOD means any and all periods of exploitation established
pursuant to the Contract.
1.27 EXPLORATION PERIOD means any and all periods of exploration set out in
the Contract.
1.28 EXPLORATION WELL means any well drilled during the course of exploration
work other than an Appraisal Well or Development Well.
1.29 G & G DATA means only geological, geophysical and geochemical data and
other information that is not obtained through a well bore.
1.30 GOVERNMENT means the government of the Republic of Colombia.
1.31 GOVERNMENT OIL COMPANY means Ecopetrol.
1.32 GROSS NEGLIGENCE means any act or failure to act (whether sole, joint or
concurrent) by a Party which was intended to cause, or which was in
reckless disregard of or wanton indifference to, harmful consequences
such Party
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knew, or should have known, such act or failure would have had on the
safety or property of another person or entity, but shall not include any
error of judgment or mistake made by such Party in the exercise in good
faith of any function, authority or discretion conferred on the Party
employing such under this Agreement.
1.33 HYDROCARBONS means all substances including liquid and gaseous
hydrocarbons which are subject to and covered by the Contract.
1.34 IN KIND PREMIUM means the grant of interest in production made pursuant
to Article 7.5(C) by a NonConsenting Party to reinstate its rights under
an Exclusive Operation.
1.35 JOINT ACCOUNT means the accounts maintained by Operator in accordance
with the provisions of this Agreement and of the Accounting Procedure for
Joint Operations.
1.36 JOINT OPERATIONS means those operations and activities carried out by
Operator pursuant to this Agreement, the costs of which are chargeable to
all Parties.
1.37 JOINT PROPERTY means, at any point in time, all wells, facilities,
equipment, materials, information, funds and the property held for the
Joint Account.
1.38 MINIMUM WORK OBLIGATIONS means those work and/or expenditure obligations
specified in the Contract which must
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be performed in order to satisfy the obligations of the Contract.
1.39 NON-CONSENTING PARTY means a Party who elects not to participate in an
Exclusive Operation.
1.40 NON-OPERATOR(S) means the Party or Parties to this Agreement other than
Operator.
1.41 OPERATING COMMITTEE means the committee constituted in accordance with
Article V.
1.42 OPERATOR means a Party to this Agreement designated as such in accordance
with this Agreement.
1.43 PARTICIPATING INTEREST means the undivided percentage interest of each
Party in the rights and obligations derived from the Contract and this
Agreement.
1.44 PARTY means any of the entities named in the first paragraph to this
Agreement and any respective successors or assigns in accordance with the
provisions of this Agreement.
1.46 PLUG BACK means a single operation whereby a deeper Zone is abandoned in
order to attempt a Completion in a shallower Zone. PLUGGING BACK and
other derivatives shall be construed accordingly.
1.47 RECOMPLETE means an operation whereby a Completion in one Zone is
abandoned in order to attempt a Completion in a different Zone within the
existing wellbore. RECOMPLETION and other derivatives shall be construed
accordingly.
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1.48 REWORK means an operation conducted in the wellbore of a well after it is
Completed to secure, restore, or improve production in a Zone which is
currently open to production in the wellbore. Such operations include,
but are not limited to, well stimulation operations, but exclude any
routine repair or maintenance work, or drilling, Sidetracking, Deepening,
Completing, Recompleting, or Plugging Back of a well. REWORKING and other
derivatives shall be construed accordingly.
1.49 SENIOR SUPERVISORY PERSONNEL means any supervisory employee of a Party
who functions as such Party's designated manager or supervisor who is
responsible for, or in charge of onsite drilling, construction or
production and related operations, or any other field operations; and,
any employee of such Party who functions at or above such management
level or an officer or a director of such Party.
1.50 SIDETRACK means the directional control and intentional deviation of a
well from vertical so as to change the bottom hole location unless done
to straighten the hole or to drill around junk in the hole or to overcome
other mechanical difficulties. SIDETRACKING and other derivatives shall
be construed accordingly.
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1.51 TEST means an operation intended to evaluate the capacity of a Zone to
produce Hydrocarbons. TESTING and other derivatives shall be construed
accordingly.
1.52 WORK PROGRAM AND BUDGET means a work program for Joint Operations and
budget therefor as described and approved in accordance with Article VI.
1.53 ZONE means a stratum of earth containing or thought to contain a common
accumulation of Hydrocarbons separately producible from any other common
accumulation of Hydrocarbons.
ARTICLE II - EFFECTIVE DATE AND TERM
This Agreement shall have effect from the 1st Day of August,
1994 and shall, subject always to the Parties' continuing obligations under
Article XV, continue in effect until the later of (i) the Contract terminates or
(ii) until all materials, equipment and personal property used in connection
with the Joint Operations have been removed and disposed of, and final
settlement has been made among the Parties, including, without limitation:
(A) all wells have been properly abandoned in accordance with Article X;
and
(B) all obligations, claims, arbitrations and lawsuits have been settled
or otherwise disposed of in accordance with Article 4.5 and Article
XVIII; and
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(C) the time relating to the protection of confidential information and
proprietary technology has expired in accordance with Article XV.
ARTICLE III - PARTICIPATING INTEREST
3.1 PARTICIPATING INTEREST
(A) The Participating Interests of the Parties under the Contract are as
follows:
GHK 10.94%
CIMARRONA 25.38%
ESMERALDA 9.78%
SIPETROL 32.90%
SEVEN SEAS 15.00%
PETROLINSON 6.00%
provided, however, that with respect to costs during the Exploration
Period, each of GHK, Cimarrona, Esmeralda, Sipetrol and Seven Seas, if
its elects to participate therein, will pay its Participating Interest
share of Petrolinson's Participating Interest of such costs. After such
carry, the costs and production from the Exploration Wells shall be
shared according to the foregoing Participating Interests; provided,
however, that any right of Petrolinson to recover costs out of the share
of production of Ecopetrol in such Exploration Wells shall be allocated
to the Parties in the proportions that they paid
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the costs of such Exploration Wells. Each of GHK, Cimarrona, Esmeralda,
Sipetrol, and Seven Seas agree to participate in the costs of the second
year well, the El Segundo, through the completing and equipping, or
plugging and abandoning if a dry hole.
(B) The Parties recognize that their Participating Interests are subject
to the rights of Ecopetrol under the Contract, and GHK, Cimarrona,
Esmeralda, Sipetrol and Seven Seas recognize that their Participating
Interests are subject to a 2% reversionary interest under that certain
agreement dated September 11, 1992 as amended October 13, 1994 between
The GHK Company and Jay Namson, Ph.D.
3.2 OWNERSHIP, OBLIGATIONS AND LIABILITIES
(A) Unless otherwise provided in this Agreement, all the rights and
interests in and under the Contract, all Joint Property and any
Hydrocarbons produced from the Contract Area shall, subject to the terms
of the Contract, be owned by the Parties in accordance with their
respective Participating Interests.
(B) Unless otherwise provided in this Agreement, the obligations of the
Parties under the Contract and all liabilities and expenses incurred by
Operator in connection with Joint Operations shall be charged to the
Joint Account and all credits to the Joint Account shall be shared by the
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Parties, as among themselves, in accordance with their respective
Participating Interests.
(C) Unless otherwise provided in this Agreement, all liabilities incurred
by any Party in connection with Joint Operations shall be borne by the
Parties in accordance with their respective Participating Interests.
(D) Each Party shall pay when due, in accordance with the Accounting
Procedure, its Participating Interest share of Joint Account expenses,
including cash advances and interest, accrued pursuant to this Agreement.
The Accounting Procedure shall govern the accrual and satisfaction of the
respective obligations, liabilities and credits among the Parties.
(E) If a Party transfers all or part of its Participating Interest
pursuant to the provisions of this Agreement and the Contract, the
Participating Interests of the Parties shall be revised accordingly.
ARTICLE IV - OPERATOR
4.1 DESIGNATION OF OPERATOR
GHK Company Colombia is designated as Operator, and agrees to act as an
independent contractor in accordance with the terms and conditions of the
Contract and this Agreement, which terms and conditions shall also apply
to any successor Operator.
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4.2 RIGHTS AND DUTIES OF OPERATOR
(A) Subject to the terms and conditions of this Agreement, Operator shall
have all of the rights, functions and duties of Operator under the
Contract and shall have exclusive charge of and shall conduct all Joint
Operations. Operator may employ independent contractors and/or agents in
such Joint Operations.
(B) In the conduct of Joint Operations Operator shall:
(1) Perform Joint Operations in accordance with the provisions of the
Contract, this Agreement and the instructions of the Operating
Committee;
(2) Conduct all Joint Operations in a diligent, safe and efficient
manner in accordance with good and prudent oil field practices and
conservation principles generally followed by the international
petroleum industry under similar circumstances;
(3) Subject to Article 4.6, neither gain a profit nor suffer a loss as
a result of being the Operator in its conduct of Joint Operations;
(4) Perform the duties for the Operating Committee set out in Article
V, and prepare and submit to the Operating Committee the proposed
Work Programs, Budgets and AFEs as provided in Article VI;
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(5) Acquire all permits, consents, approvals, surface or other rights
that may be required for or in connection with the conduct of
Joint Operations;
(6) Permit the representatives of any of the Parties to have at all
reasonable times and at their own risk and expense reasonable
access to the Joint Operations with the right to observe all such
Joint Operations and to inspect all Joint Property and to conduct
financial audits as provided in the Accounting Procedure;
(7) Maintain the Contract in full force and effect. Operator shall
promptly pay and discharge all liabilities and expenses incurred
in connection with Joint Operations and use its reasonable efforts
to keep and maintain the Joint Property free from all liens,
charges and encumbrances arising out of Joint Operations;
(8) Pay to the Government for the Joint Account, within the periods
and in the manner prescribed by the Contract and all applicable
laws and regulations, all periodic payments, royalties, taxes,
fees and other payments pertaining to Joint Operations, but
excluding any taxes measured by the incomes of the Parties;
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(9) Carry out the obligations of Operator pursuant to the Contract,
including, but not limited to, preparing and furnishing such
reports, records and information as may be required pursuant to
the Contract;
(10) Have in accordance with the decisions of the Operating Committee,
the exclusive right and obligation to represent the Parties in all
dealings with the Government with respect to matters arising under
the Contract and Joint Operations. Operator shall notify the other
Parties as soon as possible of such meetings. Non-Operators shall
have the right to attend such meetings but only in the capacity of
observers. Nothing contained in this Agreement shall restrict any
Party from holding discussions with the Government with respect to
any issue peculiar to its particular business interests arising
under this Agreement, but in such event such Party shall promptly
advise the Parties, if possible, before and in any event promptly
after such discussions, provided that such Party shall not be
required to divulge to the Parties any matters discussed to the
extent the same involve proprietary information on matters not
affecting the Parties; and
(11) Take all
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necessary and proper measures for the protection of life, health,
the environment and property in the case of an emergency;
provided, however, that Operator shall immediately notify the
Parties of the details of such emergency and measures.
4.3 EMPLOYEES OF OPERATOR
Subject to the Contract and this Agreement, Operator shall determine the
number of employees, the selection of such employees, the hours of work
and the compensation to be paid all such employees in connection with
Joint Operations.
Operator shall employ only such employees, agents and contractors as are
reasonably necessary to conduct Joint Operations.
4.4 INFORMATION SUPPLIED BY OPERATOR
(A) Operator shall provide Non-Operators the following data and reports
as they are currently produced or compiled from the Joint Operations:
(1) Copies of all electrical logs or surveys;
(2) Daily drilling progress reports;
(3) Copies of all drill stem tests and core analysis reports;
(4) Copies of the plugging reports;
(5) Copies of the final geological and geophysical maps and
reports;
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(6) Engineering studies, development schedules and annual progress
reports on development projects;
(7) Field and well performance reports, including reservoir
studies and reserve estimates;
(8) Copies of all reports relating to Joint Operations furnished
by Operator to the Government, except magnetic tapes which shall
be stored by Operator and made available for inspection and/or
copying at the sole expense of the Non-Operator requesting same;
(9) Other reports as frequently as is justified by the activities
or as instructed by the Operating Committee; and
(10) Subject to Article 15.3, such additional informa tion for
Non-Operators as they or any of them may request, provided that
the requesting Party or Parties pay the costs of preparation of
such information and that the preparation of such information will
not unduly burden Operator's administrative and technical
personnel. Only Non-Operators who pay such costs shall receive
such additional information.
(B) Operator shall give Non-Operators access at all reasonable times to
all other data acquired in the conduct of Joint Operations. Any
Non-Operator may make copies of such other data at its sole expense.
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4.5 SETTLEMENT OF CLAIMS AND LAWSUITS
(A) Operator shall promptly notify the Parties of any and all material
claims or suits and such other claims and suits as the Operating
Committee may direct which arise out of Joint Operations or relate in any
way to Joint Operations. Operator shall represent the Parties and defend
or oppose the claim or suit. Operator may in its sole discretion
compromise or settle any such claim or suit or any related series of
claims or suits for an amount not to exceed the equivalent of U.S.
dollars Twenty Five Thousand (U.S. $25,000) exclusive of legal fees.
Operator shall obtain the approval and direction of the Operating
Committee on amounts in excess of the above stated amount. Each
Non-Operator shall have the right to be represented by its own counsel at
its own expense in the settlement, compromise or defense of such claims
or suits.
(B) Any Non-Operator shall promptly notify the other Parties of any claim
made against such Non-Operator by a third party relating to or which may
affect the Joint Operations and insofar as such claim relates to or
affects the Joint Operations such Non-Operator shall defend or settle the
same in accordance with any directions given by the Operating Committee
and such costs, expenses and damages
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as are payable pursuant to such defense or settlement shall be for the
Joint Account.
(C) Notwithstanding Article 4.5(A) and Article 4.5(B), each Party shall
have the right to participate in any such pursuit, prosecution, defense
or settlement conducted in accordance with Article 4.5(A) and Article
4.5(B) at its sole cost and expense; provided always that no Party may
settle its Participating Interest share of any claim without first
satisfying the Operating Committee that it can do so without prejudicing
the interests of the Joint Operations.
4.6 LIABILITY OF OPERATOR
(A) Except as set out in this Article 4.6, the Party designated as
Operator shall bear no cost, expense or liability resulting from
performing the duties and functions of the Operator. Nothing in this
Article shall, however, be deemed to relieve the Party designated as
Operator from any cost, expense or liability for its Participating
Interest share of Joint Operations.
(B) The Parties shall be liable in proportion to their Participating
Interests and shall defend and indemnify Operator and its consultants,
agents, employees, officers and directors (the "Indemnitees") from any
and all costs, expenses (including reasonable attorneys' fees) and
liabilities incident to claims, demands or causes of action
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of every kind and character brought by or on behalf of any person or
entity for damage to or loss of property or the environment, or for
injury to, illness or death of any person or entity, which damage, loss,
injury, illness or death arises out of or is incident to any act or
failure to act by Indemnitees in the conduct of or in connection with
Joint Operations regardless of the cause of such damage, loss, injury,
illness or death and EVEN THOUGH CAUSED IN WHOLE OR IN PART BY A
PRE-EXISTING DEFECT, THE NEGLIGENCE (WHETHER SOLE, JOINT OR CONCURRENT),
GROSS NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL FAULT OF OPERATOR (OR
ANY SUCH AFFILIATE); provided that if any Senior Supervisory Personnel of
Operator, engage in Gross Negligence that proximately causes the Parties
to incur cost, expense or liability for such damage, loss, injury,
illness or death, then Operator shall bear all such costs, expenses and
liabilities.
(C) Notwithstanding the foregoing under no circumstances shall any
Indemnitee (except as a Party to the extent of its Participating
Interest) bear any cost, expense or liability for environmental,
consequential, punitive or any other similar indirect damages or losses,
including but not limited to those arising from business interruption,
reservoir or formation damage, inability to produce
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hydrocarbons, loss of profits, pollution control and environmental
amelioration or rehabilitation.
4.7 INSURANCE OBTAINED BY OPERATOR
(A) Operator shall procure and maintain or cause to be procured and
maintained for the Joint Account all insurance in the types and amounts
required by the Contract and applicable laws, rules and regulations.
Operator shall give non-Operators notice of the insurances required to
give them the opportunity to use their own policies, if possible.
(B) Operator shall obtain such further insurance, at competitive rates,
as the Operating Committee may from time to time require.
(C) Any Party may elect not to participate in the insurance to be
procured under Article 4.7(B) provided such Party:
(1) gives prompt written notice to that effect to Operator;
(2) does nothing which may interfere with Operator's negotiations
for such insurance for the other Parties; and
(3) obtains and maintains such insurance (in respect of which an
annual certificate of adequate coverage from a reputable insurance
broker shall be sufficient evidence) or other evidence of
financial responsibility
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which fully covers its Participating Interest share of the risks
that would be covered by the insurance procured under Article 4.7
(B), and which the Operating Committee may determine to be
acceptable. No such determination of acceptability shall in any
way absolve a non-participating Party from its obligation to meet
each cash call including any cash call in respect of damages and
losses and/or the costs of remedying the same in accordance with
the terms of this Agreement. If such Party obtains other
insurance, such insurance shall contain a waiver of subrogation in
favor of all the other Parties and the Operator, but only in
respect of their interests under this Agreement.
(D) The cost of insurance in which all the Parties are participating
shall be for the Joint Account and the cost of insurance in which less
than all the Parties are participating shall be charged to the Parties
participating in proportion to their respective Participating Interests.
(E) Operator shall, in respect of all insurance obtained pursuant to this
Article:
(1) promptly inform the participating Parties when such insurance
is obtained and supply them with copies of the relevant policies
when the same are issued;
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(2) arrange for the participating Parties, according to their
respective Participating Interests, to be named as co-insureds on
the relevant policies with waivers of subrogation in favor of all
the Parties; and
(3) duly file all claims and take all necessary and proper steps
to collect any proceeds and credit any proceeds to the
participating Parties in proportion to their respective
Participating Interests.
(F) Operator shall use its reasonable efforts to require all contractors
performing work in respect of Joint Operations to obtain and maintain any
and all insurance in the types and amounts required by any applicable
laws, rules and regulations or any decision of the Operating Committee
and shall use its reasonable efforts to require all such contractors to
name the Parties as additional insureds on contractor's insurance
policies or to obtain from their insurers waivers of all rights or
recourse against Operator and Non-Operators.
4.8 COMMINGLING OF FUNDS
Operator may not commingle with its own funds the monies which it
receives from or for the Joint Account pursuant to this Agreement.
4.9 RESIGNATION OF OPERATOR
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Subject to Article 4.11, Operator may resign as Operator at any time by
so notifying the other Parties at least one hundred and twenty (120) Days
prior to the effective date of such resignation.
4.10 REMOVAL OF OPERATOR
(A) Subject to Article 4.11, Operator shall be removed upon receipt of
notice from any Non-Operator if:
(1) An order is made by a court or an effective resolution is
passed for the dissolution, liquidation, winding up, or
reorganization of Operator;
(2) Operator dissolves, liquidates or terminates its corporate
existence;
(3) Operator becomes insolvent, bankrupt or makes an assignment
for the benefit of creditors; or
(4) A receiver is appointed for a substantial part of Operator's
assets.
(B) Subject to Article 4.11, Operator may be removed by the decision of
the Non-Operators if Operator has committed a material breach of this
Agreement which Operator has failed to commence to rectify within thirty
(30) Days of receipt of a notice from Non-Operators detailing the alleged
breach. Any decision of Non-Operators to give notice of breach to
Operator or to remove Operator under this Article 4.10(B) shall be made
by an affirmative vote of two or more non-
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operators holding a combined 75% of the total Participating Interest
held by the non-operators.
(C) If Operator together with any Affiliate of Operator is or becomes the
holder of a Participating Interest of less than five percent (5%), then
Operator shall be required to promptly notify the other Parties. The
Operating Committee shall then vote within thirty (30) Days of such
notification on whether or not a successor Operator should be named
pursuant to Article 4.11.
(D) If there is a direct or indirect change in control of Operator (other
than a transfer of control to an Affiliate of Operator), Operator shall
be required to promptly notify the other Parties. The Operating Committee
shall vote within thirty (30) Days of such notification on whether or not
a successor Operator should be named pursuant to Article 4.11. For
purposes of this Article, control means the ownership directly or
indirectly of fifty percent (50%) or more of the shares or voting rights
of Operator.
4.11 APPOINTMENT OF SUCCESSOR
When a change of Operator occurs pursuant to Article 4.9 or Article 4.10:
(A) The Operating Committee shall meet as soon as possible to appoint a
successor Operator pursuant to the voting
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procedure of Article 5.9. However, no Party may be appointed successor
Operator against its will.
(B) If the Operator disputes commission of or failure to rectify a
material breach alleged pursuant to Article 4.10(B) and proceedings are
initiated pursuant to Article XVIII, no successor Operator may be
appointed pending the conclusion or abandonment of such proceedings,*
(C) If an Operator is removed, other than in the case of Article 4.10(C)
or Article 4.10(D), neither Operator nor any Affiliate of Operator shall
have the right to vote for itself on the appointment of a successor
Operator, nor be considered as a candidate for the successor Operator.
(D) A resigning or removed Operator shall be compensated out of the Joint
Account for its reasonable expenses directly related to its resignation
or removal, except in the case of Article 4.10(B).
(E) The Operating Committee shall arrange for the taking of an
independent inventory of all Joint Property and Hydrocarbons, and an
audit of the books and records of the removed Operator. Such inventory
and audit shall be completed, if possible, no later than the effective
date of the change of Operator. The liabilities and expenses of such
inventory and audit shall be charged to the Joint Account.
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(F) The resignation or removal of Operator and its replacement by the
successor Operator shall not become effective prior to receipt of any
necessary governmental approvals.
(G) Upon the effective date of the resignation or removal, the successor
Operator shall succeed to all duties, rights and authority prescribed for
Operator. The former Operator shall transfer to the successor Operator
custody of all Joint Property, books of account, records and other
documents maintained by Operator pertaining to the Contract Area and to
Joint Operations. Upon delivery of the above-described property and data,
the former Operator shall be released and discharged from all obligations
and liabilities as Operator accruing after such date.
ARTICLE V - OPERATING COMMITTEE
5.1 ESTABLISHMENT OF OPERATING COMMITTEE
To provide for the overall supervision and direction of Joint Operations,
there is established an Operating Committee composed of representatives
of each Party holding a Participating Interest. Each Party shall appoint
one (1) representative and one (1) alternate representative to serve on
the Operating Committee. Each Party shall as soon as possible after the
date of this Agreement give notice in writing to the other Parties of the
name and address of its
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representative and alternate representative to serve on the Operating
Committee. Each Party shall have the right to change its representative
and alternate at any time by giving proper notice to such effect to the
other Parties.
5.2 POWERS AND DUTIES OF OPERATING COMMITTEE
The Operating Committee shall have power and duty to authorize and
supervise Joint Operations that are necessary or desirable to fulfill the
Contract and properly explore and exploit the Contract Area in accordance
with this Agreement and in a manner appropriate in the circumstances.
5.3 AUTHORITY TO VOTE
The representative of a Party, or in his absence his alternate
representative, shall be authorized to represent and bind such Party with
respect to any matter which is within the powers of the Operating
Committee and is properly brought before the Operating Committee. Each
such representative shall have a vote equal to the Participating Interest
of the Party such person represents; provided that with respect to any
operation in which Petrolinson is carried pursuant to Article 3.1, each
Party shall have a vote equal to its share of costs in the operation.
Each alternate representative shall be entitled to attend all
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Operating Committee meetings but shall have no vote at such meetings
except in the absence of the representative for whom he is the alternate.
In addition to the representative and alternate representative, each
Party may also bring to any Operating Committee meetings such technical
and other advisors as it may deem appropriate.
5.4 SUBCOMMITTEES
The Operating Committee may establish such subcommittees, including
technical subcommittees, as the Operating Committee may deem appropriate.
The functions of such subcommittees shall be in an advisory capacity or
as otherwise determined unanimously by the Parties.
5.5 NOTICE OF MEETING
(A) Operator may call a meeting of the Operating Committee by giving
notice to the Parties at least fifteen (15) Days in advance of such
meeting.
(B) Any Non-Operator may request a meeting of the Operating Committee by
giving proper notice to all the other Parties. Upon receiving such
request, Operator shall call such meeting for a date not less than
fifteen (15) Days nor more than twenty (20) Days after receipt of the
request.
(C) The notice periods above may only be waived with the unanimous
consent of all the Parties.
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5.6 CONTENTS OF MEETING NOTICE
(A) Each notice of a meeting of the Operating Committee as provided by
Operator shall contain:
(1) The date, time and location of the meeting; and
(2) An agenda of the matters and proposals to be considered and/or
voted upon.
(B) A Party, by notice to the other Parties given not less than seven (7)
Days prior to a meeting, may add additional matters to the agenda for a
meeting.
(C) On the request of a Party, and with the unanimous consent of all
Parties, the Operating Committee may consider at a meeting a proposal not
contained in such meeting agenda.
5.7 LOCATION OF MEETINGS
All meetings of the Operating Committee shall be held in Oklahoma City,
Oklahoma U.S.A, or elsewhere as may be decided by the Operating
Committee.
5.8 OPERATOR'S DUTIES FOR MEETINGS
(A) With respect to meetings of the Operating Committee and any
Subcommittee, Operator's duties shall include, but not be limited to:
(1) Timely preparation and distribution of the agenda;
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(2) Organization and conduct of the meeting; and (3) Preparation
of a written record or minutes of each meeting.
(B) Operator shall have the right to appoint the chairman of the
Operating Committee and all subcommittees.
5.9 VOTING PROCEDURE
Except as otherwise expressly provided in this Agreement, all decisions,
approvals and other actions of the Operating Committee on all proposals
coming before it under this Agreement shall be decided by the affirmative
vote of two (2) or more Parties, which are not Affiliates, then having
collectively at least seventy-five percent (75%) of the Participating
Interests.
5.10 RECORD OF VOTES
The chairman of the Operating Committee shall appoint a secretary who
shall make a record of each proposal voted on and the results of such
voting at each Operating Committee meeting. Each representative shall
sign and be provided a copy of such record at the end of such meeting and
it shall be considered the final record of the decisions of the Operating
Committee.
5.11 MINUTES
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The secretary shall provide each Party with a copy of the minutes of the
Operating Committee meeting within fifteen (15) Days after the end of the
meeting. Each Party shall have fifteen (15) Days after receipt of such
minutes to give notice of its objections to the minutes to the secretary.
A failure to give notice specifying objection to such minutes within said
fifteen (15) Day period shall be deemed to be approval of such minutes.
In any event, the votes recorded under Article 5.10 shall take precedence
over the minutes described above.
5.12 VOTING BY NOTICE
(A) In lieu of a meeting, Operator may submit any proposal for a decision
of the Operating Committee by giving each representative proper notice
describing the proposal so submitted. Each Party shall communicate its
vote by proper notice to Operator and the other Parties within one of the
following appropriate time periods after receipt of Operator's notice:
(1) Forty-eight (48) hours in the case of operations which involve
the use of a drilling rig that is standing by in the Contract
Area.
(2) Fifteen (15) Days in the case of all other proposals.
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(3) Fifteen (15) Days in the case of an AFE or supplemental AFE if
submitted for approval pursuant to Article 6.6(A).
(B) Except in the case of Article 5.12(A)(1), any Non- Operator may by
notice delivered to all Parties within five (5) Days of receipt of
Operator's notice request that the proposal be decided at a meeting
rather than by notice. In such an event, that proposal shall be decided
at a meeting duly called for that purpose. (C) Except as provided in
Article X, any Party failing to communicate its vote in a timely manner
shall be deemed to have voted against such proposal. (D) If a meeting is
not requested, then at the expiration of the appropriate time period,
Operator shall give each Party a confirmation notice stating the
tabulation and results of the vote.
5.13 EFFECT OF VOTE
All decisions taken by the Operating Committee pursuant to this Article,
shall be conclusive and binding on all the Parties, except that: (A) If
pursuant to this Article, a Joint Operation, other than an operation to
fulfill the Minimum Work Obligations,
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has been properly proposed to the Operating Committee and the Operating
Committee has not approved such proposal in a timely manner, then any
Party shall have the right for the appropriate period specified below to
propose in accordance with Article VII, an Exclusive Operation involving
operations essentially the same as those proposed for such Joint
Operation.
(1) For proposals involving the use of a drilling rig that is
standing by in the Contract Area, such right shall be exercisable
for twenty-four (24) hours after the time specified in Article
5.12(A)(1) has expired.
(2) For proposals to develop a Discovery, such right shall be
exercisable for ten (10) Days after the date the Operating
Committee was required to consider such proposal pursuant to
Article 5.6 or Article 5.12;
(3) For all other proposals, such right shall be exercisable for
five (5) Days after the date the Operating Committee was required
to consider such proposal pursuant to Article 5.6 or Article 5.12.
(B) If a Party voted against any proposal which was approved by the
Operating Committee and which could be conducted as an Exclusive
Operation pursuant to Article VII other than any proposal relating to
Minimum Work Obligations, then such Party shall have the right not to
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participate in the operation contemplated by such approval. Any such
Party wishing to exercise its right of non-consent must give notice of
non-consent to all other Parties within five (5) Days (or within
twenty-four (24) hours if the drilling rig to be used in such operation
is standing by in the Contract Area) following Operating Committee
approval of such proposal. The Parties that were not entitled to give or
did not give notice of non-consent shall be Consenting Parties as to the
operation contemplated by the Operating Committee approval, and shall
conduct such operation as an Exclusive Operation under Article VII. Any
Party that gave notice of non-consent shall be a Non-Consenting Party as
to such Exclusive Operation.
(C) If the Consenting Parties to an Exclusive Operation under Article
5.13(A) or Article 5.13(B) concur, then the Operating Committee may, at
any time, pursuant to this Article, reconsider and approve, decide or
take action on any proposal that the Operating Committee declined to
approve earlier, or modify or revoke an earlier approval, decision or
action.
(D) Once a Joint Operation for the drilling, Deepening, Testing,
Sidetracking, Plugging Back, Completing, Recompleting, Reworking or
plugging of a well, has been approved and commenced, such operation shall
not be
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discontinued without the consent of the Operating Committee; provided,
however, that such operation may be discontinued, if:
(1) an impenetrable substance or other condition in the hole is
encountered which in the reasonable judgment of Operator causes
the continuation of such operation to be impractical; or
(2) other circumstances occur which in the reasonable judgment of
Operator causes the continuation of such operation to be
unwarranted and after notice the Operating Committee within the
period required under Article 5.12(A)(1) approves discontinuing
such operation.
On the occurrence of either of the above, Operator shall promptly notify
the Parties that such operation is being discontinued pursuant to the
foregoing, and any Party shall have the right to propose in accordance
with Article VII an Exclusive Operation to continue such operation.
ARTICLE VI - WORK PROGRAMS AND BUDGETS
6.1 EXPLORATION AND APPRAISAL
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(A) The Parties recognize that they have previously approved the Work
Program and Budget for the initial Contract Year, which includes the
first two wells under the Contract as the Minimum Work Obligations for
such Year. Each Party agrees to pay its share of such wells as set forth
in Article 3.1(A). The provisions of Articles 6.1(B) shall govern Work
Programs and Budgets for the second and subsequent Contract Years.
(B) On or before the first day of the fourth month of each Contract Year,
Operator shall deliver to the Parties a proposed Work Program and Budget
detailing the Joint Operations to be performed in the Contract Area for
the such Contract Year. Within forty-five (45) Days of such delivery, the
Operating Committee shall meet to consider and to endeavor to agree on a
Work Program and Budget.
(C) If a Discovery is made, Operator shall deliver any notice of
Discovery required under the Contract and shall as soon as possible
submit to the Parties a report containing available details concerning
the Discovery and Operator's recommendation as to whether the Discovery
merits appraisal.
If the Operating Committee determines that the Discovery merits
appraisal, Operator within sixty (60) Days, shall deliver to the Parties
a proposed Work Program and Budget for the appraisal of the Discovery.
Within thirty (30) Days
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of such delivery, or earlier if necessary to meet any applicable deadline
under the Contract, the Operating Committee shall meet to consider,
modify and then either approve or reject the appraisal Work Program and
Budget. If the appraisal Work Program and Budget is approved by the
Operating Committee, Operator shall take such steps as may be required
under the Contract to secure approval of the appraisal Work Program and
Budget by the Government and Government Oil Company. In the event the
Government or the Government Oil Company requires changes in the
appraisal Work Program and Budget, the matter shall be resubmitted to the
Operating Committee for further consideration.
(D) Each Party hereby agrees to a Work Program and Budget to the extent
that it includes the Minimum Work Obligations, required by the Contract
to be carried out during the Contract Year in question. If within the
time periods prescribed in this Article the Operating Committee is unable
to agree on other items included in Work Program and Budget, Operator
shall take such actions, but only such actions for the Joint Account as
are necessary to maintain the Contract in full force and effect,
including the commencement of a Work Program and Budget to fulfill the
Minimum Work Obligations required for the given Contract Year.
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(E) Subject to Article 6.7, approval of any such Work Program and Budget,
which includes:
(1) an Exploration Well, whether by drilling, Deepening or
Sidetracking, shall include approval for all expenditures
necessary for drilling, Testing and Completing such Exploration
Well.
(2) an Appraisal Well, whether by drilling, Deepening or
Sidetracking, shall include approval for all expenditures
necessary for drilling, Testing and Completing such Appraisal
Well.
(F) Any Party desiring to propose a Completion attempt, or an alternative
Completion attempt, must do so within the time period provided in Article
5.12(A)(1) by notifying all other Parties. Any such proposal shall
include an AFE for such Completion Costs.
6.2 DEVELOPMENT
(A) If the Operating Committee determines that a Discovery may be
commercial, the Operator shall, as soon as practicable, deliver to the
Parties a Development Plan together with the first annual Work Program
and Budget and provisional Work Programs and Budgets for the remainder of
the development of the Discovery, which shall contain, inter alia:
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(1) Details of the proposed work to be undertaken, personnel
required and expenditures to be incurred, including the timing of
same, on a Contract Year basis;
(2) An estimated date for the commencement of production;
(3) A delineation of the proposed Exploitation Area; and
(4) Any other information requested by the Operating Committee.
(B) After receipt of the Development Plan, or earlier if necessary to
meet any applicable deadline under the Contract, the Operating Committee
shall meet to consider, modify and then either approve or reject the
Development Plan and the first annual Work Program and Budget for the
development submitted by Operator. If the Development Plan is approved by
the Operating Committee, Operator shall, as soon as possible, deliver any
notice of Commercial Discovery required under the Contract and take such
other steps as may be required under the Contract to secure approval of
the Development Plan by the Government and Government Oil Company. In the
event the Government or Government Oil Company requires changes in the
Development Plan, the matter shall be resubmitted to the Operating
Committee for further consideration.
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(C) If the Development Plan is approved, such work shall be incorporated
into and form part of annual Work Programs and Budgets, and Operator
shall, on or before the first Day of the fourth month of each Contract
Year submit a Work Program and Budget for the Exploitation Area, for the
such Contract Year. Within forty-five (45) Days after such submittal, the
Operating Committee shall endeavor to agree to such Work Program and
Budget, including any necessary or appropriate revisions to the Work
Program and Budget for the approved Development Plan.
6.3 PRODUCTION
On or before the first Day of tenth month of each Contract Year, Operator
shall deliver to the Parties a proposed production Work Program and
Budget detailing the Joint Operations to be performed in the Exploitation
Area and the projected production schedule for the following Contract
Year. Within forty-five (45) Days of such delivery, the Operating
Committee shall agree upon a production Work Program and Budget.
6.4 ITEMIZATION OF EXPENDITURES
(A) During the preparation of the proposed Work Programs and Budgets and
Development Plans contemplated in this Article, Operator shall consult
with the Operating Committee
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regarding the contents of such Work Programs and Budgets and Development
Plans.
(B) Each Work Program and Budget and Development Plan submitted by
Operator shall contain an itemized estimate of the costs of Joint
Operations and all other expenditures to be made for the Joint Account
during the Contract Year in question.
(C) The Work Program and Budget shall designate the portion or portions
of the Contract Area in which Joint Operations itemized in such Work
Program and Budget are to be conducted and shall specify the kind and
extent of such operations in such detail as the Operating Committee may
deem suitable.
6.5 CONTRACT AWARDS
Operator shall award each contract for approved Joint Operations on the
following basis (the amounts stated are in thousands of U.S. dollars):
PROCEDURE A PROCEDURE B PROCEDURE C
----------- ----------- -----------
Exploration
and Appraisal $200,000 to
Operations (less than)$200,000 $500,000 (greater than)$500,000
Development $200,000 to
Operations (less than)$200,000 $500,000 (greater than)$500,000
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Production $200,000 to
Operations (less than)$200,000 $500,000 (greater than)$500,000
PROCEDURE A
(A) Operator shall award the contract to the best qualified contractor as
determined by cost and ability to perform the contract without the
obligation to tender and without informing or seeking the approval of the
Operating Committee, except that before entering into contracts with
Affiliates of the Operator exceeding U.S. dollars Fifty Thousand (U.S.
$50,000), Operator shall obtain the approval of the Operating Committee.
PROCEDURE B
(B) Operator shall:
(1) Provide the Parties with a list of the entities whom Operator
proposes to invite to tender for the said contract;
(2) Add to such list any entity whom a Party requests to be added
within fourteen (14) Days of receipt of such list;
(3) Complete the tendering process within a reasonable period of
time;
(4) Inform the Parties of the entities to whom the contract has
been awarded, provided that before
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awarding contracts to Affiliates of the Operator which exceed U.S.
dollars (U.S.$50,000), Operator shall obtain the approval of the
Operating Committee;
(5) Circulate to the Parties a competitive bid analysis stating
the reasons for the choice made; and
(6) Upon the request of a Party, provide such Party with a copy of
the final version of the contract awarded.
PROCEDURE C
(C) Operator shall:
(1) Provide the Parties with a list of the entities whom Operator
proposes to invite to tender for the said contract;
(2) Add to such list any entity whom a Party requests to be added
within fourteen (14) Days of receipt of such list;
(3) Prepare and dispatch the tender documents to the entities on
the list as aforesaid and to Non-Operators;
(4) After the expiration of the period allowed for tendering,
consider and analyze the details of all bids received;
(5) Prepare and circulate to the Parties a competitive bid
analysis, stating Operator's recommendation as to the entity to
whom the contract should be awarded, the
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reasons therefor, and the technical, commercial and contractual
terms to be agreed upon;
(6) Obtain the approval of the Operating Committee to the
recommended bid; and
(7) Upon the request of a Party, provide such Party with a copy of
the final version of the contract.
6.6 AUTHORIZATION FOR EXPENDITURE ("AFE") PROCEDURE
(A) Prior to incurring any commitment or expenditure, which is estimated
to be:
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(1) In excess of U.S. dollars fifty thousand (U.S. $50,000) in an
exploration or appraisal Work Program and Budget;
(2) In excess of U.S. dollars fifty thousand (U.S. $50,000) in a
development Work Program and Budget; and
(3) In excess of U.S. dollars fifty thousand (U.S. $50,000) in a
production Work Program and Budget. Operator shall send to each
Non-Operator an AFE containing Operator's best estimate of the total
funds required to carry out such work; the estimated timing of
expenditures, and any other necessary supportive information. These AFEs
shall be for informational purposes only and Operator shall not be
required to obtain approval for such AFE prior to commencement of work.
(B) Prior to incurring any commitment or expenditure estimated to be in
excess of $200,000 in an approved Work Program and Budget, Operator shall
send to each Non-Operator and AFE containing the same information as
established in (A). Operator shall obtain the Operating Committee
approval to such AFE prior to incurring commitment of expenditure. Any
Party voting to disapprove an AFE issued in furtherance of an approved
Work Program and Budget shall demonstrate that such disapproval is duly
justified and shall state the reasons for such disapproval.
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(C) Prior to incurring any commitment or expenditure which is not
contained in an approved Work Program and Budget, Operator shall send to
each Non-Operator an AFE containing the same information as established
in (A) and shall obtain the Parties' approval regardless the amount of
such AFE.
(D) The restrictions contained in this Article shall be without prejudice
to Operator's rights to make expenditures as set out in Article
4.2(B)(11) and Article 13.5.
6.7 OVEREXPENDITURES OF WORK PROGRAMS AND BUDGETS
(A) For expenditures on any line item of an approved Work Program and
Budget, Operator shall be entitled to incur without furnishing a
supplemental AFE an overexpenditure for such line item up to ten percent
(10%) of the authorized amount for such line item; provided that
cumulative total of all overexpenditures for a Contract Year shall not
exceed ten percent (10%) of the total Work Program and Budget in
question.
(B) At such time that Operator is certain that the limits of Article
6.7(A) will be exceeded, Operator shall furnish a supplemental AFE for
the estimated overexpenditures to the Operating Committee for its
approval and shall provide the Parties with full details of such
overexpenditures. Operator shall promptly give notice of the amounts of
overexpenditures when actually incurred.
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ARTICLE VII - OPERATIONS BY LESS THAN ALL PARTIES
7.1 LIMITATION ON APPLICABILITY
(A) No operations may be conducted in furtherance of the Contract except
as Joint Operations under Article V, or as Exclusive Operations under
this Article. No Exclusive Operation shall be conducted which conflicts
with a Joint Operation.
(B) Operations which are required to fulfill the Minimum Work Obligations
must be proposed and conducted as Joint Operations under Article V, and
may not be proposed or conducted as Exclusive Operations under this
Article.
(C) No Party may propose or conduct an Exclusive Operation under this
Article, unless and until such Party has properly exercised its right to
propose an Exclusive Operation pursuant to Article 5.13, or is entitled
to conduct an Exclusive Operation pursuant to Article X.
(D) Subject to this Article, any operation that may be proposed and
conducted as a Joint Operation, other than operations pursuant to an
approved Development Plan, may be proposed and conducted as an Exclusive
Operation.
7.2 PROCEDURE TO PROPOSE EXCLUSIVE OPERATIONS
(A) Subject to Articles V and 7.1, if any Party proposes to conduct an
Exclusive Operation, such Party shall give notice
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of the proposed operation to all other Parties entitled to propose such
operation. Such notice shall specify that such operation is proposed as
an Exclusive Operation, the work to be performed, the location, the
objectives, and estimated cost of such operation.
(B) Any Party entitled to receive such notice shall have the right to
participate in the proposed operation.
(1) For proposals to Deepen, Test, Complete, Sidetrack, Plug Back,
Recomplete or Rework involving the use of a drilling rig that is
standing by in the Contract Area, any such Party wishing to
exercise such right must so notify Operator within forty-eight
(48) hours after receipt of the notice proposing the Exclusive
Operation.
(2) For proposals to develop a Discovery, any Party wishing to
exercise such right must so notify the Party proposing to develop
within fifteen (15) Days after receipt of the notice proposing the
Exclusive Operation.
(3) For all other proposals, any such Party wishing to exercise
such right must so notify Operator within ten (10) Days after
receipt of the notice proposing the Exclusive Operation;
(C) Failure of a Party to whom a proposal notice is delivered to properly
reply within the period specified
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above shall constitute an election by that Party not to participate in
the proposed operation.
(D) If all Parties properly exercise their rights to participate, then
the proposed operation shall be conducted as a Joint Operation. The
Operator shall commence such Joint Operation as promptly as practicable
and conduct it with due diligence.
(E) If less than all Parties entitled to receive such proposal notice
properly exercise their rights to participate, then:
(1) The Party proposing the Exclusive Operation, together with any
other Consenting Parties, shall have the right exercisable for the
applicable notice period set out in Article 7.2(B), to instruct
Operator (subject to Article 7.9(G)) to conduct the Exclusive
Operation.
(2) If the Exclusive Operation is conducted, the Consenting
Parties shall bear the sole liability and expense of such
Exclusive Operation in a fraction, the numerator of which is such
Consenting Party's Participating Interest as stated in Article 3.1
and the denominator of which is the aggregate of the Participating
Interests of the Consenting Parties as stated in Article 3.1, or
in such other proportion totaling one hundred percent (100%) of
such liability
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and expense as the Consenting Parties may agree; provided that,
for operations during the Exploration Period for which Petrolinson
is carried pursuant to Article 3.1(A), the interest of each Party
other than Petrolinson shall be increased as provided in that
Article.
(3) If work in the field on such Exclusive Operation has not been
commenced within ninety (90) Days (excluding any extension
specifically agreed by all Parties or allowed by the force majeure
provisions of Article XVI), the right to conduct such Exclusive
Operation shall terminate. If any Party still desires to conduct
such Exclusive Operation, written notice proposing such operation
must be resubmitted to the Parties in accordance with Article V,
as if no proposal to conduct an Exclusive Operation had been
previously made.
7.3 RESPONSIBILITY FOR EXCLUSIVE OPERATIONS
(A) The Consenting Parties shall bear in accordance with the
Participating Interests agreed under Article 7.2(E) the entire cost and
liability of conducting an Exclusive Operation and shall indemnify the
Non-Consenting Parties from any and all costs and liabilities incurred
incident to such Exclusive Operation (including but not limited to all
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costs, expenses or liabilities for environmental, consequential, punitive
or any other similar indirect damages or losses arising from business
interruption, reservoir or formation damage, inability to produce
petroleum, loss of profits, pollution control and environmental
amelioration or rehabilitation) and shall keep the Contract Area free and
clear of all liens and encumbrances of every kind created by or arising
from such Exclusive Operation.
(B) Notwithstanding Article 7.3(A), each Party shall continue to bear its
Participating Interest share of the cost and liability incident to the
operations in which it participated, including but not limited to
plugging and abandoning and restoring the surface location, but only to
the extent those costs were not increased by the Exclusive Operation.
7.4 CONSEQUENCES OF EXCLUSIVE OPERATIONS
(A) With regard to any Exclusive Operation, for so long as a
Non-Consenting Party has the option to reinstate the rights it
relinquished under Article 7.4(B) below, such NonConsenting Party shall
be entitled to have access concurrently with the Consenting Parties, to
all data and other information relating to such Exclusive Operation,
other than G & G Data obtained in an Exclusive Operation.
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If a Non-Consenting Party desires to receive and acquire the right to use
such G & G Data, then such Non-Consenting Party shall have the right to
do so by paying to the Consenting Parties its Participating Interest
share as set out in Article 3.1(A) of the cost incurred in obtaining such
G & G Data.
(B) With regard to any Exclusive Operation and subject to Article 7.4(C)
and Article 7.8, below, each Non-Consenting Party shall be deemed to have
relinquished to the Consenting Parties, and the Consenting Parties shall
be deemed to own, in proportion to their respective Participating
Interests in the Exclusive Operation:
(1) All of each such Non-Consenting Party's right to participate
in further operations to Appraise or Develop any Discovery made in
the course of such Exclusive Operation; and
(2) All of each such Non-Consenting Party's right pursuant to the
Contract to take and dispose of Hydrocarbons produced and saved:
(a) From the well in which such Exclusive Operation was
conducted, and
(b) From any wells drilled to Appraise or Develop a
Discovery.
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(C) A Non-Consenting Party shall have the option to reinstate the rights
it relinquished pursuant to Article 7.4(B) after satisfying the In Kind
Penalty as set out in Article 7.5(A).
7.5 IN-KIND PENALTY
(A) The In Kind Penalty shall be the right to own, take in kind and
separately dispose of Hydrocarbons produced out of all of the
Non-Consenting Party's Entitlement to future production (including the
right to recoup costs out of Ecopetrol's share, as provided in the
Contract and, where applicable under the Contract, gas) from the
Exploitation Area for the Discovery in which the Non-Consenting Party
desires to reinstate the rights it relinquished pursuant to Article
7.4(B) until the In Kind Penalty has been satisfied. In Kind Penalty
shall equal a total of:
(1) Two Hundred percent (200%) of such Non-Consenting Party's
Participating Interest share of all liabilities and expenses,
including overhead, that were incurred in any Exclusive Operations
relating to the obtaining of the portion of the G & G Data which
pertains to the Discovery, and that were not previously paid by
such Non-Consenting Party; plus
(2) Five Hundred percent (500%) of such Non-Consenting Party's
Participating Interest share of all liabilities
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and expenses, including overhead, that were incurred in any
Exclusive Operations relating to the drilling, Deepening, Testing,
Completing, Sidetracking, Plugging Back, Recompleting and
Reworking of the Exploration Well which made the Discovery in
which the Non-Consenting Party desires to reinstate the rights it
relinquished pursuant to Article 7.4(B), and that were not
previously paid by such Non-Consenting Party; plus
(3) Three Hundred percent (300%) of the Non-Consenting Party's
Participating Interest share of all liabilities and expenses,
including overhead, that were incurred in any Exclusive Operations
relating to the drilling, Deepening, Testing, Completing,
Sidetracking, Plugging Back, Recompleting and Reworking of the
Appraisal or Development Well(s) which Appraised or Developed
delineated the Discovery in which the Non-Consenting Party desires
to reinstate the rights it relinquished pursuant to Article
7.4(B), and that were not previously paid by such Non-Consenting
Party.
(4) One Hundred percent (100%) of the cost of surface equipment
not covered above, including, but not limited to, pipelines and
(5) One Hundred percent (100%) of the cost of operating the
foregoing wells and equipment.
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(B) The In Kind Penalty shall be deemed fully satisfied when the proceeds
(less taxes measured by production, royalties and other burdens on
production) of the sale of Hydrocarbons received by the Consenting
Parties as equals the sum of the In Kind Penalty calculated in U.S.
dollars pursuant to Articles 7.5(A) and (C)). After such satisfaction the
Consenting Parties' right to such In Kind Penalty shall terminate, and
such Non-Consenting Party shall own, take and dispose of its Entitlement
from such Exploitation Area. Production from other fields in the Contract
Area, outside such Exploitation Area shall not be used to satisfy the In
Kind Penalty. Any obligation of the Non-Consenting Party to satisfy the
In Kind Penalty shall terminate with the cessation of production from the
Exploitation Area (or well, as the case may be) which the In Kind Penalty
encumbers.
(C) Within ninety (90) Days after the Completion of any Exclusive
Operation, the Operator shall furnish to each NonConsenting Party that
has granted an In Kind Penalty in respect of such Exclusive Operation an
inventory of the equipment in and connected to the well, and an itemized
statement of the cost of such Exclusive Operation, including equipping
the well for production. Each Calendar Quarter during the period of
satisfying an In Kind Penalty, Operator
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shall furnish to the Non-Consenting Parties that have granted such In
Kind Penalty an itemized statement of all costs and liabilities incurred
in the Exclusive Operation(s), establishing the value of such In Kind
Penalty together with a statement of the quantity of Hydrocarbons
produced to satisfy such In Kind Penalty and the amount of proceeds
realized from the sale of such production during the preceding Calendar
Quarter.
(D) In determining the quantity of Hydrocarbons produced for purposes of
the In Kind Penalty, the Consenting Parties shall use industry accepted
methods such as but not limited to metering or periodic well tests.
(E) During the period of time Consenting Parties are entitled to an In
Kind Penalty, such Consenting Parties shall be responsible for the
payment of all royalties, charges, taxes, and all other burdens
established by the Contract directly related to such In Kind Penalty.
(F) Any amount realized from the sale or other disposition of equipment,
which was acquired in connection with an Exclusive Operation, shall be
credited against the satisfaction of the In Kind Penalty.
(G) On satisfaction of the In Kind Penalty, the right of such
Non-Consenting Party to own, take in kind and separately dispose of its
Entitlement granted under Article
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7.5(C), shall be reinstated automatically as of 7:00 a.m. on the Day
following the Day on which such satisfaction occurs.
7.6 ORDER OF PREFERENCE OF OPERATIONS
(A) Except as otherwise specifically provided in this Agreement, if any
Party desires to propose the conduct of an operation that will conflict
with an existing proposal for an Exclusive Operation, such Party shall
have the right exercisable for five (5) Days, or forty-eight (48) hours
if the drilling rig to be used is standing by in the Contract Area, from
receipt of the proposal for the Exclusive Operation, to deliver to all
Parties entitled to participate in the proposed operation such Party's
alternative proposal. Such alternative proposal shall contain the
information required under Article 7.2(A).
(B) Each Party receiving such proposals shall elect by delivery of notice
to Operator within the appropriate response period set out in Article
7.2(B) to participate in one of the competing proposals. Any Party not
notifying Operator within the response period shall be deemed not to have
voted.
(C) The proposal receiving the largest aggregate Participating Interest
vote shall have priority over all other competing proposals. In the case
of a tie vote, the
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Operator shall choose among the proposals receiving the largest aggregate
Participating Interest vote. Operator shall deliver notice of such result
to all Parties entitled to participate in the operation within five (5)
Days of the end of the response period, or forty-eight (48) hours if the
drilling rig to be used is standing by in the Contract Area.
(D) Each Party shall then have two (2) Days (or forty-eight (48) hours if
the drilling rig to be used is standing by in the Contract Area) from
receipt of such notice to elect by delivery of notice to Operator whether
such Party will participate in such Exclusive Operation, or will
relinquish its interest pursuant to Article 7.4(B). Failure by a Party to
deliver such notice within such period shall be deemed an election not to
participate in the prevailing proposal.
7.7 STAND-BY COSTS
(A) When an operation has been performed, all tests have been conducted
and the results of such tests furnished to the Parties, stand by costs
incurred pending response to any Party's notice proposing an Exclusive
Operation for Deepening, Testing, Sidetracking, Completing, Plugging
Back, Recompleting, Reworking or other further operation in such well
(including the period required under Article 7.6 to resolve competing
proposals) shall be charged and borne as part of the operation just
completed. Stand by costs
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incurred subsequent to all Parties responding, or expiration of the
response time permitted, whichever first occurs, shall be charged to and
borne by the Parties proposing the Exclusive Operation in proportion to
their Participating Interests, regardless of whether such Exclusive
Operation is actually conducted.
(B) If a further operation is proposed while the drilling rig to be
utilized is on location, any Party may request and receive up to five (5)
additional Days after expiration of the applicable response period
specified in Article 7.2(B) within which to respond by notifying Operator
that such Party agrees to bear all stand by costs and other costs
incurred during such extended response period. Operator may require such
Party to pay the estimated stand by time in advance as a condition to
extending the response period. If more than one Party requests such
additional time to respond to the notice, stand by costs shall be
allocated between such Parties on a Day-to-Day basis in proportion to
their Participating Interests.
7.8 SPECIAL CONSIDERATIONS REGARDING DEEPENING
(A) An Exclusive Well shall not be Deepened without first affording the
Non-Consenting Parties in accordance with this Article the opportunity to
participate in such operation.
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(B) In the event any Consenting Party desires to Deepen an Exclusive
Well, such Party shall initiate the procedure contemplated by Article
7.2. If a Deepening operation is approved pursuant to such provisions,
and if any NonConsenting Party to the Exclusive Well elects to
participate in such Deepening operation, the payment, if any, pursuant to
Article 7.5 of such Non-Consenting Party shall be calculated based on the
following liabilities and expenses:
(1) If the proposal is to Deepen and is made prior to the
Completion of such well as a Commercial Discovery, then payment
shall be based on such Non-Consenting Party's Participating
Interest share of the liabilities and expenses incurred in
connection with drilling the Exclusive Well from the surface to
the depth previously drilled which such Non-Consenting Party would
have paid had such Non-Consenting Party agreed to participate in
such Exclusive Well, plus the Non-Consenting Party's Participating
Interest share of the liabilities and expenses of Deepening and of
participating in any further operations on such Exclusive Well in
accordance with the other provisions of this Agreement; provided,
however, all liabilities and expenses for Testing and Completing
or attempting Completion of the well incurred
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by Consenting Parties prior to the commencement of actual
operations to Deepen beyond the depth previously drilled shall be
for the sole account of Consenting Parties in the proportion their
Participating Interest bears to the aggregate of their
Participating Interests.
(2) If the proposal is to Deepen and is made for an Exclusive Well
that has been previously Completed as a Commercial Discovery, but
is no longer producing, then payment shall be based on the
Non-Consenting Party's Participating Interest share of all costs
of drilling and Completing said well from the surface to the depth
previously drilled, calculated in the manner provided in Article
7.8(B)(1), less those costs recouped by the Consenting Parties
from the sale of production from such Exclusive Well, plus the
Non-Consenting Party's Participating Interest share of all costs
of reentering said well, plus the Non-Consenting Party's
proportionate part (based on the percentage of the Exclusive Well
such Non-Consenting Party would have owned had it previously
participated in such Exclusive Well) of the costs of salvable
materials and equipment remaining in the hole and salvable surface
equipment used in connection with such well shall be determined in
accordance with the
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Accounting Procedure. If at the time such Deepening operation is
conducted the Consenting Parties have recouped from the Exclusive
Well the amount calculated pursuant to Article 7.5, then a
Non-Consenting Party may participate in the Deepening of the
Exclusive Well with no payment for liabilities and expenses
incurred prior to reentering the well for Deepening.
7.9 MISCELLANEOUS
(A) Each Exclusive Operation shall be carried out by the Consenting
Parties acting as the Operating Committee, subject to the provisions of
this Agreement applied mutatis mutandis to such Exclusive Operation and
subject to the terms and conditions of the Contract.
(B) The computation of liabilities and expenses incurred in Exclusive
Operations, including the liabilities and expenses of Operator for
conducting such operations, shall be made in accordance with the
principles set out in the Accounting Procedure.
(C) Operator shall maintain separate books, financial records and
accounts for Exclusive Operations which shall be subject to the same
rights of audit and examination as the Joint Account and related records,
all as provided in the Accounting Procedure. Said rights of audit and
examination shall extend to each of the Consenting Parties and each of
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the Non-Consenting Parties so long as the latter are, or may be,
entitled to elect to participate in such operations.
(D) Operator, if it is not a Consenting Party and it is conducting an
Exclusive Operation for the Consenting Parties, shall be entitled to
request cash advances and shall not be required to use its own funds to
pay any cost and expense and shall not be obliged to commence or continue
Exclusive Operations until cash advances requested have been made, and
the Accounting Procedure shall apply to Operator in respect of any
Exclusive Operations conducted by it.
(E) Should the submission of a Development Plan be approved in accordance
with Article 5.9, or should any Party propose a development in accordance
with Article VII, with either proposal not calling for the conduct of
additional appraisal drilling, and should any Party wish to drill an
additional Appraisal Well prior to development, then the Party proposing
the Appraisal Well as an Exclusive Operation shall be entitled to proceed
first, but without the right to future reimbursement of costs or to any
Penalty, pursuant to Article 7.5. If, as the result of drilling such
Appraisal Well as an Exclusive Operation, the Party proposing to apply
for an Exploitation Area decides to not develop the reservoir, then each
Non-Consenting Party who voted in favor of such Development Plan prior to
the drilling of such
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Appraisal Well shall pay to the Consenting Party the amount such
Non-Consenting Party would have paid had such Appraisal Well been drilled
as a Joint Operation.
(F) In the case of any Exclusive Operation for Deepening, Testing,
Completing, Plugging Back, Recompleting or Reworking, the Consenting
Parties shall be permitted to use, free of cost, all casing, tubing and
other equipment in the well, that is not needed for Joint Operations, but
the ownership of all such equipment shall remain unchanged. On
abandonment of a well after such Exclusive Operation, the Consenting
Parties shall account for all such equipment to the Parties who shall
receive their respective Participating Interest shares, in value, less
cost of salvage.
(G) If the Operator is a Non-Consenting Party to an Exclusive Operation
to Develop a Discovery, then subject to obtaining any necessary
Government approval the Operator may resign, but in any event shall
resign on the request of the Consenting Parties, as Operator for the
Exploitation Area for such Discovery and the Consenting Parties shall
select a Party to serve as Operator.
ARTICLE VIII - DEFAULT
8.1 DEFAULT AND NOTICE
Any Party that fails to pay when due its Participating Interest share of
Joint Account expenses including cash
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advances and interest, accrued pursuant to this Agreement (a "Defaulting
Party") shall be in default under this Agreement. Operator, or any other
Party in the case of the default of Operator, shall promptly give written
notice of such default to such Party and each of the non-defaulting
Parties. The amount not paid by the Defaulting Party shall bear interest
from the date due until paid in full. Interest will be calculated using
the Agreed Interest Rate.
8.2 OPERATING COMMITTEE MEETINGS AND DATA
After any default has continued for five (5) Business Days from the date
of written notice of default under Article 8.1, and for as long
thereafter as the Defaulting Party remains in default on any payment due
under this Agreement, the Defaulting Party shall not be entitled to
attend Operating Committee meetings or to vote on any matter coming
before the Operating Committee during the period such default continues.
Unless agreed otherwise by the non-defaulting Parties, the voting
interest of each non-defaulting Party shall be in the proportion which
its Participating Interest bears to the total of the Participating
Interests of all the non-defaulting Parties. Any matters requiring
unanimous vote of the Parties shall be deemed to exclude the Defaulting
Party. After the said five
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(5) Business Days and while the Defaulting Party remains in default as
aforesaid, the Defaulting Party shall not have access to any data or
information relating to Joint Operations, and non-defaulting Parties
shall be entitled to trade data without such Defaulting Party's consent
and the Defaulting Party shall have no right to any data received on such
trade unless and until its default is remedied in full.
Notwithstanding the foregoing, the Defaulting Party shall be deemed to
have approved, and shall join with the non-defaulting Parties in taking
any action to maintain and preserve the Contract.
8.3 ALLOCATION OF DEFAULTED ACCOUNTS
(A) Operator shall, either at the time of giving notice of default as
provided in Article 8.1, or by separate notice, notify each
non-defaulting Party of the sum of money it is to pay as its portion
(such portion being in the ratio that each non-defaulting Party's
Participating Interest bears to the Participating Interests of all
non-defaulting Parties) of such amount in default. Each non-defaulting
Party shall, if such default continues, pay Operator, within five (5)
Business Days after receipt of such notice, its share of the amount which
the Defaulting Party failed to pay. If any non-defaulting Party fails to
pay its share of the amount in default as aforesaid, such non-defaulting
Party shall
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thereupon be in default and shall be a Defaulting Party subject to the
provisions of this Article. The non-defaulting Parties which pay the
amount owed by any Defaulting Party shall be entitled to receive their
respective share of the principal and interest payable by such Defaulting
Party pursuant to Article 8.1.
(B) The total of all amounts paid by the non-defaulting Parties for the
Defaulting Party, together with interest accrued on such amounts shall
constitute a debt due and owing by the Defaulting Party to the
non-defaulting Parties in proportion to such amounts paid. In addition
the non-defaulting Parties may in the manner contemplated by this
Article, satisfy such debt (together with interest) and may accrue an
amount equal to the Defaulting Party's Participating Interest share of
the estimated cost to abandon any Joint Property.
(C) A Defaulting Party may remedy its default by paying to Operator the
total amount due, together with interest calculated as provided in
Article 8.1, at any time prior to transfer of its interest pursuant to
Article 8.4, and upon receipt of such payment Operator shall remit to
each non-defaulting Party its proportionate share of such amount.
(D) The rights granted to each non-defaulting Party pursuant to this
Article, shall be in addition to, and not
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in substitution for any other rights or remedies which each
non-defaulting Party may have at law or equity or pursuant to the other
provisions of this Agreement.
8.4 TRANSFER OF INTEREST
(A) For thirty (30) Days after each failure by the Defaulting Party to
remedy its default by the thirtieth (30th) Day following notice of
default without prejudice to any other rights of the non-defaulting
Parties to recover the amounts paid for the Defaulting Party, together
with interest accrued on such amount, each non-defaulting Party shall
have the option to give notice to the Defaulting Party requiring the
Defaulting Party to transfer its interest to the non-defaulting Parties.
To that end if any of the non-defaulting Parties so elect, the Defaulting
Party shall be deemed to have transferred and to have empowered the
electing non-defaulting Parties to execute on said Defaulting Party's
behalf any documents required to effect a transfer, of all of its right,
title and beneficial interest in and under this Agreement and the
Contract, and in all wells and Joint Property to the electing
non-defaulting Parties. If requested, each Party shall execute a Power of
Attorney in the form prescribed by the Operating Committee. The
Defaulting Party shall, without delay following any request from the
non-defaulting Parties, do any and all acts
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required to be done by applicable law or regulation in order to render
such transfer legally valid, including, without limitation, the
obtaining of all governmental consents and approvals, and shall execute
any and all documents and take such other actions as may be necessary in
order to effect prompt and valid transfer of the interests described
above, free of all liens and encumbrances. In the event all Government
approvals are not timely obtained, the Defaulting Party shall hold its
Participating Interest in trust for such non-defaulting Parties who
elected to assume such Defaulting Party's Participating Interest.
(B) In the absence of an agreement among the non-defaulting Parties to
the contrary, any such transfer to the non-defaulting Parties shall be in
the proportion that the non-defaulting Parties have paid the amounts due
from the Defaulting Party.
(C) Subject to Article 12.1(C), on the effective date of such transfer
the Defaulting Party shall forthwith cease to be a Party to this
Agreement to the extent of the Participating Interest so transferred. The
acceptance or non-acceptance by a non-defaulting Party of any portion of
a Defaulting Party's Participating Interest shall be without prejudice to
any rights or remedies such non-defaulting
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Parties have to recover the outstanding debts (including interest) owed
by the Defaulting Party.
8.5 CONTINUATION OF INTEREST
If within thirty (30) Days after each failure by the Defaulting Party to
remedy its default by the thirtieth (30th) Day following notice of
default the non-defaulting Parties elect to not acquire the Defaulting
Party's Participating Interest as provided in Article 8.4 and to continue
to bear the Defaulting Party's Participating Interest share of
liabilities and expenses, then the non-defaulting Parties shall
accumulate all such liabilities and expenses as a debt pursuant to
Article VIII, but the Defaulting Party shall continue to be a Party
subject to Article 8.2 and Article 8.7. If Operator disposes of any Joint
Property or any other credit or adjustment is made to the Joint Account,
or if Operator sells any of the Defaulting Party's Participating Interest
share of Hydrocarbons, then, in respect of the Defaulting Party's
Participating Interest share of the proceeds of such disposal, credit or
adjustment or sale, Operator shall be entitled to retain and to set off
the same against all amounts, together with interest accrued on such
amount, due and owing from the Defaulting Party plus an accrued amount
equal to the Defaulting Party's Participating Interest share
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of the estimated cost to abandon any Joint Property. Any surplus
remaining after setting off the same as aforesaid shall be paid promptly
to the Defaulting Party.
8.6 ABANDONMENT
If, within thirty (30) Days after the failure by the Defaulting Party to
remedy its default by the thirtieth (30th) Day as aforesaid, no
non-defaulting Party elects to acquire the Defaulting Party's
Participating Interest as provided in Article 8.4, or to bear the
Defaulting Party's Participating Interest share of liabilities and
expenses as provided in Article 8.5, then no transfer shall be made and
Joint Operations shall be abandoned subject to any necessary consents and
notices being given, and each Party, including the Defaulting Party shall
pay its Participating Interest share of all costs of abandoning and
relinquishing the Contract. If abandonment occurs as aforesaid, all
monies paid by the non-defaulting Parties for the Defaulting Party
pursuant to Article 8.3, together with interest accrued on such amount,
shall remain a debt due and owing by the Defaulting Party.
8.7 SALE OF HYDROCARBONS
If a Party defaults after the commencement of commercial production and
has not remedied the default by the thirtieth (30th) Day as aforesaid,
then, during the
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continuance of such default, the Defaulting Party shall not be entitled
to its Participating Interest share of Hydrocarbons which shall vest in
and be the property of the non-defaulting Parties, and Operator shall be
authorized to sell such Hydrocarbons at the best price obtainable under
the circumstances and, after deducting all costs, charges and expenses
incurred by Operator in connection with such sale, pay the proceeds
proportionately to the non-defaulting Parties which proceeds shall be
credited against all monies advanced pursuant to Article 8.3, together
with interest accrued thereon. Any surplus remaining shall be paid to the
Defaulting Party, and any deficiency shall remain a debt due from the
Defaulting Party to the non-defaulting Parties. Notwithstanding any such
sales by Operator, the provisions of Article 8.4 shall continue to apply.
8.8 NO RIGHT OF SET OFF
Each Party acknowledges and accepts that a fundamental principle of this
Agreement is that each Party pays its Participating Interest share of all
amounts due under this Agreement as and when required. Accordingly, any
Party which becomes a Defaulting Party undertakes that, in respect of
either any exercise by the non-defaulting Parties of any rights under or
the application of any of the provisions of this Article, such Party
shall not raise by way of set off
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or invoke as a defense, whether in law or equity, any failure to pay
amounts due and owing under this Agreement or any alleged or unliquidated
claim that such Party may have against Operator or any Non-Operator,
whether such claim arises under this Agreement or otherwise. Such Party
further undertakes not to raise by way of defense, whether in law or in
equity, that the nature or the amount of the remedies granted to the
non-defaulting Parties is unreasonable or excessive.
ARTICLE IX - DISPOSITION OF PRODUCTION
9.1 RIGHT AND OBLIGATION TO TAKE IN KIND
Except as otherwise provided in this Article, each Party shall have the
right and obligation to own, take in kind and separately dispose of its
Participating Interest share of total production available to the Parties
pursuant to the Contract from any Exploitation Area in such quantities
and in accordance with such procedures as may be set forth in the offtake
agreement referred to in Article 9.2 or in the special arrangements for
natural gas referred to in Article 9.3. If Government Oil Company is
party to the offtake agreement, then the Parties shall endeavor to obtain
its agreement to the principles set forth in this Article.
9.2 OFFTAKE AGREEMENT FOR CRUDE OIL
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If crude oil is to be produced from an Exploitation Area, the Parties
shall in good faith, and not less than three (3) months prior to first
delivery of crude oil, negotiate and conclude the terms of an agreement
to cover the offtake of crude oil produced under the Contract. The
Government Oil Company may, if necessary and practicable, also be party
to the offtake agreement. This offtake agreement shall, to the extent
consistent with the Contract, make provision for:
(A) The delivery point, at which title and risk of loss of
Participating Interest shares of crude oil shall pass to the
Parties interested (or as the Parties may otherwise agree);
(B) Operator's regular periodic advice to the Parties of estimates
of total available production for suc ceeding periods,
Participating Interest shares, and grades of crude oil for as far
ahead as is necessary for Operator and the Parties to plan offtake
arrangements. Such advice shall also cover for each grade of crude
oil total available production and deliveries for the preceding
period, inventory and overlifts and underlifts;
(C) Nomination by the Parties to Operator of acceptance of their
Participating Interest share of
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total available production for the succeeding period. Such
nominations shall in any one period be for each Party's entire
Participating Interest share arising during that period subject to
operational tolerances and agreed minimum economic cargo sizes or
as the Parties may otherwise agree;
(D) Elimination of overlifts and underlifts;
(E) If offshore loading or a shore terminal for vessel loading is
involved, risks regarding acceptability of tankers, demurrage and
(if applicable) availability of berths;
(F) Distribution to the Parties of Entitlements to ensure, to the
extent Parties take delivery of their Entitlements in proportion
to the accrual of such Entitlements, that each Party shall receive
currently Entitlements of grades, gravities and qualities of
Hydrocarbons similar to Hydrocarbons received by each other Party.
(G) To the extent that distribution of Entitlements on such basis
is impracticable due to availability of facilities and minimum
cargo sizes, a method of making periodic adjustments; and
(H) The option and the right of the other Parties to sell an
Entitlement which a Party fails to nominate for
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acceptance pursuant to (C) above or of which a Party fails to take
delivery, in accordance with applicable agreed procedures,
provided that such failure either constitutes a breach of
Operator's or Parties' obligations under the terms of the
Contract, or is likely to result in the curtailment or shut-in of
production. Such sales shall be made only to the limited extent
necessary to avoid disruption in Joint Operations. Operator shall
give all Parties as much notice as is practicable of such
situation and that a sale option has arisen. Any sale shall be of
the unnominated or undelivered Entitlement as the case may be and
for reasonable periods of time as are consistent with the minimum
needs of the industry and in no event to exceed twelve (12)
months. The right of sale shall be revocable at will subject to
any prior contractual commitments. Sales to non-affiliated third
parties shall be for the realized price f.o.b. the delivery point.
Sales to any of the Parties or their Affiliates shall be at
current market value f.o.b. the delivery point. The Party
arranging the sale shall pay to the Party whose Entitlement is
involved the above price after deduction of all costs, including
storage costs, incurred in respect of such sale, reflecting actual
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costs of disposal at immediate notice. Current market value shall
be the value of the Entitlement in international markets (unless
the Entitlement was required to be delivered into the Government's
domestic market, in which case it shall be the value therein)
between a willing buyer and a willing seller and shall be agreed
between the two Parties concerned, or failing agreement,
determined by an expert to be appointed in accordance with
procedures set forth in the offtake agreement.
9.3 SEPARATE AGREEMENT FOR NATURAL GAS
The Parties recognize that if natural gas is discovered it may be
necessary for the Parties to enter into special arrangements for the
disposal of the natural gas, which are consistent with the Development
Plan and subject to the terms of the Contract.
ARTICLE X - ABANDONMENT OF WELLS
10.1 ABANDONMENT OF WELLS DRILLED AS JOINT OPERATIONS
(A) Any well which has been drilled as a Joint Operation and which is
proposed to be plugged and abandoned shall not be plugged and abandoned
without the consent of all Parties.
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(B) Should any such Party fail to reply within the period prescribed in
Article 5.12(A)(1) or Article 5.12(A)(2), whichever is applicable, after
delivery of notice of the Operator's proposal to plug and abandon such
well, such Party shall be deemed to have consented to the proposed
abandonment. If all the Parties consent to abandonment, such well shall
be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of the Parties who participated in the cost of
drilling such well.
(C) If all Parties do not agree to the abandonment of such well, those
wishing to continue operations shall assume financial responsibility over
the well and shall be deemed to be Consenting Parties conducting an
Exclusive Operation pursuant to Article VII. In the case of a producing
well, the Consenting Parties shall be entitled to continue producing only
from the Zone open to production at the time they assumed responsibility
for the well.
(D) Consenting Parties taking over a well as provided above shall tender
to each of the Non-Consenting Parties such NonConsenting Parties'
Participating Interest share of the value of the well's salvable material
and equipment, determined in accordance with the Accounting Procedure,
less the estimated cost of salvaging and the estimated cost of
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plugging and abandoning as of the date the Consenting Party assumed
responsibility for the well; provided, however, that in the event the
estimated cost of plugging and abandoning and the estimated cost of
salvaging are higher than the value of the well's salvable material and
equipment, each of the abandoning Parties shall continue to be liable
pursuant to Article 7.3(B) for their respective Participating Interest
shares of the estimated excess cost.
(E) Each Non-Consenting Party shall be deemed to have relinquished to the
Consenting Parties in proportion to their Participating Interests all of
its interest in the wellbore of a produced well and related equipment in
accordance with Article 7.4(B), insofar and only insofar as such interest
covers the right to obtain production from that wellbore in the Zone then
open to production.
(F) Subject to Article 7.9(G), Operator shall continue to operate a
produced well for the account of the Consenting Parties at the rates and
charges contemplated by this Agreement, plus any additional cost and
charges which may arise as the result of the separate allocation of
interest in such well.
10.2 ABANDONMENT OF EXCLUSIVE OPERATIONS
This Article shall apply mutatis mutandis to the abandonment of an
Exclusive Well or any well in which an
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Exclusive Operation has been conducted; provided that no well shall be
permanently plugged and abandoned unless and until all Parties having the
right to conduct further operations in such well have been notified of
the proposed abandonment and afforded the opportunity to elect to take
over the well in accordance with the provisions of this Article X.
ARTICLE XI - SURRENDER, EXTENSIONS AND RENEWALS
11.1 SURRENDER
(A) If the Contract requires the Parties to surrender any portion of the
Contract Area, Operator shall advise the Operating Committee of such
requirement at least one hundred and twenty (120) Days in advance of the
earlier of the date for filing irrevocable notice of such surrender or
the date of such surrender. Prior to the end of such period, the
Operating Committee shall determine pursuant to Article V, the size and
shape of the surrendered area, consistent with the requirements of the
Contract. If a sufficient vote of the Operating Committee cannot be
attained, then the proposal supported by a simple majority of the
Participating Interests shall be adopted. If no proposal attains the
support of a simple majority of the Participating Interests, then the
proposal receiving the largest aggregate Participating Interest vote
shall be adopted. In the event
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of a tie, the Operator shall choose among the proposals receiving the
largest aggregate Participating Interest vote. The Parties shall execute
any and all documents and take such other actions as may be necessary to
effect the surrender. Each Party renounces all claims and causes of
action against Operator and any other Parties on account of any area
surrendered in accordance with the foregoing but against its
recommendation if Hydrocarbons are subsequently discovered under the
surrendered area.
(B) A surrender of all or any part of the Contract Area which is not
required by the Contract shall require the unanimous consent of the
Parties.
11.2 EXTENSION OF THE TERM
(A) A proposal by any Party to extend the term of the Exploration or
Exploitation Period or any phase of the Contract, a proposal to enter
into a new phase of the Exploration Period, and a proposal to extend the
term of the Contract shall be brought before the Operating Committee
pursuant to Article V.
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(B) Any Party shall have the right to extend the term of the Exploration
or Exploitation Period or any phase of the Contract to enter into a new
phase of the Exploration Period or extend the term of the Contract to the
extent provided in the Contract. Any Party not wishing to extend, shall
have a right to withdraw, subject to the requirements of Article XIII.
(C) The Contract shall not be modified, or a new contract shall not be
entered into, without a written agreement duly executed by all Parties.
ARTICLE XII - TRANSFER OF INTEREST OR RIGHTS
12.1 OBLIGATIONS
(A) Subject always to the requirements of the Contract, the transfer of
all or part of a Party's Participating Interest shall be effective only
if it satisfies the terms and conditions of this Article.
(B) Except in the case of a Party transferring all of its Participating
Interest, no transfer shall be made by any Party which results in the
transferor or the transferee holding a Participating Interest of less
than ten percent (10%) or holding any Interest other than a Participating
Interest in the Contract, the Contract Area and this Agreement.
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(C) The transferring Party shall, notwithstanding the transfer, be liable
to the other Parties for any obligations, financial or otherwise, which
have vested, matured or accrued under the provision of the Contract or
this Agreement prior to such transfer. Such obligations shall include,
without limitation, any proposed expenditure approved by the Operating
Committee, prior to the transferring Party notifying the other Parties of
its proposed transfer.
(D) The transferee shall have no rights in and under the Contract, the
Contract Area or this Agreement unless and until it obtains any necessary
Government or Government Oil Company approval and expressly undertakes in
writing to perform the obligations of the transferor under the Contract
and this Agreement in respect of the Participating Interest being
transferred, to the satisfaction of the Parties and furnishes any
guarantees required by the Government or the Contract.
(E) The transferee shall have no rights in and under the Contract, the
Contract Area or this Agreement unless each Party has consented in
writing to such transfer, which consent shall be denied only if such
transferee fails to establish to the reasonable satisfaction of each
Party its
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financial or technical capability to perform its obligations under the
Contract and this Agreement.
(F) Nothing contained in this Article shall prevent a Party from
mortgaging, pledging, charging or otherwise encumbering all or part of
its interest in the Contract Area and in and under this Agreement for the
purpose of security relating to finance provided that:
(1) such Party shall remain liable for all obligations relating to
such interest;
(2) the encumbrance shall be subject to any necessary approval of
the Government and be expressly subordinated to the rights of the
other Parties under this Agreement; and
(3) such Party shall ensure that any such mortgage, pledge, charge
or encumbrance shall be expressed to be without prejudice to the
provisions of this Agreement.
(G) Notwithstanding the foregoing, a Party may transfer all or a part of
its Participating Interest to an Affiliate of that Party. Such transfer
shall be effective only upon the transferor furnishing to the Parties a
guarantee of the obligations of the transferee, in a form satisfactory to
the other Parties.
12.2 RIGHTS
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(A) Each Party shall have the right, subject to the provisions of Article
12.1, to freely transfer its Participating Interest.
ARTICLE XIII - WITHDRAWAL FROM AGREEMENT
13.1 RIGHT OF WITHDRAWAL
(A) Subject to the provisions of this Article, any Party may withdraw
from this Agreement and the Contract by giving notice to all other
Parties stating its decision to withdraw and specifying a proposed
effective date of withdrawal which shall be at least sixty (60) Days, but
not more than one hundred eighty (180) Days after the date of such
notice. Such notice shall be unconditional and irrevocable when given.
(B) Notwithstanding Article 13.1(A) a Party shall not have the right to
withdraw from this Agreement and the Contract until the Minimum Work
Obligation set forth in the Contract has been fulfilled. However, if the
Operating Committee or any Party decides to accept new Minimum Work
Obligations by voluntarily extending the current or entering into a new
exploration period under the Contract, a Party that voted against such
decision shall not be prevented from withdrawing; provided that such
Party delivers notice of its withdrawal to all Parties within thirty (30)
Days of such
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vote pursuant to Article 11.2 and fully satisfies its outstanding Minimum
Work Obligation, if any.
(C) Subject to Articles 13.1(A) and (B) and Article 13.5, the effective
date of withdrawal for a withdrawing Party shall be the later of:
(1) The date proposed in the notice of withdrawal; or
(2) The date that the withdrawing Party has fulfilled its
obligations under this Article.
13.2 PARTIAL OR COMPLETE WITHDRAWAL
(A) Within thirty (30) Days of receipt of each withdrawing Party's
notification, each of the other Parties may also give notice that it
desires to withdraw from this Agreement and the Contract. Should all
Parties give notice of withdrawal, the Parties shall proceed to abandon
the Contract Area and terminate the Contract and this Agreement. If less
than all of the Parties give such notice of withdrawal, then the
withdrawing Parties shall take all steps to withdraw from the Contract
and this Agreement on the earliest possible date and execute and deliver
all necessary instruments and documents to assign their Participating
Interest to the Parties which are not withdrawing, without any
compensation whatsoever, in accordance with the provisions of Article
13.6.
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(B) If any part of the withdrawing Party's Participating Interest remains
unclaimed after sixty (60) Days from the date of the first notice of
withdrawal, the Parties shall be deemed to have decided to withdraw from
the Contract and this Agreement, unless at least one Party agrees to
accept the unclaimed Participating Interest.
(C) Any Party withdrawing under Article 11.2 or under this Article shall
withdraw from all exploration activities under the Contract, but not from
any Exploitation Area, Commercial Discovery, or Discovery whether
appraised or not, made prior to such withdrawal. Such withdrawing Party
shall retain its rights in the Joint Property but only insofar as they
relate to any Exploitation Area, Commercial Discovery or Discovery
whether appraised or not, and shall abandon all other rights in the Joint
Property.
13.3 VOTING
After giving its notification of withdrawal, a Party shall not be
entitled to vote on any matters coming before the Operating Committee,
other than matters for which such Party has financial responsibility.
13.4 OBLIGATIONS AND LIABILITIES
(A) A withdrawing Party, prior to its withdrawal, shall satisfy all
obligations and liabilities it has incurred or attributable to it prior
to its withdrawal, including,
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without limitation, any expenditures budgeted and/or approved by the
Operating Committee prior to its written notification of withdrawal
(development projects included), and any liability for acts, occurrences
or circumstances taking place or existing prior to its withdrawal.
Furthermore, any liens, charges and other encumbrances which the
withdrawing Party placed on such Party's Participating Interest prior to
its withdrawal shall be fully satisfied or released, at the withdrawing
Party's expense, prior to its withdrawal. A Party's withdrawal shall not
relieve it from liability to the non-withdrawing Parties with respect to
any obligations or liabilities attributable to the withdrawing Party
which are not identified or identifiable at the time of withdrawal.
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(B) Notwithstanding the foregoing, a Party shall not be liable for any
operations or expenditures it voted against if it sends notification of
its withdrawal within five (5) Days (or within twenty-four (24) hours if
the drilling rig to be used in such operation is standing by on the
Contract Area) of the Operating Committee vote approving such operation
or expenditure, nor shall such Party be liable for any operations or
expenditures approved by the Operating Committee, excluding those
approved pursuant to Article 13.5, after notice has been given pursuant
to Article 13.1.
13.5 EMERGENCY
A Party's notification of withdrawal shall not become effective if prior
to the proposed date of withdrawal a well goes out of control or a fire,
blow out, sabotage or other emergency occurs. The notification of
withdrawal shall become effective only after the emergency has been
contained and the withdrawing Party has paid, or has provided, security
satisfactory to the Parties for its Participating Interest share of the
costs of such emergency.
13.6 ASSIGNMENT
A withdrawing Party shall assign its Participating Interest to each of
the non-withdrawing Parties which shall be allocated to them in the
proportion which each of their
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Participating Interests (prior to the withdrawal) bears to the total
Participating Interests of all the non-withdrawing Parties (prior to the
withdrawal), unless the non- withdrawing Parties agree otherwise. The
expenses associated with the withdrawal and assignments shall be borne by
the withdrawing Party.
13.7 APPROVALS
A withdrawing Party shall promptly join in such actions as may be
necessary or desirable to obtain any Government or Government Oil Company
approvals required in connection with the withdrawal and assignments, and
any penalties or expenses incurred by the Parties in connection with such
withdrawal shall be borne by the withdrawing Party.
(Continued on Page 87-A)
13.8 ABANDONMENT SECURITY
(A) A withdrawing Party shall provide Security satisfactory to the other
Parties to satisfy any such obligations or liabilities which were
approved or accrued prior to notice of withdrawal, but which become due
after its withdrawal, including, without limitation, Security to cover
the costs of an abandonment, if applicable.
(B) Failure to provide Security shall constitute default under this
Agreement.
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(C) "Security" means a standby letter of credit issued by a bank or an on
demand bond issued by a corporation, such bank or corporation having a
credit rating indicating it has sufficient worth to pay its obligations
in all reasonably foreseeable circumstances, or, failing the provision of
either of those, cash contributed to a secure fund administered by
independent trustees and invested in securities backed by the full faith
and credit of the government of the United States of America.
13.9 WITHDRAWAL OR ABANDONMENT BY ALL PARTIES
In the event all Parties decide to withdraw or are required to do so
pursuant to this Article, the Parties agree that they shall be bound by
the terms and conditions of this Agreement for so long as may be
necessary to wind up the affairs of the Parties with the Government, to
satisfy any requirements of applicable law or to facilitate the sale,
disposition or abandonment of property or interests held by the Joint
Account.
ARTICLE XIV - RELATIONSHIP OF PARTIES AND TAX
14.1 RELATIONSHIP OF PARTIES
The rights, duties, obligations and liabilities of the Parties under this
Agreement shall be individual, not joint or collective. It is not the
intention of the Parties to create, nor shall this Agreement be deemed or
construed to
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create a mining or other partnership, joint venture, association or
trust, or as authorizing any Party to act as an agent, servant or
employee for any other Party for any purpose whatsoever except as
explicitly set forth in this Agreement. In their relations with each
other under this Agreement, the Parties shall not be considered
fiduciaries except as expressly provided in this Agreement.
14.2 TAX
Each Party shall be responsible for reporting and discharging its own tax
measured by the income of the Party and the satisfaction of such Party's
share of all contract obligations under the Contract and under this
Agreement. Each Party shall protect, defend and indemnify each other
Party from any and all loss, cost or liability arising from a failure or
refusal to report and discharge such taxes or satisfy such obligations.
14.3 UNITED STATES TAX ELECTIONS
The Parties who are subject to the income tax laws of the United States
of America shall be governed by the tax provisions marked Exhibit B,
attached hereto and made a part hereof.
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ARTICLE XV - CONFIDENTIAL INFORMATION -
PROPRIETARY TECHNOLOGY
15.1 CONFIDENTIAL INFORMATION
(A) Subject to the provisions of the Contract, the Parties agree that
all information and data acquired or obtained by any Party in
respect of Joint Operations shall be considered confidential and
shall be kept confidential and not be disclosed during the term of
the Contract and for a period of one (1) year after expiration of
the Contract to any person or entity not a Party to this
Agreement, except:
(1) To an Affiliate, provided such Affiliate maintains
confidentiality as provided in this Article;
(2) To a governmental agency or other entity when required by the
Contract;
(3) To the extent such data and information is required to be
furnished in compliance with any applicable laws or regulations,
or pursuant to any legal proceedings or because of any order of
any court binding upon a Party;
(4) Subject to Article 15.1(B), to potential contractors,
contractors, consultants and attorneys employed by any Party where
disclosure of such data or
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information is essential to such contractor's, consultant's or
attorney's work;
(5) Subject to Article 15.1(B), to a bona fide prospective
transferee of a Party's Participating Interest (including an
entity with whom a Party or its Affiliates is conducting bona fide
negotiations directed toward a merger, consolidation or the sale
of a majority of its or an Affiliate's shares);
(6) Subject to Article 15.1(B), to a bank or other financial
institution to the extent appropriate to a Party arranging for
funding for its obligations under this Agreement;
(7) To the extent such data and information must be disclosed
pursuant to any rules or requirements of any government or stock
exchange having jurisdiction over such Party, or its Affiliates;
provided that if any Party desires to disclose information in an
annual or periodic report to its or its Affiliates' shareholders
and to the public and such disclosure is not required pursuant to
any rules or requirements of any government or stock exchange,
then such Party shall comply with Article 19.2;
(8) To its respective employees for the purposes of Joint
Operations, subject to each Party taking customary
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precautions to ensure such data and information is kept
confidential;
(9) Where any data or information which, through no fault of a
Party, becomes a part of the public domain.
(B) Disclosure as pursuant to Article 15.1(A)(4), (5), and (6) shall not
be made unless prior to such disclosure the disclosing Party has obtained
a written undertaking from the recipient party to keep the data and
information strictly confidential and not to use or disclose the data and
information except for the express purpose for which disclo sure is to be
made.
15.2 CONTINUING OBLIGATIONS
Any Party ceasing to own a Participating Interest during the term of this
Agreement shall nonetheless remain bound by the obligations of
confidentiality and any disputes shall be resolved in accordance with
Article XVIII.
15.3 PROPRIETARY TECHNOLOGY
Nothing in this Agreement shall require a Party to divulge proprietary
technology to the other Parties; provided that where the cost of
development of proprietary technology has been charged to the Joint
Account, such proprietary technology shall be disclosed to all Parties
bearing a portion of such cost and may be used by such Party or its
Affiliates in other operations.
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15.4 TRADES
Notwithstanding the foregoing provisions of this Article, Operator may,
with approval of the Operating Committee, make well trades and data
trades for the benefit of the Parties, with any data, the cost of which
has been charged to the Joint Account, so obtained to be furnished to all
Parties. In such event, Operator must enter into an undertaking with any
third party to such trade to keep such information confidential.
ARTICLE XVI - FORCE MAJEURE
16.1 OBLIGATIONS
If as a result of Force Majeure any Party is rendered unable, wholly or
in part, to carry out its obligations under this Agreement, other than
the obligation to pay any amounts due or to furnish security, then the
obligations of the Party giving such notice, so far as and to the extent
that the obligations are affected by such Force Majeure, shall be
suspended during the continuance of any inability so caused, but for no
longer period. The Party claiming Force Majeure shall notify the other
Parties of the Force Majeure situation within a reasonable time after the
occurrence of the facts relied on and shall keep all Parties informed of
all significant developments. Such notice shall give reasonably full
particulars of said Force Majeure, and
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also estimate the period of time which said Party will probably require
to remedy the Force Majeure. The affected Party shall use all reasonable
diligence to remove or overcome the Force Majeure situation as quickly as
possible in an economic manner, but shall not be obligated to settle any
labor dispute except on terms acceptable to it and all such disputes
shall be handled within the sole discretion of the affected Party.
16.2 DEFINITION OF FORCE MAJEURE
For the purposes of this Agreement, "Force Majeure" shall have the same
meaning as is set out in Clause 34 of the Contract for "fuerza mayor o
caso fortuito."
ARTICLE XVII - NOTICES
Except as otherwise specifically provided, all notices authorized or
required between the Parties by any of the provisions of this Agreement,
shall be in writing, in English and delivered in person or by registered
mail or by courier service or by any electronic means of transmitting
written communications which provides confirmation of complete
transmission, and addressed to such Parties as designated below. The
originating notice given under any provision of this Agreement shall be
deemed delivered only when received by the Party to whom such notice is
directed, and the time for such Party to deliver any notice in
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response to such originating notice shall run from the date the
originating notice is received. The second or any responsive notice shall
be deemed delivered when received. "Received" for purposes of this
Article with respect to written notice delivered pursuant to this
Agreement shall be actual delivery of the notice to the address of the
Party to be notified specified in accordance with this Article. Each
Party shall have the right to change its address at any time and/or
designate that copies of all such notices be directed to another person
at another address, by giving written notice thereof to all other
Parties.
Petrolinson S.A.
Calle 100 No. 8A-49- Ofc. 705
World Trade Center, Torre B
Apartado Aereo 89956
Santa fe de Bogota, Colombia
FAX: 011-57-1-611-2756
Attention: Norm Rowlinson
GHK Company Colombia
6305 Waterford Boulevard, Suite 470
Oklahoma City, Oklahoma 73118
FAX: (405) 858-9898
Attention: Robert A. Hefner III
Esmeralda Limited Liability Company
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6305 Waterford Boulevard, Suite 470
Oklahoma City, Oklahoma 73118
FAX: (405) 858.9898
Attention: Robert A. Hefner III
Cimarrona Limited Liability Company
6305 Waterford Boulevard, Suite 470
Oklahoma City, Oklahoma 73118
FAX: (405) 858.9898
Attention: Robert A. Hefner III
Sociedad Internacional Petrolera S.A.
Tajamar 183 Piso 4
Santiago, Chile
Telefax: (61-2) 233 7673
Attention: Sr. Salvador Harambour G.
Seven Seas Petroleum Colombia, Inc.
Three Post Oak Central, Suite 960
1990 Post Oak Blvd.
Houston, TX 77056
Telefax: (713.621.9770)
Attention: Tim Stephens
ARTICLE XVIII - APPLICABLE LAW AND DISPUTE RESOLUTION
18.1 APPLICABLE LAW
This Agreement shall be governed by, construed, interpreted and applied
in accordance with the laws of New
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York, U.S.A., excluding any choice of law rules which would refer the
matter to the laws of another jurisdiction.
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18.2 DISPUTE RESOLUTION
(A) Any dispute, controversy or claim arising out of or relating to this
contract, or the breach, termination or invalidity thereof, shall be
settled by arbitration in accordance with the UNCITRAL Arbitration Rules
(the "Rules") as at present in force.
(B) The arbitration shall be heard and determined by three (3)
arbitrators. Each side shall appoint an arbitrator of its own choice
within ten (10) days of the submission of a Notice of Arbitration. The
party-appointed arbitrators shall in turn appoint a presiding arbitrator
of the tribunal within ten (10) days following the appointment of the
arbitrators. If the party-appointed arbitrators cannot reach agreement on
a presiding arbitrator of the tribunal, the appointing authority for the
implementation of such procedure shall be the President for the time
being of the American Arbitration Association in New York, who shall
appoint an independent arbitrator who has no financial interest in the
controversy. If all members of the tribunal were not to accept the
appointment within ten (10) days after receipt of the Notice of
Arbitration, and/or one Party refuses to appoint its party-appointed
arbitrator within said ten (10) days period, either one of the Parties
may require from the said President the designation of a single
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arbitrator, who has no financial interest in the controversy, to solve
the controversy. All decisions and awards made by the arbitration
tribunal shall be by majority vote.
(C) The controversy may not be submitted to any court.
(D) Unless otherwise expressly agreed in writing by the Parties to the
arbitration proceedings:
(1) The arbitration proceedings shall be held in New York, USA;
(2) The arbitration proceedings shall be conducted in the English
language and the arbitrator(s) shall be fluent in the Spanish and
English languages;
(3) The arbitrator(s) shall be and remain at all times wholly
independent and impartial;
(4) Any procedural issues not determined under the Rules shall be
determined by the laws of the place of arbitration, except those
laws which would refer the matter to another jurisdiction;
(5) The cost of the arbitration proceedings (including attorney's
fees and costs) shall be borne in the manner determined by the
arbitrator(s);
(6) The decision of the sole arbitrator or the decision of a
majority of the arbitrators, as the case may be, shall be written,
final and binding without the
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right of appeal, the sole and exclusive remedy regarding any
claims, counterclaims, issues or accounts presented to the
arbitrator, made as promptly paid in Dollars free of any deduction
or offset. Any costs or fees incident to enforcing the award, up
to the maximum extent permitted by law, will be charged against
the Party resisting such enforcement;
(7) Consequential, punitive or other similar damages shall not be
allowed; provided, however, the award may include appropriate
punitive damages where a Party has engaged in delaying and
dilatory actions;
(8) The award shall include interest from the date of any breach
of violation of this Agreement, as determined by the arbitral
award, and from the date of the award until paid in full, at the
Agreed Interest Rate;
(9) Judgment upon the award rendered may be entered in any court
having jurisdiction over the person or the assets of the indebted
Party, or application may be made to such court for a judicial
acceptance of the award and an order of enforcement, as the case
may be; and
(10) Whenever the Parties are of more than one nationality, the
single arbitrator or the presiding arbitrator, as the case may be,
shall not be of the same
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nationality as any of the Parties or their ultimate parent
entities.
ARTICLE XIX - GENERAL PROVISIONS
19.1 CONFLICTS OF INTEREST
(A) Each Party undertakes that it shall avoid any conflict of interest
between its own interests (including the interests of Affiliates) and the
interests of the other Parties in dealing with suppliers, customers and
all other organizations or individuals doing or seeking to do business
with the Parties in connection with activities contemplated under this
Agreement.
(B) The provisions of the preceding paragraph shall not apply to:
(1) A Party's performance which is in accordance with the local
preference laws or policies of the host government; or
(2) A Party's acquisition of products or services from an
Affiliate, or the sale thereof to an Affiliate, made in accordance
with rules and procedures established by the Operating Committee.
19.2 PUBLIC ANNOUNCEMENTS
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(A) Operator shall be responsible for the preparation and release of all
public announcements and statements regarding this Agreement or the Joint
Operations; provided that, no public announcement or statement shall be
issued or made unless prior to its release all the Parties have been
furnished with a copy of such statement or announcement and the approval
of at least two (2) non-affiliated Parties holding fifty percent (50%),
or more, of the Participating Interests has been obtained. Where a public
announcement or statement becomes necessary or desirable because of
danger to or loss of life, damage to property or pollution as a result of
activities arising under this Agreement, Operator is authorized to issue
and make such announcement or statement without prior approval of the
Parties, but shall promptly furnish all the Parties with a copy of such
announcement or statement.
(B) If a Party wishes to issue or make any public announcement or
statement regarding this Agreement or the Joint Operations, it shall not
do so unless prior to its release, such Party furnishes all the Parties
with a copy of such announcement or statement, and obtains the approval
of at least two (2) non-affiliated Parties holding fifty percent (50%) or
more of the Participating Interests; provided that, notwithstanding any
failure to obtain such
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approval, no Party shall be prohibited from issuing or making any such
public announcement or statement if it is necessary to do so in order to
comply with the applicable laws, rules or regulations of any government,
legal proceedings or stock exchange having jurisdiction over such Party
as set forth in Articles 15.1(A)(3) and (7).
19.3 SUCCESSORS AND ASSIGNS
Subject to the limitations on transfer contained in Article XII, this
Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Parties.
19.4 WAIVER
No waiver by any Party of any one or more defaults by another Party in
the performance of this Agreement shall operate or be construed as a
waiver of any future default or defaults by the same Party, whether of a
like or of a different character. Except as expressly provided in this
Agreement no Party shall be deemed to have waived, released or modified
any of its rights under this Agreement unless such Party has expressly
stated, in writing, that it does waive, release or modify such right.
19.5 SEVERANCE OF INVALID PROVISIONS
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If and for so long as any provision of this Agreement shall be deemed to
be judged invalid for any reason whatsoever, such invalidity shall not
affect the validity or operation of any other provision of this Agreement
except only so far as shall be necessary to give effect to the
construction of such invalidity, and any such invalid provision shall be
deemed severed from this Agreement without affecting the validity of the
balance of this Agreement.
19.6 MODIFICATIONS
Except as is provided in Article 19.5, there shall be no modification of
this Agreement except [by written consent of all Parties.
19.7 HEADINGS
The topical headings used in this Agreement are for convenience only and
shall not be construed as having any substantive significance or as
indicating that all of the provisions of this Agreement relating to any
topic are to be bound in any particular Article.
19.8 SINGULAR AND PLURAL
Reference to the singular includes a reference to the plural and vice
versa.
19.9 GENDER
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Reference to any gender includes a reference to all other genders.
19.10 COUNTERPART EXECUTION
This Agreement may be executed in any number of counterparts and each
such counterpart shall be deemed an original Agreement for all purposes;
provided no Party shall be bound to this Agreement unless and until all
Parties have executed a counterpart. For purposes of assembling all
counterparts into one document, Operator is authorized to detach the
signature page from one or more counterparts and, after signature thereof
by the respective Party, attach each signed signature page to a
counterpart.
19.11 ENTIRETY
This Agreement is the entire agreement of the Parties and supersedes all
prior understandings and negotiations of the Parties.
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IN WITNESS of their agreement each Party has caused its duly authorized
representative to sign this instrument on the date indicated below such
representative's signature.
Attest: GHK COMPANY COLOMBIA
- ------------------
Secretary
By______________________________
Vice President
CIMARRONA LIMITED LIABILITY
COMPANY by The GHK Company
L.L.C., Manager
By______________________________
Attorney-in-Fact
ESMERALDA LIMITED LIABILITY
COMPANY by The GHK Company
L.L.C., Manager
By______________________________
Attorney-in-Fact
SOCIEDAD INTERNACIONAL PETROLERA
S.A.
By______________________________
Title:________________________
SEVEN SEAS PETROLEUM COLOMBIA,
INC.
By
Title:
Attest: PETROLINSON S.A.
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Secretary
By____________________________
112
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Title:________________________
STATE OF OKLAHOMA )
)
COUNTY OF OKLAHOMA )
On this ___ day of ____________,1996, before me, the undersigned, a
Notary Public, in and for the county and state aforesaid, personally appeared
____________________________, to me known to be the identical person who signed
the name of GHK Company Colombia to the within and foregoing instrument as its
________ President and acknowledged to me that he executed the same as his free
and voluntary act and deed, and as the free and voluntary act and deed of said
corporation, for the uses and purposes therein set forth.
Given under my hand and seal the day and year last above written.
My commission expires: Notary Public
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[SEAL]
STATE OF OKLAHOMA )
)
COUNTY OF OKLAHOMA )
On this ___ day of ____________,1996, before me, the undersigned, a
Notary Public, in and for the county and state aforesaid, personally appeared
____________________________, to me known to be the identical person who signed
the name of Cimarrona Limited Liability Company to the within and foregoing
instrument as its Manager and acknowledged to me that he executed the same as
his free and voluntary act and deed, and as the free and voluntary act and deed
of said company for the uses and purposes therein set forth.
Given under my hand and seal the day and year last above written.
113
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My commission expires: Notary Public
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[SEAL]
STATE OF OKLAHOMA )
)
COUNTY OF OKLAHOMA )
On this ___ day of ____________,1996, before me, the undersigned, a
Notary Public, in and for the county and state aforesaid, personally appeared
____________________________, to me known to be the identical person who signed
the name of Esmeralda Limited Liability Company to the within and foregoing
instrument as its Manager and acknowledged to me that he executed the same as
his free and voluntary act and deed, and as the free and voluntary act and deed
of said company, for the uses and purposes therein set forth.
Given under my hand and seal the day and year last above written.
My commission expires: Notary Public
- --------------------------
[SEAL]
STATE OF _______________ )
)
COUNTY OF ______________ )
On this ___ day of ____________,1996, before me, the undersigned, a
Notary Public, in and for the county and state aforesaid, personally appeared
____________________________, to me known to be the identical person who signed
the name of Sociedad Internacional Petrolera S.A. to the within and foregoing
instrument as its ________ President and acknowledged to me that he executed the
same as his free and voluntary act and deed, and as the free and voluntary act
and deed of said corporation, for the uses and purposes therein set forth.
Given under my hand and seal the day and year last above written.
114
<PAGE>
My commission expires: Notary Public
- --------------------------
[SEAL]
STATE OF _______________ )
)
COUNTY OF ______________ )
On this ___ day of ____________,1996, before me, the undersigned, a
Notary Public, in and for the county and state aforesaid, personally appeared
____________________________, to me known to be the identical person who signed
the name of Seven Seas Petroleum Colombia, Inc. to the within and foregoing
instrument as its ________ President and acknowledged to me that he executed the
same as his free and voluntary act and deed, and as the free and voluntary act
and deed of said corporation, for the uses and purposes therein set forth.
Given under my hand and seal the day and year last above written.
My commission expires: Notary Public
- --------------------------
[SEAL]
STATE OF _______________ )
)
COUNTY OF ______________ )
On this ___ day of ____________,1996, before me, the undersigned, a
Notary Public, in and for the county and state aforesaid, personally appeared
____________________________, to me known to be the identical person who signed
the name of Petrolinson S.A. to the within and foregoing instrument as its
________ President and acknowledged to me that he executed the same as his free
and voluntary act and deed, and as the free and voluntary act and deed of said
corporation, for the uses and purposes therein set forth.
115
<PAGE>
Given under my hand and seal the day and year last above written.
My commission expires: Notary Public
- --------------------------
[SEAL]
116
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AIPN MODEL FORM
INTERNATIONAL ACCOUNTING PROCEDURE
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EXHIBIT A
ACCOUNTING PROCEDURE
TABLE OF CONTENTS
SECTION PAGE
SECTION I - GENERAL PROVISIONS
1.1 Purpose.............................................................1
1.2 Conflict with Agreement.............................................2
1.3 Definitions.........................................................2
1.4 Joint Account Records and Currency Exchange.........................3
1.5 Statements and Billings.............................................6
1.6 Payments and Advances...............................................8
1.7 Adjustments........................................................13
1.8 Audits.............................................................14
1.9 Allocations........................................................16
SECTION II - DIRECT CHARGES
2.1 Licenses, Permits, Etc.............................................17
2.2 Salaries, Wages and Related Costs..................................17
2.3 Employee Relocation Costs..........................................21
2.4 Offices, Camps and Miscellaneous Facilities........................22
2.5 Material...........................................................22
2.6 Exclusively Owned Equipment and Facilities of Operator and
Affiliates.........................................................23
2.7 Services...........................................................24
2.8 Insurance..........................................................24
2.9 Damages and Losses to Property.....................................25
2.10 Litigation and Legal Expenses......................................26
2.11 Taxes and Duties...................................................27
2.12 Other Expenditures.................................................28
SECTION III - INDIRECT CHARGES
3.1 Purpose............................................................28
3.2 Amount.............................................................29
3.3 Exclusions.........................................................30
3.4 Indirect Charge for Projects.......................................30
3.5 Changes............................................................31
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SECTION PAGE
SECTION IV - ACQUISITION OF MATERIAL
4.1 Acquisitions.......................................................31
4.2 Materials Furnished by Operator....................................32
4.2.1 New Materials (Condition "1")...............................32
4.2.2 Used Materials (Condition "2" and "3")......................32
4.3 Premium Prices.....................................................34
4.4 Warranty of Material Furnished by Operator.........................36
SECTION V - DISPOSAL OF MATERIALS
5.1 Disposal...........................................................36
5.2 Material Purchased by a Party or Affiliate.........................37
5.3 Division In Kind...................................................38
5.4 Sales to Third Parties.............................................38
SECTION VI - INVENTORIES
6.1 Periodic Inventories - Notice and Representation...................39
6.2 Special Inventories................................................39
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EXHIBIT A
ACCOUNTING PROCEDURE
Attached to and made part of the Operating Agreement, hereinafter called the
"Agreement," effective as of the 8th day of December, 1993, by and between GHK
Company Colombia, Operator, and others, Non-operators.
SECTION I
GENERAL PROVISIONS
1.1 PURPOSE.
1.1.1 The purpose of this Accounting Procedure is to establish
equitable methods for determining charges and credits
applicable to operations under the Agreement which reflect the
costs of Joint Operations to the end that no Party shall gain
or lose in relation to other Parties.
It is intended that approval of the Work Program and Budget and
AFE's as provided in the Agreement shall constitute approval of
the rates and allocation methods used therein to currently
charge the Joint Account, but subject to verification by audit
at a later date as provided in the Accounting Procedure.
1.1.2 The Parties agree, however, that if the methods prove unfair or
inequitable to Operator or Non-Operators, the Parties shall
meet and in good faith endeavor to agree on changes in methods
deemed necessary to correct any unfairness or inequity.
1.2 CONFLICT WITH AGREEMENT. In the event of a conflict between the
provisions of this Accounting Procedure and the provisions of the
Agreement to which this Accounting Procedure is attached, the provisions
of the Agreement shall prevail.
1.3 DEFINITIONS. The definitions contained in ARTICLE I of the Agree
ment to which this Accounting Procedure is attached shall apply to
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this Accounting Procedure and have the same meanings when used herein.
Certain terms used herein are defined as follows:
"COUNTRY OF OPERATIONS" shall mean the Republic of Colombia.
"MATERIAL" shall mean personal property (including, but not limited to,
equipment and supplies) acquired and held for use in Joint Operations.
1.4 JOINT ACCOUNT RECORDS AND CURRENCY EXCHANGE.
1.4.1 Operator shall at all times maintain and keep true and
correct records of the production and disposition of all
liquid and gaseous Hydrocarbons, and of all costs and
expenditures under the Agreement, as well as other data
necessary or proper for the settlement of accounts
between the Parties hereto in connection with their
rights and obligations under the Agreement and to enable
Parties to comply with their respective applicable
income tax and other laws. The Operator shall charge to
the Joint Account only the foregoing expenses and shall
maintain their respective back-up and supporting
documents. Operator shall keep, available for Non-
Operators audit, in its main office in Colombia, all the
original supporting documents, or copies of them if
required to keep the originals in a different place.
1.4.2 Operator shall maintain accounting records pertaining to Joint
Operations in accordance with generally accepted accounting
practices used in the international petroleum industry and any
applicable statutory obligations of the Country of Operations
as well as the provisions of the Contract and the Agreement.
1.4.3 Joint Account records shall be maintained by Operator in the
English language and in United States of America ("U.S.")
currency and in such other language and currency as may be
required by the laws of the Country of Operations. Conversions
of currency shall be recorded at the rate actually experienced
in that
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conversion. Currency translations for expenditures and receipts
shall be recorded at the arithmetic average buying and selling
exchange rates for the day of the expenditure or receipt as
published by the WALL STREET JOURNAL or, if not published by
the WALL STREET JOURNAL for such day, then for the next
preceding day for which a rate was so published.
1.4.4 Any currency exchange gain or losses shall be credited or
charged to the Joint Account, except as otherwise specified in
this Accounting Procedure.
1.4.5 This Accounting Procedure shall apply, MUTATIS MUTANDIS,
to Exclusive Operations in the same manner that it
applies to Joint Operations; provided, however, that the
charges and credits applicable to Consenting Parties
shall be distinguished by an Exclusive Operation Ac
count. For the purpose of determining and calculating
the remuneration of the Consenting Parties, including
the premiums for Exclusive Operations, the costs and
expenditures shall be expressed in U.S. currency (irre
spective of the currency in which the expenditure was
incurred).
1.4.6 The cash basis for accounting shall be used in preparing
accounts concerning the Joint Operations. Operator shall show
accruals as memorandum items.
1.5 STATEMENTS AND BILLINGS.
1.5.1 Unless otherwise agreed by the Parties, Operator shall
submit monthly to each Party, on or before the last Day
of each month, statements of the costs and expenditures
incurred during the prior month, indicating by
appropriate classification the nature thereof, the
corresponding budget category, and the portion of such
costs charged to each of the Parties. The final format
to be used shall be approved by the Operating Committee.
These statements, as a minimum, shall contain the
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following information:
- advances of funds setting forth the currencies
received from each Party
- the share of each Party in total expenditures
- the current account balance of each Party
- summary of costs, credits, and expenditures on a cur rent
month, year-to-date, and inception-to-date basis or other
periodic basis, as agreed by Parties
- details of unusual charges and credits in excess of
U.S. dollars Twenty-five Thousand (U.S.$25,000).
1.5.2 Operator shall, upon request, furnish a description of
the accounting classifications used by it.
1.5.3 Amounts included in the statements and billings shall be
expressed in U.S. currency and reconciled to the
currencies advanced.
1.5.4 Each Party shall be responsible for preparing its own
accounting and tax reports to meet the requirements of
the Country of Operations and of all other countries to
which it may be subject. Operator, to the extent that
the information is reasonably available from the Joint
Account records, shall provide Non-Operators in a timely
manner with the necessary statements to facilitate the
discharge of such responsibility.
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1.6 PAYMENTS AND ADVANCES.
1.6.1 Upon approval of any Work Program and Budget, if Opera
tor so requests, each Non-Operator shall advance its
share of estimated cash requirements for the succeeding
month's operations. Each such cash call shall be equal
to the Operator's estimate of the money to be spent in
the currencies required to perform its duties under the
approved Work Program and Budget during the month
concerned. For informational purposes the cash call
shall contain an estimate of the funds required for the
succeeding two (2) months.
1.6.2 Each such cash call, detailed by major budget catego
ries, shall be made in writing and delivered to all Non-
Operators not less than fifteen (15) Days before the
payment due date. The due date for payment of such ad
vances shall be set by Operator but shall be no sooner
than the first Business Day of the month for which the
advances are required. All advances shall be made
without bank charges. Any charges related to receipt of
advances from a Non-Operator shall be borne by that Non-
Operator.
1.6.3 Each Non-Operator shall wire transfer its share of the
full amount of each such cash call to Operator on or
before the due date, in US dollars or Colombian pesos as
requested by Operator, and at a bank designated by
Operator. If currency provided by a Non-Operator is
other than the requested currency, then the entire cost
of converting to the requested currency shall be charged
to that Non-Operator.
1.6.4 Notwithstanding the provisions of Section 1.6.2, should
Operator be required to pay any sums of money for the
Joint Operations which were unforeseen at the time of
providing the Non-Operators with said estimates of its
requirements, Operator may make a written request of the
Non-Operators for special advances covering the Non-
Operators' share of such payments. Each such Non-
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Operator shall make its proportional special advances within
fifteen (15) Days after receipt of such notice.
1.6.5 If a Non-Operator's advances exceed its share of cash
expenditures, the next succeeding cash advance require
ments, after such determination, shall be reduced
accordingly. A Non-Operator may request that its excess
advances be refunded. Operator shall make such refund
within ten (10) Days after receipt of the Non-Operator's
request provided that the amount is in excess of the
requesting Non-Operator's share of the cash advance
requirements for the succeeding month.
1.6.6 If Non-Operator's advances are less than its share of cash
expenditures, the deficiency shall, at Operator's option, be
added to subsequent cash advance requirements or be paid by
Non-Operator within fifteen (15) Days following the receipt of
Operator's billing to Non- Operator for such deficiency.
1.6.7 If, under the provisions of the Agreement, Operator is
required to segregate funds received from the Parties,
any interest received on such funds shall be applied
against the next succeeding cash call or, if directed by
the Operating Committee, distributed quarterly. The
interest thus received shall be allocated to the Parties
on an equitable basis taking into consideration date of
funding by each Party to the accounts in proportion to
the total funding into the account. A monthly statement
summarizing receipts, disbursements, transfers to each
joint bank account and beginning and ending balances
thereof shall be provided by Operator to the Parties.
1.6.8 If Operator does not request Non-Operators to advance their
share of estimated cash requirements, each Non- Operator shall
pay its share of cash expenditures within fifteen (15) Days
following receipt of Operator's billing.
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1.6.9 Payments of advances or billings shall be made on or before the
due date. If these payments are not received by the due date
the unpaid balance shall bear and accrue interest from the due
date until the payment is received by Operator at the Agreed
Interest Rate. For the purpose of determining the unpaid
balance and interest owed, Operator shall translate to U.S.
currency all amounts owed in other currencies using the
currency exchange rate readily available to Operator at the
close of the last Business Day prior to the due date for the
unpaid balance as quoted by the applicable authority identified
in Section 1.4.3 of this Section I.
1.6.10 Subject to governmental regulation, Operator shall have the
right, at any time and from time to time, to convert the funds
advanced or any part thereof to other currencies to the extent
that such currencies are then required for operations. The cost
of any such conver sion shall be charged to the Joint Account.
1.6.11 Operator shall maintain funds held for the Joint Account in
bank accounts at a level consistent with that required for the
prudent conduct of Joint Operations.
1.6.12 If under the Agreement, Operator is required to segre gate
funds received from or for the Joint Account, the provisions
under this Section 1.6 for payments and advances by
Non-Operators shall apply also to Operator.
1.7 ADJUSTMENTS. Payments of any advances or billings shall not prejudice the
right of any Non-Operator to protest or question the correctness thereof;
provided, however, all bills and statements rendered to Non-Operators by
Operator during any Calendar Year shall conclusively be presumed to be
true and correct after twenty-four (24) months following the end of such
Calendar Year, unless within the said twenty-four (24) month period a
Non-Oper ator takes written exception thereto and makes claim on Operator
for adjustment. Failure on the part of a Non-Operator to make claim on
Operator for adjustment within such period shall establish the
correctness thereof and preclude the filing of exceptions
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thereto or making claims for adjustment thereon. No adjustment favorable
to Operator shall be made unless it is made within the same prescribed
period. The provisions of this paragraph shall not prevent adjustments
resulting from a physical inventory of the Property as provided for in
Section VI. Operator shall be allowed to make adjustments to the Joint
Account after such twenty-four (24) month period if these adjustments
result from audit exceptions outside of this Agreement, third party
claims, or Government or Government Oil Company requirements. Any such
adjustments shall be subject to audit within the time period specified in
Section 1.8.1.
1.8 AUDITS.
1.8.1 A Non-Operator, upon at least sixty (60) Days advance
notice in writing to Operator and all other Non-Opera
tors, shall have the right to audit the Joint Accounts
and records of Operator relating to the accounting here
under for any Calendar Year within the twenty-four (24)
month period following the end of such Calendar Year.
The cost of each such audit shall be borne by Non-
Operators conducting the audit. It is provided,
however, that Non-Operators must take written exception
to and make claim upon the Operator for all discrepan
cies disclosed by said audit within said twenty-four
(24) month period. Where there are two or more Non-
Operators, the Non-Operators shall make every reasonable
effort to conduct joint or simultaneous audits in a
manner which will result in a minimum of inconvenience
to the Operator. Operator and Non-Operators shall make
every effort to resolve any claim resulting from an
audit within a reasonable period of time.
A Non-Operator may audit the records of an Affiliate of
Operator relating to that Affiliate's charges. The provisions
of this Accounting Procedure shall apply MUTATIS MUTANDIS to
such audits.
1.8.2 Any information obtained by a Non-Operator under the
provisions of this Section 1.8 which does not relate
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directly to the Joint Operations shall be kept confi dential
and shall not be disclosed to any party, except as would
otherwise be permitted by ARTICLE 15.1(A)(3) AND (9) of the
Agreement.
1.8.3 In the event that the Operator is required by law to
employ a public accounting firm to audit the Joint
Account and records of Operator relating to the ac
counting hereunder, the cost thereof shall be a charge
against the Joint Account, and a copy of the audit shall
be furnished to each Party. On the contrary, audits
required to be conducted either to the Operator's or to
any of the non-Operator's records, not directly and
specifically related to the Joint Operations, shall be
borne and paid by the audited company.
1.9 ALLOCATIONS. If it becomes necessary to allocate any costs or
expenditures to or between Joint Operations and any other opera tions,
such allocation shall be made on an equitable basis. Upon request,
Operator shall furnish a description of its allocation procedures
pertaining to these costs and expenditures.
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SECTION II
DIRECT CHARGES
Operator shall charge the Joint Account with all costs and expenditures incurred
in connection with Joint Operations. It is also understood that charges for
services normally provided by an operator such as those contemplated in Section
2.7.2 which are provided by Operator's Affiliates shall reflect the cost to the
Affiliate, excluding profit, for performing such services, except as otherwise
provided in Section 2.6, Section 2.7.1, and Section 2.5.1 if selected.
The costs and expenditures shall be recorded as required for the settle ment of
accounts between the Parties hereto in connection with the rights and
obligations under this Agreement and for purposes of complying with the tax laws
of the Country of Operations and of such other countries to which any of the
Parties may be subject. Without in any way limiting the generality of the
foregoing, chargeable costs and expenditures shall include:
2.1 LICENSES, PERMITS, ETC. All costs, if any, attributable to the
acquisition, maintenance, renewal or relinquishment of licenses, permits,
contractual and/or surface rights acquired for Joint Operations and
bonuses paid in accordance with the Contract when paid by Operator in
accordance with the provisions of the Agreement.
2.2 SALARIES, WAGES AND RELATED COSTS.
2.2.1 The employees of Operator and its Affiliates in the Country of
Operations directly engaged in Joint Opera tions whether
temporarily or permanently assigned.
2.2.2 The employees of Operator and its Affiliates outside the
Country of Operations directly engaged in Joint Operations
whether temporarily or permanently assigned, and not otherwise
covered in Section 2.7.2.
2.2.3 Salaries and wages, including everything constituting
the employees' total compensation. To the extent not
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included in salaries and wages, the Joint Account shall also be
charged with the cost to Operator of holiday, vacation,
sickness, disability benefits, living and housing allowances,
travel time, and other customary allowances applicable to the
salaries and wages charge able hereunder, as well as costs to
Operator for employee benefits, including but not limited to
employee group life insurance, group medical insurance,
hospitalization, retirement, and other benefit plans of a like
nature applicable to labor costs of Operator. Operator's
employees participating in Country of Opera tions benefit plans
may be charged at a percentage rate to reflect payments or
accruals made by Operator appli cable to such employees. Such
accruals for Country of Operations benefit plans shall not be
paid by Non- Operators, unless otherwise approved by the
Operating Committee, until the same are due and payable to the
employee, upon withdrawal of a Party pursuant to the Agreement,
or upon termination of the Agreement, which ever occurs first.
2.2.4 Expenditures or contributions made pursuant to assess ments
imposed by governmental authority for payments with respect
thereto or on account of such employees.
2.2.5 Salaries and wages charged in accordance with Operator's
usual practice, when and as paid or accrued, or on a
basis of the Operator's average cost per employee for
each job category; and the rates to be charged shall be
initially determined by the Operating Committee and
reviewed at least annually to reflect the Operator's
actual costs. In determining the average cost per
employee for each job category, expatriate and national
employee salaries and wages shall be calculated
separately. During a given period of time it is
understood that some costs for salaries and wages may be
charged on an actual basis while the remaining costs for
salaries and wages are charged at a rate based upon the
above described average cost
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2.2.6 Reasonable expenses (including related travel costs) of those
employees whose salaries and wages are chargeable to the Joint
Account under Sections 2.2.1 and 2.2.2 of this Section II and
for which expenses the employees are reimbursed under the usual
practice of Operator.
2.2.7 If employees are engaged in other activities in addition to the
Joint Operations, the cost of such employees shall be allocated
on an equitable basis.
2.3 EMPLOYEE RELOCATION COSTS.
2.3.1 Except as provided in Section 2.3.3, Operator's cost of
employees' relocation to or from the Contract Area
vicinity or location where the employees will reside or
work, whether permanently or temporarily assigned to the
Joint Operations. If such employee works on other
activities in addition to Joint Operations, such relo
cation costs shall be allocated on an equitable basis.
Such costs shall not exceed the cost of relocating such
employees to and from the contract area vicinity to and
from the Operator's head office.
2.3.2 Such relocation costs shall include transportation of
employees, families, personal and household effects of the
employee and family, transit expenses, and all other related
costs in accordance with Operator's usual practice.
2.3.3 Relocation costs from the vicinity of the Contract Area to
another location classified as a foreign location by Operator
shall not be chargeable to the Joint Account unless such
foreign location is the point of origin of the employee.
2.4 OFFICES, CAMPS, AND MISCELLANEOUS FACILITIES. Cost of maintaining
any offices, sub-offices, camps, warehouses, housing, and other
facilities of the Operator and/or Affiliates directly serving the
Joint Operations. If such facilities serve operations in addition
to the Joint Operations the costs shall be allocated to the
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properties served on an equitable basis.
2.5. MATERIAL. Cost, net of discounts taken by Operator, of Material
purchased or furnished by Operator. Such costs shall include, but
are not limited to, export brokers' fees, transportation charges,
loading, unloading fees, export and import duties and license fees
associated with the procurement of Material and in-transit losses,
if any, not covered by insurance. So far as it is reasonably
practical and consistent with efficient and economical operation,
only such Material shall be purchased for, and the cost thereof
charged to, the Joint Account as may be required for immediate
use.
2.6 EXCLUSIVELY OWNED EQUIPMENT AND FACILITIES OF OPERATOR AND AFFILIATES.
Charges for exclusively owned equipment, facilities, and utilities of
Operator and its Affiliates at rates not to exceed the average commercial
rates of non-affiliated third parties then prevailing for like equipment,
facilities, and utilities for use in the area where the same are used
hereunder. On request, Operator shall furnish Non-Operators a list of
rates and the basis of application. Such rates shall be determined by the
Operating Committee and revised from time to time if found to be either
excessive or insuffi cient, but not more than once every six months.
Drilling tools and other equipment lost in the hole or damaged beyond
repair may be charged at replacement cost less depreciation plus
transportation costs to deliver like equipment to the location where
used.
2.7 SERVICES.
2.7.1 The cost of services provided by third parties including
Affiliates of Operator other than those services covered by
Section 2.7.2. Such charges for services by Operator's
Affiliates shall not exceed those currently prevailing if
performed by non-affiliated third parties, considering quality
and availability of services.
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2.7.2 The cost of services performed by Operator's Affiliates
technical and professional staffs not located within the
Country of Operation, with the previous agreement of the
Operating Committee.
2.8 INSURANCE. Premiums paid for insurance required by law or the Agreement
to be carried for the benefit of the Joint Operations, provided however
that Operator shall give non-Operators notice of the insurance required
to give them the opportunity to use their own policies, if possible.
2.9 DAMAGES AND LOSSES TO PROPERTY.
2.9.1 All costs or expenditures necessary to replace or repair
damages or losses incurred by fire, flood, storm, theft,
accident, or any other cause. Operator shall furnish
Non-Operators written notice of damages or losses
incurred in excess of Ten Thousand U.S. dollars (U.S.
$10,000) as soon as practical after report of the same
has been received by Operator. All losses in excess of
Ten Thousand U.S. dollars (U.S. $10,000) shall be listed
separately in the monthly statement of costs and
expenditures.
2.9.2 Credits for:
Settlements received from insurance carried for the benefit of
Joint Operations and from others from losses or damages to
Joint Property or Materials;
Government subsidy payments, disposition of material and
receipts from third parties for settlement of claims;
Interest amounts earned by investment of cash surpluses;
and
Any other credit arising from Joint Operations, contracts or
sales of Joint Property pursuant to the Contract or the Joint
Operating Agreement.
Each Party shall be credited with its Participating Interest
share thereof except where such receipts are
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derived from insurance purchased by Operator for less than all
Parties in which event such proceeds shall be credited to those
Parties for whom the insurance was purchased in the proportion
of their respective contributions toward the insurance
coverage.
2.9.3 Expenditures incurred in the settlement of all losses,
claims, damages, judgments, and other expenses for the
account of Joint Operations.
2.10 LITIGATION AND LEGAL EXPENSES. The costs and expenses of litiga
tion and legal services necessary for the protection of the Joint
Operations under this Agreement as follows:
2.10.1 Legal services necessary or expedient for the protection of the
Joint Operations, and all costs and expenses of litigation,
arbitration or other alternative dispute resolution procedure,
including reasonable attorneys' fees and expenses, together
with all judgments obtained against the Parties or any of them
arising from the Joint Operations.
2.10.2 If the Parties hereunder shall so agree, actions or
claims affecting the Joint Operations hereunder may be
handled by the legal staff of one or any of the Parties
hereto; and a charge commensurate with the reasonable
costs of providing and furnishing such services rendered
may be made by the Party providing such service to
Operator for the Joint Account, but no such charges
shall be made until approved by the Parties.
2.11 TAXES AND DUTIES. All taxes, duties, assessments and governmental
charges, of every kind and nature, assessed or levied upon or in
connection with the Joint Operations, other than any that are measured by
or based upon the revenues, income and net worth of a Party.
If Operator or an Affiliate is subject to income or withholding tax as a
result of services performed at cost for the operations under the
Agreement, its charges for such services may be in
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creased by the amount of such taxes incurred (grossed up).
2.12 OTHER EXPENDITURES. Any other costs and expenditures incurred by Operator
for the necessary and proper conduct of the Joint Opera tions in
accordance with approved Work Programs and Budgets and not covered in
this Section II or in Section III.
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AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE
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<PAGE>
SECTION III
INDIRECT CHARGES
3.1 PURPOSE. Operator shall charge the Joint Account monthly for the cost of
indirect services and related office costs of Operator and its Affiliates
not otherwise provided in this Accounting Procedure. Indirect costs
chargeable under this Section III represent the cost of general
counseling and support services provided to Operator by its Affiliate.
These costs are such that it is not practical to identify or associate
them with specific projects but are for services which provide Operator
with needed and necessary resources which Operator requires and provide a
real benefit to Joint Operations. No cost or expenditure included under
Section II shall be included or duplicated under this Section III.
3.2 AMOUNT. The charge for the period beginning with the Calendar Year
through the end of the period covered by Operator's invoice
("Year-to-Date") under Section 3.1 above shall be a percentage of the
Year-to-Date expenditures, calculated on the following scale (U.S.
Dollars):
ANNUAL EXPENDITURES
$0 to $2,000,000 of expenditures = 3%
Next $3,000,000 of expenditures = 2%
Excess above $5,000,000 of expenditures = 1%
A minimum amount of U.S.$120,000 shall be assessed each year.
3.3 EXCLUSIONS. The expenditures used to calculate the monthly indi rect
charge shall not include the indirect charge (calculated either as a
percentage of expenditures or as a minimum monthly charge), rentals on
surface rights acquired and maintained for the Joint Account, guarantee
deposits, pipeline tariffs, concession
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acquisition costs, bonuses paid in accordance with the Contract,
royalties and taxes paid under the Contract, expenditures associated with
major construction projects for which a separate indirect charge is
established hereunder, payments to third parties in settlement of claims,
and other similar items.
Credits arising from any government subsidy payments, disposition of
Material, and receipts from third parties for settlement of claims shall
not be deducted from total expenditures in determin ing such indirect
charge.
3.4 INDIRECT CHARGE FOR PROJECTS. As to major construction projects (such as,
but not limited to, pipelines, gas reprocessing and processing plants,
and final loading and terminalling facilities) when the estimated cost of
each project amounts to more than U.S. $5,000,000, a separate indirect
charge for such project shall be set by the Operating Committee at the
time of approval of the project.
3.5 CHANGES. The indirect charges provided for in this Section III may be
amended periodically by mutual agreement between the Parties if, in
practice, these charges are found to be insufficient or excessive.
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SECTION IV
ACQUISITION OF MATERIAL
4.1 ACQUISITIONS. Materials purchased for the Joint Account shall be charged
at net cost paid by the Operator. The price of Materials purchased shall
include, but shall not be limited to export broker's fees, insurance,
transportation charges, loading and unloading fees, import duties,
license fees, and demurrage (retention charges) associated with the
procurement of Materials, and applicable taxes, less all discounts taken.
4.2 MATERIALS FURNISHED BY OPERATOR. Materials required for opera tions shall
be purchased for direct charge to the Joint Account whenever practicable,
except the Operator or any other party may furnish such Materials from
its stock under the following conditions:
4.2.1 NEW MATERIALS (CONDITION "1"). New Materials trans ferred from
the warehouse or other properties of Opera tor shall be priced
at net cost determined in accordance with Section 4.1 above, as
if Operator had purchased such new Material just prior to its
transfer. Such net costs shall in no event exceed the then
current market price.
4.2.2 USED MATERIALS (CONDITIONS "2" AND "3").
4.2.2.1 Material which is in sound and serviceable condition
and suitable for use without repair or
reconditioning shall be classed as Condition "2" and
priced at seventy-five percent (75%) of such new
purchase net cost at the time of transfer.
4.2.2.2 Materials not meeting the requirements of Section
4.2.2.1 above, but which can be made suitable for
use after being repaired or reconditioned, shall be
classed as Condition "3" and priced at fifty percent
(50%) of
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such new purchase net cost at the time of transfer.
The cost of reconditioning shall also be charged to
the Joint Account provid ed the Condition "3" price,
plus cost of reconditioning, does not exceed the
Condi tion "2" price; and provided that Material so
classified meet the requirements for Condition "2"
Material upon being repaired or reconditioned.
4.2.2.3 Material which cannot be classified as Con dition
"2" or Condition "3", shall be priced at a value
commensurate with its use, but not exceeding the
price of Condition "3" material. This type of
material shall be purchased only when immediately
needed for the Joint Operations and not for stock.
4.2.2.4 Tanks, derricks, buildings, and other items of
Material involving erection costs, if transferred in
knocked-down condition, shall be graded as to
condition as provided in this Section 4.2.2 of
Section IV, and priced on the basis of knocked-down
price of like new Material.
4.2.2.5 Material including drill pipe, casing and tubing,
which is no longer useable for its original purpose
but is useable for some other purpose, shall be
graded as to condition as provided in this Section
4.2.2 of Section IV. Such Material shall be priced
on the basis of the current price of items normally
used for such other purpose if sold to third
parties.
For purposes of this Section, the Operator shall provide to the Non- Operators a
list of the relevant materials that are necessary for the Joint Operations
according to the Work Program.
4.3 PREMIUM PRICES. Whenever Material is not readily obtainable at
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prices specified in Sections 4.1 and 4.2 of this Section IV because of
national emergencies, strikes or other unusual causes over which Operator
has no control, Operator may charge the Joint Account for the required
Material at Operator's actual cost incurred procuring such Material, in
making it suitable for use, and moving it to the Contract Area, provided
that notice in writing, including a detailed description of the Material
required and the required delivery date, is furnished to Non-Operators of
the proposed charge at least 10 Days (or such shorter period as may be
specified by Operator) before the Material is projected to be needed for
operations and prior to billing Non-Operators for such Material the cost
of which exceeds Twenty-five Thousand U.S. dollars (U.S. $25,000). Each
Non-Operator shall have the right, by so electing and notifying Operator
within 5 Days (or such shorter period as may be specified by Operator)
after receiving notice from Operator, to furnish in kind all or part of
his share of such Material per the terms of the notice which is suitable
for use and acceptable to Operator both as to quality and time of
delivery. Such acceptance by Operator shall not be unreasonably withheld.
If Material furnished is deemed unsuitable for use by Operator, all costs
incurred in disposing of such Material or returning Material to owner
shall be borne by the Non-Operator furnishing the same unless otherwise
agreed by the Parties. If a Non-Operator fails to properly submit an
election notification within the designated period, Operator is not
required to accept Material furnished in kind by that Non-Operator. If
Operator fails to submit proper notification prior to billing
Non-Operators for such Material, Operator shall only charge the Joint
Account on the basis of the price allowed during a "normal" pricing
period in effect at time of movement.
4.4 WARRANTY OF MATERIAL FURNISHED BY OPERATOR. Operator does not warrant the
Material furnished. In case of defective Material, credit shall not be
passed to the Joint Account until adjustment has been received by
Operator from the manufacturers or their agents.
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SECTION V
DISPOSAL OF MATERIALS
5.1 DISPOSAL. Operator shall be under no obligation to purchase the interest
of Non-Operators in new or used surplus Materials. Operator shall have
the right to dispose of Materials but shall advise and secure prior
agreement of the Operating Committee of any proposed disposition of
Materials having an original cost to the Joint Account either
individually or in the aggregate of Twenty-five Thousand U.S. Dollars
(U.S. $25,000) or more. When Joint Operations are relieved of Material
charged to the Joint Account, Operator shall advise each Non-Operator of
the original cost of such Material to the Joint Account so that the
Parties may eliminate such costs from their asset records. Credits for
Material sold by Operator shall be made to the Joint Account in the month
in which payment is received for the Material. Any Material sold or
disposed of under this Section shall be on an "as is, where is" basis
without guarantees or warranties of any kind or nature. Costs and
expenditures incurred by Operator in the disposition of Materials shall
be charged to the Joint Account.
5.2 MATERIAL PURCHASED BY A PARTY OR AFFILIATE. Material purchased from the
Joint Property by a Party or an Affiliate thereof shall be credited by
Operator to the Joint Account, with new Material valued in the same
manner as new Material under Section 4.2.1 and used Material valued in
the same manner as used Material under Section 4.2.2, unless otherwise
agreed by the Operating Committee.
5.3 DIVISION IN KIND. Division of Material in kind, if made between the
Parties, shall be in proportion to their respective interests in such
Material. Each Party will thereupon be charged individu ally with the
value (determined in accordance with the procedure set forth in Section
5.2) of the Material received or receivable by it.
5.4 SALES TO THIRD PARTIES. Material purchased from the Joint
Property by third parties shall be credited by Operator to the
Joint Account at the net amount collected by Operator from the
buyer. If the sales price is less than that determined in
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accordance with the procedure set forth in Section 5.2, then approval by
the Operating Committee shall be required prior to the sale. Any claims
by the buyer for defective materials or otherwise shall be charged back
to the Joint Account if and when paid by Operator.
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SECTION VI
INVENTORIES
6.1 PERIODIC INVENTORIES - NOTICE AND REPRESENTATION. At reasonable
intervals, but at least annually, inventories shall be taken by Operator
of all Material on which detailed accounting records are normally
maintained. The expense of conducting periodic invento ries shall be
charged to the Joint Account. Operator shall give Non-Operators written
notice at least thirty Days (30) in advance of its intention to take
inventory, and Non-Operators, at their sole cost and expense, shall each
be entitled to have a representative present. The failure of any
Non-Operator to be represented at such inventory shall bind such
Non-Operator to accept the inventory taken by Operator, who shall in that
event furnish each Non-Operator with copies of the inventory listings and
a reconciliation of overages and shortages. Inventory adjust ments to the
Joint Account shall be made for overages and short ages. Any adjustment
equivalent to Twenty-five Thousand U.S. Dollars (U.S.$25,000) or more
shall be brought to the attention of the Operating Committee.
6.2 SPECIAL INVENTORIES. Whenever there is a sale or change of interest in
the Agreement, a special inventory may be taken by the Operator provided
the seller and/or purchaser of such interest agrees to bear all of the
expense thereof. In such cases, both the seller and the purchaser shall
be entitled to be represented and shall be governed by the inventory so
taken.
AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE
JUNE 8, 1992
EXHIBIT 10(e)
GHK COMPANY COLOMBIA SHARE PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 26th day of July, 1996
BETWEEN:
ROBERT A. HEFNER, III, Businessman, of 2121 Kirby Drive
#65E, Houston, Texas 77019, in the United States of America
(hereinafter called the "Vendor")
AND:
SEVEN SEAS PETROLEUM COLOMBIA INC., a company incorporated under the
laws of the Cayman Islands and having a business address at 1900
Post Oak Boulevard, Suite 960, Houston, Texas, 77056, in the United
States of America
(hereinafter called "SSPC")
AND:
SEVEN SEAS PETROLEUM INC., a company incorporated under the laws of
the Province of British Columbia with registered offices at 800 -
885 West Georgia Street, Vancouver, British
Columbia, Canada, V6C 3H1
(hereinafter called "SSPI")
WITNESSES THAT WHEREAS:
A. The Vendor is the registered and beneficial owner of all of the issued and
outstanding shares of the Company;
B. The Vendor has agreed to sell and SSPI has agreed to purchase the Vendor's
Shares on the terms and conditions detailed herein.
THEREFORE in consideration of the premises and the mutual covenants and
agreements herein set forth, the parties hereto covenant and agree each with the
other as follows:
1. INTERPRETATION
1.1 In this Agreement, including the schedules hereto, except as otherwise
expressly provided:
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(a) "Agreement" means this agreement, including the preamble and the
Schedules hereto, as it may from time to time be supplemented or
amended;
(b) "Association Contracts" means the association contracts between the
Company and Empressa Colombiana de Petroles S.A. respecting the
Properties;
(c) "Cimarrona Agreement" means the agreement of even date between
certain members of Cimarrona Limited Liability Company on the one
hand, and SSPI and SSPC on the other hand respecting the acquisition
by SSPI of a 62.963% membership interest in Cimarrona LLC;
(d) "Closing" means the completion of the transactions contemplated in
this Agreement in accordance with its terms;
(e) "Closing Certificate" means a closing certificate executed by or on
behalf of, inter alia, the parties to this Agreement;
(f) "Closing Date" means the date of the closing of the transactions
contemplated herein;
(g) "Company" means GHK Company Colombia;
(h) "Escrow Agreement" means that agreement providing for the escrowing
of certain of the SSPI Preferred Shares in the form attached as
Schedule "I" hereto;
(i) "Esmeralda Agreement" means the agreement of even date between the
members of Esmeralda Limited Liability Company on the one hand, and
SSPI, SSPC and Seven Seas Petroleum Holdings Inc. on the other hand
respecting the acquisition by SSPI of the members' interests in
Esmeralda LLC;
(j) "Final Prospectus" means a final prospectus of SSPI which qualifies
INTER ALIA the exchange of the SSPI Preferred Shares for the SSPI
Shares;
(k) "Financial Statements" means the financial statements of the Company
attached as Schedule "A" hereto;
(l) "JOA" means that joint operating agreement dated August 1, 1994
respecting the operatorship of the Properties;
(m) "Liens" means all liens, mortgages, debentures, charges,
hypothecations, pledges or other security interests or encumbrances
of whatever kind;
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(n) "Management Contract" means that management contract to be entered
into between the Company, GHK Company, LLC, SSPI and SSPC in the
form attached as Schedule "C" hereto;
(o) "Material Adverse Effect" means an adverse effect that is, or would
be, singly or in the aggregate material;
(p) "1933 Act" means the SECURITIES ACT OF 1933 (United States) as
amended;
(q) "Preliminary Prospectus" means a preliminary prospectus of SSPI
which qualifies the exchange of the SSPI Preferred Shares for the
SSPI Shares;
(r) "Properties" means the Dindal and Rio Seco areas located in the
Upper Magdalena Basin of Colombia as described in the Association
Contracts;
(s) "Public Record" means, in respect of SSPI, the financial statements,
offering memoranda, material change reports, information circulars,
press releases and all other documents and information filed or
required to be filed with the Ontario Securities Commission or the
Alberta Securities Commission on or during the 12 months preceding
the date of this Agreement;
(t) "Registration Rights Agreement" means that registration rights
agreement between, INTER ALIA, SSPI and the Vendor, in the form
attached as Schedule "J" hereto;
(u) "SSPI Financial Statements" means the audited, consolidated
financial statements of SSPI as at and for the year ended December
31, 1995 and the unaudited, consolidated financial statements of
SSPI for the six month period ended June 30, 1996;
(v) "SSPI Preferred Shares" means a total of 5,002,972 Class "A"
preferred shares Series I of SSPI having the rights and restrictions
as detailed in the Articles of SSPI attached as Schedule "B" hereto;
(w) "SSPI Shares" means the common shares of SSPI to be issued upon
conversion of the SSPI Preferred Shares;
(x) "Statement Date" means the date to which the Financial Statements of
the Company were prepared;
(y) "U.S. Person" has the meaning set out in Regulation S under the 1933
Act;
(z) "Vendor's Shares" means the shares of the Vendor in the Company;
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(aa) "Voting Support Agreement" means the shareholders voting support
agreement in the form attached as Schedule "D" hereto;
(ab) all references in this Agreement to a designated "Section" or other
subdivision or to a Schedule are to the designated Section or other
subdivision of, or Schedule to, this Agreement;
(ac) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Section or other subdivision or Schedule;
(ad) the headings are for convenience only and do not form a part of this
Agreement and are not intended to interpret, define, or limit the
scope, extent or intent of this Agreement or any provision hereof;
(ae) the singular of any term includes the plural, and vice versa; the
use of any term is equally applicable to any gender and, where
applicable, a body corporate; the word "or" is not exclusive and the
word "including" is not limiting (whether or not non-limiting
language, such as "without limitation" or "but not limited to" or
words of similar import, is used with reference thereto);
(af) in respect of the Company, any accounting term not otherwise defined
has the meaning assigned to it in accordance with United States tax
basis accounting practices;
(ag) in respect of SSPI and SSPC, any accounting term not otherwise
defined has the meaning assigned to it in accordance with Canadian
generally accepted accounting principles;
(ah) where any representation or warranty is made "to the knowledge of"
any party, such party will not be liable for a misrepresentation or
breach of warranty by reason of the fact, state of facts, or
circumstance in respect of which the representation or warranty is
given being untrue if such party proves it did not have actual
knowledge thereof;
(ai) in respect of SSPI and SSPC, where any representation or warranty is
made to the knowledge of one, it is deemed to be to the knowledge of
both; and
(aj) where any representation or warranty of the Vendor references
disclosure to either SSPI or SSPC, disclosure to one is deemed to be
disclosure to both.
1.2 The following are the Schedules to this Agreement:
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SCHEDULE DESCRIPTION
-------- -----------
A Financial Statements
B Memorandum and Articles of SSPI
C Management Contract
D Voting Support Agreement
E Directors and Officers of the Company
F Outstanding Indebtedness
G Surviving Contracts
H Cost Allocation
I Escrow Agreement
J Registration Rights Agreement
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, the Vendor hereby
sells and assigns to SSPI, and SSPI hereby purchases from the Vendor the
Vendor's Shares free and clear of any Liens.
2.2 SSPI hereby directs the Vendor to transfer the Vendor's Shares to and into
the name of SSPC, and SSPC hereby acknowledges its entitlement to and receipt of
the Vendor's Shares.
2.3 The Purchase Price payable by SSPI for the Vendor's Shares shall be the SSPI
Preferred Shares which are hereby issued and tendered to the Vendor, and the
Vendor hereby acknowledges receipt of same.
3. VENDOR'S WARRANTIES AND REPRESENTATIONS
3.1 The Vendor warrants and represents to SSPI, with the intent that SSPI will
rely thereon in entering into this Agreement and in concluding the purchase and
sale contemplated herein, that on the date hereof:
(a) the Vendor is the registered holder and beneficial owner of the
Vendor's Shares free and clear of all Liens, and the Vendor has no
interest, legal or beneficial, direct or indirect, in any shares of,
or the assets or business of, the Company other than the Vendor's
Shares, the Management Contract and any interest arising from the
Vendor's beneficial ownership interest in Esmeralda LLC;
(b) the Vendor's Shares represent all of the issued and outstanding
shares of the Company;
(c) with the exception of this Agreement, no party has any agreement,
right or option, consensual or arising by law, present or future,
contingent or absolute, or capable of becoming an agreement, right
or option:
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(i) to require the Company to issue or allot any further or other
shares in its capital or any other security convertible or
exchangeable into shares in its capital or to convert or
exchange any securities into or for shares in the capital of
the Company;
(ii) to require the Company to purchase, redeem or otherwise
acquire any of the issued and outstanding shares in its
capital; or
(iii) to purchase or otherwise acquire any shares in the capital of
the Company;
(d) the Vendor has good and sufficient right and authority to enter into
this Agreement on the terms and conditions herein set forth and to
transfer the legal and beneficial title and ownership of the
Vendor's Shares to SSPC;
(e) the Company is duly incorporated, validly existing and in good
standing under the laws of the State of Oklahoma;
(f) the directors and officers of the Company are as described in
Schedule "E";
(g) all alterations to the constating documents of the Company since its
incorporation have been duly approved by the shareholders of the
Company and registered with the appropriate authorities where
required;
(h) to the Vendor's knowledge, the Company is duly registered to carry
on business in all jurisdictions in which the Company carries on
business except where the failure to so register would not have a
Material Adverse Effect on the Company;
(i) to the Vendor's knowledge, the Company has the power, authority and
capacity to carry on its business as presently conducted by it;
(j) the Company holds the 10.944% participating interest under the
Association Contracts, free and clear of all Liens;
(k) the Company carries on no other business other than the holding of
the 10.944% participating interest under the Association Contracts
and acting as operator of the Properties;
(l) to the Vendor's knowledge, the Association Contract is in good
standing and remains in full force and effect;
(m) to the Vendor's knowledge, the Company holds all licences and
permits required for the conduct in the ordinary course of its
business as presently conducted by it and all such licences and
permits are in good standing and
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the conduct and uses of the same by the Company are in compliance
with all laws, and other restrictions, rules, regulations and
ordinances applicable to the Company and its respective business,
save and except for breaches which do not have a Material Adverse
Effect on the Company or its business as presently conducted and
with the exception that no such representation and warranty is given
with respect to any permit, license, contract consent or authority
granted under or in connection with the Association Contracts;
(n) the making of this Agreement and the completion of the transactions
contemplated hereby and the performance of and compliance with the
terms hereof will not:
(i) conflict with or result in a breach of or violate any of the
terms, conditions, or provisions of the constating documents
of the Company;
(ii) to the Vendor's knowledge, conflict with or result in a breach
of or violate any of the terms, conditions or provisions of
any law, judgment, order, injunction, decree, regulation or
ruling of any court or governmental authority, domestic or
foreign, to which the Company or the Vendor is subject or
constitute or result in a default under any agreement,
contract or commitment to which the Company or the Vendor is a
party with the exception that no such representation and
warranty is made with respect to or in connection with the
Association Contracts;
(iii) to the Vendor's knowledge, give to any person any remedy,
cause of action, right of termination, cancellation or
acceleration in or with respect to any understanding,
agreement, contract, or commitment, written, oral or implied,
to which the Company is a party with the exception that no
such representation and warranty is made with respect to the
Association Contracts;
(iv) to the Vendor's knowledge, give to any government or
governmental authority including any governmental department,
commission, bureau, board, or administrative agency any right
of termination, cancellation, or suspension of, or constitute
a breach of or result in a default under any permit, license,
control, or authority issued to the Company and which is
necessary or desirable in connection with the conduct and
operation of the businesses currently conducted by the Company
with the exception that no such representation and warranty is
given with respect to any permit, license, contract or
authority granted under or in connection with the Association
Contracts;
(v) to the Vendor's knowledge, constitute a default by the Company
or an event which, with the giving of notice or lapse of time
or both, might constitute an event of default or
non-observance under any agreement, contract, indenture or
other instrument relating to any indebtedness of any of the
Company which would give any
<PAGE>
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party the right to accelerate the maturity for the payment of
any amount payable under that agreement, contract, indenture,
or other instrument;
so as to have a Material Adverse Effect on the Company;
(o) the Financial Statements were prepared on a cash basis in accordance
with U.S. tax regulations applied on a basis consistent with prior
years and are true and correct in every material respect;
(p) to the Vendor's knowledge, there is no indebtedness of the Company,
including to the Vendor, which is not disclosed or reflected in the
Company's Financial Statements other than as detailed in Schedule
"F";
(q) to the Vendor's knowledge, the Company has been assessed for income
tax for all years to and including the most recent fiscal year end
of the Company to which the Financial Statements are made up, and
the Company has withheld and remitted to all applicable tax
collecting authorities all amounts required to be remitted to all
tax collecting authorities respecting payments to employees or to
non-residents, or otherwise and has paid all instalments of
corporate taxes due and payable as of the date hereof;
(r) to the Vendor's knowledge, all tax returns and reports of the
Company required by law to be filed prior to the date hereof
including all income tax returns and all other corporate tax returns
required to be filed with any governmental taxing authority or board
have been filed and are true, complete and correct, and all taxes
and other government charges including all income, excise, sales,
business and property taxes and other rates, charges, assessment,
levies, duties, taxes, contributions, fees and licenses required to
be paid have been paid, and if not required to be paid as at the
date hereof, have been accrued in the Financial Statements;
(s) to the Vendor's knowledge, adequate provision has been made for
taxes payable by the Company which are not yet due and payable and
there are no agreements, waivers or other arrangements providing for
an extension of time with respect to the assessment or reassessment
of any tax return by any taxing authority or for the filing of any
tax return by or payment of any tax, governmental charge or
deficiency by the Company, and to the Vendor's knowledge, there are
no contingent tax liabilities or any grounds which would prompt a
re-assessment;
(t) to the Vendor's knowledge, no authorization, approval, order,
license, permit or consent of any governmental authority, regulatory
body or court, and no registration, declaration or filing by the
Vendor or the Company with any such governmental authority,
regulatory body or court
<PAGE>
- 9 -
remains outstanding in order for the Vendor to complete the within
purchase and sale, to duly perform and observe the terms and
provisions of this Agreement, and to render this Agreement legal,
valid, binding and enforceable in accordance with its terms with the
exception that no representation and warranty is given as to any
authorizations, approvals, orders, licenses, permits or consents
granted under or in connection with the Association Contracts;
(u) the Vendor does not have any specific information relating to the
Company which is not generally known and which to the knowledge of
the Vendor has not been disclosed to, SSPC or SSPI and which if
known could reasonably be expected to have a Material Adverse Effect
on the Company;
(v) (i) to the Vendor's knowledge, the business of the Company as
currently carried on by it, and in particular the conduct of
the Company as operator of the Properties, complies with all
applicable laws, judgments, decrees, orders, injunctions,
rules, statutes and regulations of all courts, arbitrators or
governmental authorities, including all environmental, health
and safety statutes and regulations except where the failure
to comply would not have a Material Adverse Effect on the
Company;
(ii) to the Vendor's knowledge, the Company' business, assets or
properties are not subject to any judicial or administrative
proceeding alleging the violation of any applicable
environmental, health or safety law, judgment, decree, order,
injunction, rule, statute or regulation except where such
proceeding would not have a Material Adverse Effect on the
Company;
(w) since the date of the Company's most recent Financial Statements, to
the Vendor's knowledge, there has not been any occurrence or event
which has had, or might reasonably be expected to have, a Material
Adverse Effect on the business of the Company as currently carried
on or the results of its operations;
(x) to the Vendor's knowledge, other than as disclosed in Schedule "G"
hereto, the Company does not have any material contract, agreement,
undertaking or arrangement, whether oral, written or implied, which
cannot be terminated on not more than one month's notice and the
Company does not have any outstanding material agreements, contracts
or commitments (whether written or oral) whatsoever relating to or
affecting the conduct of its business as currently carried on or any
of its assets or for the purchase, sale or lease of its assets with
the exception of this Agreement;
<PAGE>
- 10 -
(y) there are no actions, suits, judgments, investigations or
proceedings outstanding or pending or to the knowledge of the Vendor
threatened against or affecting the Company at law or in equity or
before or by any court or federal, state, municipal or other
governmental authority, department, commission, board, tribunal,
bureau or agency and the Company is not a party to or threatened
with any litigation which in either case would have a Material
Adverse Effect on the Company;
(z) [intentionally left blank]
(aa) the Company has not guaranteed, or agreed to guarantee, any
indebtedness or other obligation of any party, except in the
ordinary course of its business as operator of the Properties and
except as described in the Financial Statements, under the
Association Contracts, the JOA and under a trust agreement with SSPC
pertaining to SSPC's interest in the Association Contracts;
(ab) the Company has no employees;
(ac) since the date of the most recent Financial Statements:
<PAGE>
- 11 -
(i) no dividends of any kind or other distribution on any shares
of the Company has been declared or paid by the Company;
(ii) except as required under the Association Contracts, no single
capital expenditure or commitment therefor has been made by
the Company other than as previously disclosed in writing to
SSPC; and
(iii) the Company has not increased the pay of or paid or agreed to
pay any pension, bonus, share of profits or other similar
benefit to or for the benefit of any agent, director or
officer of the Company, except increases in the normal course
of business;
(ad) the Vendor:
(i) is a U.S. Person;
(ii) has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of
the transactions detailed in this Agreement and is able to
bear the economic risk of loss arising from the transactions
contained herein;
(iii) is acquiring the SSPI Preferred Shares and will acquire the
SSPI Shares for investment only and not with a view to resale
or distribution and, in particular, has no intention to
distribute either directly or indirectly any of the SSPI
Preferred Shares or the SSPI Shares in the United States or to
U.S. Persons other than pursuant to registration thereof
pursuant to the 1933 Act and any applicable State securities
laws, or unless an exemption from such registration
requirements is available or registration is not required
pursuant to Regulation S under the 1933 Act or registration is
otherwise not required under the 1933 Act, and the Vendor
hereby acknowledges that SSPI has no obligation or present
intention of filing a registration statement under the 1933
Act in respect of the SSPI Preferred Shares or the SSPI
Shares;
(iv) understands that the SSPI Preferred Shares and the SSPI Shares
have not been and will not be registered under the 1933 Act
and that the issuance contemplated hereby is being made in
reliance on an exemption from such registration requirement;
(v) is a natural person whose individual net worth, or joint net
worth with his spouse, on the date of purchase exceeds US
$1,000,000;
<PAGE>
- 12 -
(ae) the Vendor is aware that if he decides to offer, sell or otherwise
transfer any of the SSPI Preferred Shares or SSPI Shares, he will
not offer, sell or otherwise transfer any of such securities
directly or indirectly, unless:
(ix) the sale is to SSPI;
(x) the sale is made outside the United States in a transaction
meeting the requirements of Rule 904 of Regulation S under the
1933 Act and in compliance with applicable local laws and
regulations;
(xi) the sale is made pursuant to the exemption from the
registration requirements under the 1933 Act provided by Rule
144 thereunder if available and in accordance with any
applicable state securities or "Blue Sky" laws; or
(xii) the SSPI Preferred Shares or SSPI Shares are sold in a
transaction that does not require registration under the 1933
Act or any applicable U.S. state laws and regulations
governing the offer and sale of securities, and it has prior
to such sale furnished to SSPI an opinion of counsel
reasonably satisfactory to SSPI;
(af) the SSPI Preferred Shares were not acquired as a result of, and the
Vendor will not engage in, any "directed selling efforts" (as
defined in Regulation S under the 1933 Act) in the United States in
respect of the SSPI Preferred Shares which would include any
activities undertaken for the purpose of, or that could reasonably
be expected to have the effect of, conditioning the market in the
United States for the resale of the SSPI Preferred Shares or SSPI
Shares; provided, however, that the Vendor may sell or otherwise
dispose of any of the SSPI Preferred Shares or SSPI Shares pursuant
to registration of the SSPI Preferred Shares or SSPI Shares pursuant
to the 1933 Act and any applicable state securities laws or under an
exemption from such registration requirements and as otherwise
provided herein; and
(ag) the Vendor is aware that upon the issuance thereof, and until such
time as the same is no longer required under the applicable
requirements of the 1933 Act or applicable U.S. State laws and
regulations, the certificates representing any of the SSPI Preferred
Shares or SSPI Shares will bear a legend in substantially the
following form:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT
BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933,
AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY ACQUIRING
SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE COMPANY THAT
SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (a) TO THE COMPANY, (b) OUTSIDE THE UNITED
STATES IN
<PAGE>
- 13 -
ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAW, (c)
PURSUANT TO THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF
AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS, OR (d) IN A TRANSACTION THAT DOES NOT REQUIRE
REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE LAWS
AND REGULATIONS GOVERNING THE OFFER AND SALE OF SECURITIES,
AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE
COMPANY AN OPINION OF COUNSEL, OF RECOGNIZED STANDING, OR
OTHER EVIDENCE OF EXEMPTION, REASONABLY SATISFACTORY TO THE
COMPANY. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD
DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN
CANADA; A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF
WHICH WILL CONSTITUTE "GOOD DELIVERY" MAY BE OBTAINED FROM THE
REGISTRAR AND TRANSFER AGENT OF THE COMPANY UPON DELIVERY OF
THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM
SATISFACTORY TO THE COMPANY AND ITS REGISTRAR AND TRANSFER
AGENT, TO THE EFFECT THAT THE SALE OF THE SECURITIES
REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904
OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS."
and that any certificate representing SSPI Shares issuable in
exchange for the SSPI Preferred Shares or in substitution thereof
will bear the same legend; provided that if the SSPI Shares are
being sold in the manner described in subsection 3.1 (ae)(ii) above,
the legend may be removed by providing a declaration to the
registrar and transfer agent of SSPI in the form agreed upon by SSPI
(or as SSPI may reasonably prescribe from time to time);
"The Undersigned (A) acknowledges that the sale of the
securities to which this declaration relates is being made in
reliance on Rule 904 of Regulation S under the United States
SECURITIES ACT OF 1933, as amended (the "1933 Act') and (B)
certifies that: (1) the seller is not an affiliate of the
Company as defined in the 1933 Act (other than solely by
virtue of his position as an officer or director of the
Company); (2) the offer of such securities was not made to a
person in the United States and either (a) at the time the buy
order was originated or (b) at the time the sale was made, the
buyer was outside the United States";
(ah) the Vendor is a resident of the State of Texas;
(ai) the Vendor is not acquiring the SSPI Preferred Shares as a result of
any form of general solicitation or general advertising including
advertisements, articles, notices or other communications published
in any newspaper, magazine or similar media or broadcast over radio,
or television, or any seminar or meeting whose attendees have been
invited by general solicitation or general advertising.
(aj) the Company has provided to SSPC all material drilling, completion
and testing information in its possession for the El Segundo No. 1
well and
<PAGE>
- 14 -
any and all material engineering or other evaluations which the
Company has done based on such information; and
4. SSPC'S AND SSPI'S WARRANTIES AND REPRESENTATIONS
4.1 SSPC and SSPI jointly and severally warrant and represent to the Vendor,
with the intent that the Vendor will rely thereon in entering into this
Agreement and in concluding the purchase and sale contemplated herein, that on
the date hereof:
(a) SSPC has been duly and validly incorporated and is a validly
existing corporation in good standing under the laws of the Cayman
Islands, with all necessary power, authority and capacity to own its
property and assets and carry on its business as presently carried
on by it and to complete the transactions provided for herein;
(b) SSPI has been duly and validly incorporated and is a validly
existing corporation in good standing under the laws of the Province
of British Columbia, with all necessary power, authority and
capacity to own its property and assets and carry on its business as
presently carried on by it and to complete the transactions provided
for herein;
(c) SSPI is a reporting issuer in good standing under the securities
laws of Ontario and Alberta and, since March 31, 1996, no material
change relating to SSPI has occurred with respect to which the
requisite material change report has not been filed under the
applicable securities laws in Ontario and Alberta and no such
disclosure has been made on a confidential basis;
(d) SSPI is not a reporting issuer under the securities laws of any
other province, state, country or other jurisdiction;
(e) SSPI has full corporate power and authority to issue the SSPI
Preferred Shares and the SSPI Shares upon the conversion of the SSPI
Preferred Shares; the SSPI Preferred Shares have been duly and
validly created, authorized, allotted and issued, the SSPI Shares
issuable upon conversion of the SSPI Preferred Shares have been duly
and validly authorized, allotted and reserved for issuance upon such
conversion and will, upon conversion in accordance with the terms of
the Articles of SSPI, be duly and validly issued as fully paid and
non-assessable shares;
<PAGE>
- 15 -
(f) the authorized capital of SSPI consists of 100,000,000 common shares
without par value and 10,000,000 Class "A" preferred shares without
par value of which 12,995,463 common shares (and no Class "A"
preferred shares with the exception of the SSPI Preferred Shares)
are issued and outstanding as at the date hereof; a further
1,085,000 common shares are reserved for issuance pursuant to the
exercise of incentive stock options; and a further 3,000,000 common
shares are reserved for issuance pursuant to the exercise of special
warrants previously issued by way of a private placement; as a
result of which the total issued and outstanding share capital of
SSPI on a fully diluted basis is 17,080,463;
(g) the creation, terms (including the terms of conversion),
authorization, allotment and issuance to the Vendor of the SSPI
Preferred Shares comply with all applicable securities and other
statutes, rules, regulations and policies;
(h) the authorized capital of SSPC consists of 50,000 common shares with
a par value of $1.00 (US) each, of which one share is issued and
outstanding as at the date hereof, and SSPI is the registered and
beneficial owner thereof;
(i) all alterations to the constating documents of each of SSPI and SSPC
since their incorporation have been duly approved by the
shareholders of SSPI and SSPC respectively and registered with the
appropriate authorities;
(j) each of SSPI and SSPC is duly registered to carry on business in all
jurisdictions in which it carries on business except where the
failure to register would not have a Material Adverse Effect on SSPI
or SSPC as the case may be;
(k) each of SSPI and SSPC has full corporate power and authority to
enter into this Agreement and to perform its obligations set out
herein, and the Agreement has been duly authorized, executed and
delivered by each of SSPI and SSPC and constitutes a legal, valid
and binding obligation of each of SSPI and SSPC enforceable in
accordance with its terms;
(l) neither SSPC nor SSPI is in default or breach of, and the execution
and delivery of this Agreement by SSPC and SSPI and the performance
of the transactions contemplated thereby will not result in a breach
of, and do not create a state of facts which, after notice or lapse
of time or both, will result in a breach of, and do not and will not
conflict with, any of the terms, conditions or provisions of the
constating documents, resolutions or bylaws of SSPC or SSPI;
<PAGE>
- 16 -
(m) SSPC and SSPI hold all licenses and permits required for the conduct
in the ordinary course of their respective businesses as presently
conducted by them and all such licenses and permits are in good
standing and the conduct and uses of the same by them are in
compliance with all laws and other restrictions, rules, regulations
and ordinances applicable to them and their respective businesses,
save and except for breaches which do not have a Material Adverse
Effect on SSPC or SSPI, as the case may be, or their respective
businesses as currently conducted;
(n) SSPI has the right, power and authority to direct the transfer of
the Vendor's Shares to SSPC and SSPC has the right, power and
authority to receive same, and neither such direction nor reception
of the Vendor's Shares gives rise to any liability under taxation or
other laws;
(o) the making of this Agreement and the completion of the transactions
contemplated hereby and the performance of and compliance with the
terms hereof do not and will not:
(i) conflict with or result in a breach of or violate any of the
terms, conditions or provisions of any law, judgment, order,
injunction, decree, regulation or ruling of any court or
governmental authority, domestic or foreign, to which SSPI or
SSPC are subject;
(ii) give to any person any right, remedy, cause of action, right
of termination, cancellation or acceleration in or with
respect to any understanding, agreement, contract, or
commitment, written, oral or implied to which SSPI or SSPC or
any predecessor or shareholder thereof is or was a party with
the exception that no such representation and warranty is made
with respect to the Association Contracts;
(iii) give to any government or governmental authority including any
governmental department, commission, bureau, board, or
administrative agency any right of termination, cancellation,
or suspension of, or constitute a breach of or result in a
default under any permit, license, control, or authority
issued to SSPI or SSPC and which is necessary or desirable in
connection with the conduct and operation of the businesses
currently conducted by SSPI and SSPC with the exception that
no such representation and warranty is given with respect to
any permit, license, contract or authority granted under or in
connection with the Association Contracts;
(iv) constitute a default by SSPI or SSPC or an event which, with
the giving of notice or lapse of time or both, might
constitute an event of default or nonobservance under any
agreement, contract, indenture or other instrument relating to
any indebtedness of SSPI
<PAGE>
- 17 -
or SSPC which would give any person the right to accelerate
the maturity for the payment of any amount payable under that
agreement, contract, indenture, or other instrument;
such that there would be a Material Adverse Effect on them;
(p) SSPI and its subsidiaries are the beneficial owners of or have the
right to acquire the interests in the properties, business and
assets referred to in the Public Record, which interests in the
properties, business and assets represent all interests of SSPI and
its subsidiaries in any properties, business or assets and any and
all agreements pursuant to which SSPI or its subsidiaries hold or
will hold any such interest in property, business or assets are in
good standing in all material respects according to their terms, and
the properties are in good standing in all material respects under
the applicable statues and regulations of the jurisdictions in which
they are situated;
(q) the Public Record is in all material respects accurate and omits no
facts, the omission of which makes the Public Record, or any
particulars therein, misleading or incorrect, as at the date they
were made;
(r) SSPI is not party to and has not granted and no person has any
agreement, warrant, option, right or privilege, consensual or
arising by law, present or future, contingent or absolute, capable
of becoming an agreement, warrant, option, right or privilege for
the creation, purchase, acquisition, subscription, issuance or
allotment of any shares of SSPI or securities convertible into or
exchangeable for shares of SSPI or to convert or exchange any
securities into or for shares of SSPI, or to require SSPI to
purchase, redeem or otherwise acquire any of the issued and
outstanding shares in its capital except as disclosed in the Public
Record or as contemplated hereunder;
(s) no judgments, investigations, actions, suits, inquiries or
proceedings are outstanding or pending or, to the knowledge of SSPI,
are contemplated or threatened to which SSPI or its subsidiaries is
a party or to which the property of SSPI or its subsidiaries is
subject at law or in equity that would have a Material Adverse
Effect on the business, operations, condition (financial or
otherwise) of SSPI and its subsidiaries, on a consolidated basis;
(t) the SSPI Financial Statements were prepared in accordance with
Canadian general accepted accounting principles applied on a basis
consistent with prior years (in respect of any predecessors of SSPI)
and are true and correct in every material respect and present
fairly and accurately the financial condition and position of SSPI
and it subsidiaries as at the dates set out therein and the results
of its operations and the changes in its
<PAGE>
- 18 -
financial position for the periods then ended, in accordance with
Canadian generally accepted accounting principles;
(u) except as disclosed in the Public Record, there has not been any
material change in the assets, liabilities or obligations (absolute,
accrued, contingent or otherwise) of SSPI and its subsidiaries, on a
consolidated basis, as set forth in the SSPI Financial Statements
and there has not been any material adverse change in the business,
operations or condition (financial or otherwise) or results of the
operations of SSPI and its subsidiaries, on a consolidated basis,
since June 30, 1996 and since that date there have been no material
facts, transactions, events or occurrences which could have a
Material Adverse Effect on the business of SSPI and its
subsidiaries, on a consolidated basis;
(v) none of SSPI's or any of its subsidiaries' businesses, assets or
properties are subject to any judicial or administrative proceeding
alleging the violation of any applicable law, judgment, decree,
order, injunction, rule, statute or regulation except where such
violation would not have a Material Adverse Effect on SSPI or its
subsidiaries;
(w) except as disclosed in Schedule "G", neither SSPI nor any of its
subsidiaries has any material contract, agreement, undertaking or
arrangement, whether oral, written or implied, which cannot be
terminated on not more than one month's notice and neither SSPI nor
any of its subsidiaries has any outstanding material agreements,
contracts or commitments (whether written or oral) whatsoever
relating to or affecting the conduct of their businesses as
currently carried on or any of their assets or for the purchase,
sale or lease of any of their assets with the exception of this
Agreement;
(x) each of SSPI and its subsidiaries has been assessed for income tax
for all years to and including the fiscal year of each of SSPI and
its subsidiaries ended on December 31, 1995, and each of SSPI and
its subsidiaries has withheld and remitted to all applicable tax
collecting authorities all amounts required to be remitted to all
tax collecting authorities respecting payments to employees or to
nonresidents, or otherwise and has paid all instalments or corporate
taxes due and payable as of the date hereof;
(y) all tax returns and reports of each of SSPI and its subsidiaries
required by law to be filed prior to the date hereof including all
income tax returns and all other corporate tax returns required to
be filed with any governmental taxing authority or board have been
filed and are true, complete and correct, and all taxes and other
government charges including all income, excise, sales, business and
property taxes and other rates, charges, assessment, levies, duties
taxes, contributions, fees,
<PAGE>
- 19 -
licenses, interest and penalties required to be paid have been paid,
and if not required to be paid as at the date hereof, have been
accrued in the SSPI Financial Statements;
(z) adequate provision has been made for taxes payable by each of SSPI
and its subsidiaries which are not yet due and payable and there are
no agreements, waivers or other arrangements providing for an
extension of time with respect to the assessment or reassessment of
any taxing authority or board or the filing of any tax return by or
payment of any tax, governmental charge or deficiency by any of SSPI
or its subsidiaries, and there are no contingent tax liabilities or
any grounds which would prompt a reassessment, including aggressive
treatment of income and expenses in filing earlier tax returns;
(aa) no authorization, approval, order, license, permit or consent of any
governmental authority, regulatory body or court, and no
registration, declaration or filing by either of SSPI or SSPC with
any such governmental authority, regulatory body or court is
required in order for SSPI and SSPC to complete the within purchase
and sale, to duly perform and observe the terms and provisions of
this Agreement, to allot and issue the SSPI Preferred Shares, and to
render this Agreement legal, valid, binding and enforceable in
accordance with its terms with the exception that no representation
and warranty is given as to any authorizations, approvals, orders,
licenses, permits or consents required under the Association
Contracts;
(ab) neither SSPI nor SSPC has guaranteed or agreed to guarantee any
indebtedness or other obligation of any party except as described in
the SSPI Financial Statements;
(ac) no order ceasing or suspending trading in securities of SSPI or
prohibiting the sale of securities by SSPI has been issued and no
proceedings for this purpose have been instituted, are pending,
contemplated or threatened;
(ad) SSPI has not, directly or indirectly, declared or paid any dividend
or declared or made any other distribution on any of its shares or
securities of any class, or, directly or indirectly, redeemed,
purchased or otherwise acquired any of its shares or securities or
agreed to do any of the foregoing;
(ae) since June 30, 1996, there has not been any occurrence or event
which has had, or might reasonably be expected to have, a Material
Adverse Effect on the business of SSPI or SSPC as currently carried
on or the results of their operations;
<PAGE>
- 20 -
(af) neither SSPI nor SSPC has increased the pay of or paid or agreed to
pay any pension, bonus, share of profits or other similar benefit of
any individual named on the "Summary Compensation Table" in the
Management Information Circular of SSPI as at May 8, 1996;
(ag) since June 30, 1996, no single capital expenditure or commitment
therefor has been made by SSPI or SSPC other than as previously
disclosed in writing to the Vendor;
(ah) there is not, in the constating documents or bylaws of SSPI or in
any agreement, mortgage, note, debenture, indenture or other
instrument or document to which SSPI is a party, any restriction
upon or impediment to the declaration or payment of dividends by the
directors of SSPI or the payment of dividends by SSPI to the holders
of its common shares;
(ai) neither SSPI nor SSPC:
(i) is in breach of any of the terms, covenants, conditions or
provisions of, is in default under, or has done or omitted to
do anything which, with the giving of notice or lapse of time
or both, would constitute a breach of or a default under any
contract to which it is a party provided that no
representation or warranty is given with respect to any beach
or default under the Association Contracts which may arise as
a result of the entering into of this Agreement and the
completion of the transactions contemplated hereby;
(ii) is in violation of nor are any present uses by either SSPI or
SSPC of any of its assets in violation of or contravention of
any applicable law, statute, order, rule or regulation;
(iii) is in breach or default under any judgment, injunction or
other order or aware of any judicial, administration,
governmental, or other authority or arbitrator by which either
SSPI or SSPC is bound or to which either SSPI or SSPC or any
of their assets are subject except where such breach or
violation would not have a Material Adverse Effect;
(aj) The Montreal Trust Company of Canada at its office in Calgary,
Alberta has been duly appointed as the transfer agent and registrar
for all of the outstanding common shares of SSPI;
(ak) each of the material contracts referred to in the Public Record to
which SSPI or its subsidiaries is a party has been duly authorized,
executed and delivered by the parties thereto and is a legal, valid
and binding obligation
<PAGE>
- 21 -
of the parties thereto enforceable in accordance with their
respective terms; and
(al) SSPI is not a nonresident of Canada for the purposes of the INCOME
TAX ACT (Canada).
5. COVENANTS OF THE VENDOR
5.1 The Vendor shall:
(a) duly and punctually perform all the obligations to be performed by
him under this Agreement; and
(b) execute all such documents and do all such things as shall be
reasonably necessary to give full effect to this Agreement.
6. COVENANTS OF SSPI
6.1 SSPI shall:
(a) use its best efforts to file the Preliminary Prospectus within two
weeks of the Closing Date and to obtain a receipt for the Final
Prospectus by September 30, 1996;
(b) use its best efforts to obtain a listing of SSPI's common shares on
a stock exchange recognized under the INCOME TAX ACT (Canada) by
September 30, 1996;
(c) ensure that at the respective times of filing and at all times
subsequent to the filing thereof during the distribution of the SSPI
Shares, the Preliminary Prospectus, and the Final Prospectus will
fully comply with the requirements of applicable securities
legislation;
(d) duly and punctually perform all the obligations to be performed by
it under this Agreement, and cause SSPC to duly and punctually
perform all the obligations to be performed by it under this
Agreement;
(e) execute, and will cause SSPC to execute, all such documents and
shall do, and will cause SSPC to do, all such things as shall be
reasonably necessary to give full effect to this Agreement;
(f) continue under the laws of the Yukon Territory within 30 days of the
date hereof;
<PAGE>
- 22 -
(g) until such time as Robert Hefner and Brian Egolf became directors of
SSPI, give them reasonable prior notice of all meetings of the board
of directors of SSPI and afford them observer status at such
meetings;
(h) purchase within 45 days of the date hereof and maintain in good
standing for a period of two years thereafter, an insurance policy
or policies insuring the directors and officers of the Company
against reasonable risks of liability and costs in an amount no less
than U.S. $3 million;
(i) reserve and keep available a sufficient number of common shares of
SSPI for the purpose of enabling it to satisfy its obligations to
issue common shares upon the conversion of the SSPI Preferred
Shares;
(j) cause the SSPI Shares and the certificates representing the same
from time to time acquired pursuant to the conversion of the SSPI
Preferred Shares to be duly issued and delivered in accordance with
the Articles of SSPI;
(k) cause all SSPI Shares which shall be issued upon conversion of the
SSPI Preferred Shares shall be fully paid and non-assessable at the
time of conversion;
(l) use its best efforts to maintain its corporate existence;
(m) use its best efforts to ensure that all common shares of SSPI
outstanding or issuable from time to time continue to be traded on
the Canadian Dealing Network, the Alberta Stock Exchange or such
other exchange or electronic trading facility satisfactory to the
directors of SSPI;
(n) duly and punctually take all such steps as shall be necessary to
cause the removal of any order which may be issued ceasing or
suspending trading in the securities of SSPI or prohibiting the sale
of such securities or otherwise take all such steps as shall be
necessary to allow the issuance of SSPI Shares upon exercise of the
SSPI Preferred Shares, notwithstanding the existence of such order;
(o) make all requisite filings under applicable securities legislation
including those necessary to remain a reporting issuer not in
default in the provinces of Ontario and Alberta until the date of
conversion of the SSPI Preferred Shares in accordance with their
terms and it will use its reasonable best efforts to:
(i) maintain that status for a period of one year from the date
hereof;
and
(ii) become a reporting issuer in British Columbia, if it is not
already one, and maintain that status for a period of 12
months thereafter;
<PAGE>
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(p) if SSPI pays a dividend or makes any other distribution in cash or
property or securities of SSPI (including rights, options or
warrants to acquire common shares of SSPI or securities convertible
into or exchangeable for common shares of SSPI and including
evidences of its indebtedness) to holders of the common shares of
SSPI prior to the date of conversion of the SSPI Preferred Shares in
accordance with their terms, SSPI agrees that it will pay the same
amount of such dividend or make the same distribution to the holders
of the SSPI Preferred Shares, as if they were holders of the SSPI
Shares. SSPI will mail a notice to each holder of SSPI Preferred
Shares specifying the particulars of such payment or distribution
within two (2) Business Days of such payment or distribution; and
(q) deliver a notice to each holder of the SSPI Preferred Shares of the
issuance of the receipts for the Final Prospectus, together with a
commercial copy of the Final Prospectus, within two days of the
issuance of such receipt.
7. NON-MERGER
7.1 The representations, warranties, covenants and agreements of the Vendor
contained herein and those contained in the documents and instruments delivered
pursuant hereto will survive the Closing Date for a period of one year from the
date hereof, and notwithstanding the completion of the transactions herein
contemplated, the waiver of any condition contained herein (unless such waiver
expressly releases the Vendor of such representation, warranty, covenant or
agreement), or any investigation by SSPC, the same will remain in full force and
effect during that period.
7.2 The representations, warranties, covenants and agreements of SSPC and SSPI
contained herein and those contained in the documents and instruments delivered
pursuant hereto will survive the Closing Date for a period of one year, and
notwithstanding the completion of the transactions herein contemplated, the
waiver of any condition contained herein (unless such waiver expressly releases
SSPC and SSPI of such representation, warranty, covenant or agreement), or any
investigation by the Vendor, the same will remain in full force and effect
during that period.
8. CONDITIONS PRECEDENT
8.1 The obligations of SSPC and SSPI to consummate the transactions herein
contemplated are subject to the fulfilment of each of the following conditions
at the times stipulated:
(a) the representations and warranties of the Vendor contained herein
are true and correct in all respects;
<PAGE>
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(b) all covenants, agreements and obligations hereunder on the part of
the Vendor to be performed or complied with at or prior to the
Closing, including the Vendor's obligation to deliver the documents
and instruments herein provided for, shall have been performed and
complied with at and as of the Closing;
(c) all contracts, other than as detailed in Schedule "G", shall have
been terminated without further obligation to the Company;
(d) the Vendor shall have entered into the Escrow Agreement and shall
have executed all such other documents as may be required by the
Ontario Securities Commission and the Alberta Stock Exchange
providing for restrictions on the resale of the SSPI Preferred
Shares and the SSPI Shares;
(e) the Vendor shall have entered into the Voting Support Agreement; and
(f) the Cimarrona Agreement and the Esmeralda Agreement shall have been
executed by all parties thereto, and all conditions precedent to the
consummation of the transactions contemplated therein, except for
the execution and delivery at the closing Certificate referenced
therein, shall have been satisfied or waived.
8.2 The conditions set forth in Section 8.1 are for the exclusive benefit of
SSPI and may be waived by SSPI in writing in whole or in part at any time.
8.3 The obligations of the Vendor to consummate the transactions herein
contemplated are subject to the fulfilment of each of the following conditions:
(a) the representations and warranties of SSPC and SSPI contained herein
are true and correct in all material respects; and
(b) all covenants, agreements and obligations hereunder on the part of
SSPC and SSPI to be performed or complied with at or prior to the
Closing, including SSPC's and SSPI's obligations to deliver the
documents and instruments herein provided for, shall have been
performed and complied with as at the Closing;
(c) the terms of any escrow restrictions imposed by the Ontario
Securities Commission with respect to the resale of the SSPI
Preferred Shares and the SSPI Shares shall be acceptable to the
Vendor;
(d) SSPI shall have executed the Management Contract, the Registration
Rights Agreement, the Esmeralda Agreement and the Cimarrona
Agreement and all conditions precedent to the transactions
contemplated by the Esmeralda Agreement and the Cimarrona Agreement,
except for the execution and delivery of the Closing Certificate
referenced therein, shall have been satisfied or waived.
<PAGE>
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8.4 The conditions set forth in Section 8.3 are for the exclusive benefit of the
Vendor and may be waived by the Vendor in whole or in part at any time.
8.5 The obligations of the Vendor, SSPI and SSPC to complete and give effect to
the transactions herein contemplated are further subject to the due execution of
the Closing Certificate by or on behalf of all parties whose execution is
provided for therein.
9. TRANSACTIONS OF THE VENDOR AT THE CLOSING
9.1 At the Closing, the Vendor will execute and deliver or cause to be executed
and delivered all documents, instruments, resolutions and share certificates as
are necessary to effectively transfer the Vendor's Shares to SSPC, free and
clear of all Liens, including:
(a) certified copies of resolutions of the directors of the Company
authorizing the transfer of the Vendor's Shares and certified copies
of resolutions of the directors of the Company authorizing the
registration of the Vendor's Shares in the name of SSPC and
authorizing the issue of new share certificates representing the
Vendor's Shares in the name of SSPC;
(b) share certificates representing the Vendor's Shares duly endorsed
for transfer to SSPC;
(c) duly issued share certificates in the name of SSPC;
(d) resignations in writing of all the directors and officers and
signing officers of the Company;
(e) all corporate records and books of account of the Company including,
without limiting the generality of the foregoing, minute books,
share register books, share certificate books and annual reports;
(f) a Closing Warranty and Certificate from the Vendor confirming that
the conditions to be satisfied by the Vendor, unless waived, set out
in Section 8.1 have been satisfied at the Closing;
(g) the Voting Support Agreement duly executed by the Vendor;
(h) the Escrow Agreement duly executed by the Vendor together with duly
executed copies of such other documents as may be required under
Section 8.1 (d) of this Agreement;
(i) consents to act as directors of SSPI duly executed by Robert Hefner
and Brian Egolf;
(j) a legal opinion from counsel to the Company addressed to SSPI in
form satisfactory to SSPI; and
<PAGE>
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(k) all such other documents and instruments as SSPI may reasonably
require including but not limited to all geologic information, and
data from drilling and exploration, computer data including
information as to the Properties, administrative information, plans
and drawings and all exploration data including computer input,
computer models and computer outputs and all accounting information,
vouchers, receipts, accounting entries and diaries of the Company.
10. TRANSACTIONS OF SSPI AT THE CLOSING
10.1 At the Closing, SSPC and SSPI will deliver or cause to be executed and
delivered all documents, instruments, resolutions and share certificates as are
necessary to effectively transfer the SSPI Preferred Shares to the Vendor, free
and clear of all Liens, including:
(a) certified copies of resolutions of the directors of SSPC and SSPI
authorizing the entering into of this Agreement and the carrying out
of the transactions contemplated herein and certified copies of
resolutions of the directors of SSPI authorizing the issuance of
SSPI Preferred Shares and the SSPI Shares;
(b) duly issued share certificates representing the SSPI Preferred
Shares in the name of the Vendor as provided in Section 2.3 hereof;
(c) a Closing Warranty and Certificate from SSPC and SSPI confirming
that the conditions to be satisfied by SSPC and SSPI, unless waived,
set out in Section 8.3 have been satisfied at the Closing;
(d) a legal opinion from counsel to SSPC and SSPI addressed to the
Vendor and in form satisfactory to the Vendor;
(e) a directors' resolution of SSPI appointing Robert Hefner and Brian
Egolf as directors of SSPI effective upon the continuation of SSPI
under the laws of the Yukon Territory and the satisfaction of
Section 6.1(h);
(f) the Management Contract duly executed by SSPI;
(g) the Registration Rights Agreement duly executed by SSPI; and
(h) all such other documents and instruments as the Vendor may
reasonably require with respect to SSPC and SSPI, including but not
limited to:
(i) a draft form of the Preliminary Prospectus;
(ii) a letter from counsel to SSPI advising of the status of SSPI's
application to list its common shares on the Alberta Stock
Exchange; and
<PAGE>
- 27 -
(iii) a letter from SSPI and Yorkton Securities Inc. discussing the
plans of Yorkton Securities Inc. to carry out a private
placement for SSPI.
11. INDEMNITY
11.1 Subject to Section 11.2, the Vendor will indemnify and hold harmless SSPI
from and against:
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfilment of any
covenant on the part of the Vendor under this Agreement or from any
misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to SSPI or SSPC hereunder;
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing; and
(c) any and all liability to which SSPI or SSPC is subject as a result
of the failure of the Vendor to pay such tax obligations of the
Vendor as are determined to exist arising from the transactions
contemplated herein;
and if any action or claim shall be asserted against SSPI or SSPC in respect of
which indemnity may be sought hereunder, SSPI or SSPC, as the case may be, shall
promptly notify the Vendor in writing and the Vendor shall assume the defence
thereof at his expense through legal counsel acceptable to SSPI. No party shall
effect a settlement of such action or claim without the written consent of the
other party, such consent not to be unreasonably withheld or delayed.
11.2 The maximum extent of the liability of the Vendor under Section 11.1 herein
(with the exception of liability arising directly or indirectly by reason of a
misrepresentation or breach of warranty as it relates to the representations and
warranties contained in Section 3.1(a), 3.1(d) and 3.1(ad) to 3.1(ai)) shall be
limited in the aggregate to the market value, as at the date of a claim for
indemnity, of the SSPI Preferred Shares or SSPI Shares of the Vendor, as the
case may be acquired pursuant to this Agreement and then held subject to the
Escrow Agreement as at such date, and the Vendor shall have no further personal
liability to SSPI or SSPC in this regard.
11.3 Subject to the maximum limit on liability in Section 11.2 the Vendor can
satisfy any liability referred to in Section 11.2 herein by either paying the
amount thereof to SSPI or surrendering or causing to be surrendered to SSPI such
of the Vendor's SSPI Preferred Shares or SSPI Shares or the rights thereto then
held subject to the Escrow Agreement as at the date of receipt of a claim for
indemnity as have a market value equal to the amount of the liability.
11.4 In circumstances where the Vendor is liable under Section 11.1 in respect
of a misrepresentation or breach of warranty as it relates to a representation
or warranty contained
<PAGE>
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in Sections 3.1(a), 3.1(d) and 3.1(ad) to 3.1(ai), SSPC and SSPI agree that it
shall first exhaust recourse against the SSPI Preferred Shares or SSPI Shares of
such Vendor, as the case may be, then held subject to the Escrow Agreement, to
satisfy such liability in which case the provisions of Section 11.3 apply
mutatis mutandis, and SSPI may only further seek recourse against the Vendor
generally in circumstances where the market value of such SSPI Preferred Shares
or SSPI Shares, as the case may be, is not sufficient to satisfy such liability
under Sections 3.1(a), 3.1(d) and 3.1(ad) to 3.1(aj).
11.5 For the purposes of Sections 11.2 and 11.3, herein the "market value" of
the SSPI Preferred Shares or SSPI Shares or the rights thereto shall be deemed
to be equal to the weighted average of the closing prices at which SSPI's common
shares have traded on the Alberta Stock Exchange or, if such shares are not then
listed on the Alberta Stock Exchange, on such stock exchange or electronic
trading facility on which the shares then trade as may be selected by the board
of directors of SSPI, during the 20 most recent trading days ending on the
trading day immediately prior to the date of a claim for indemnity.
11.6 SSPC and SSPI will indemnify and hold harmless the Vendor from and against:
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfilment of any
covenant on the part of SSPC or SSPI under this Agreement or from
any misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to the Vendor hereunder; and
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing;
and if any action or claim shall be asserted against the Vendor in respect of
which indemnity may be sought hereunder, the Vendor shall notify SSPI in writing
and SSPI shall assume the defence thereof at its expense through legal counsel
acceptable to the Vendor. No party shall effect a settlement of such action or
claim without the written consent of the other party, such consent not to be
unreasonably withheld or delayed.
11.7 SSPI shall bear the costs relating to the test procedures in respect of the
El Segundo No. 1 well as detailed in Schedule "H". To the extent such costs
exceed the amounts set forth in Schedule "H", the Vendor, together with the
vendors under the Cimarrona Agreement and the Esmeralda Agreement, shall
reimburse SSPI for the excess pursuant to Section 11.8 hereof.
11.8 If the costs relating to the test procedures in respsct of El Segundo No 1
well exceed the amounts set forth in Schedule "H", GHK Company Colombia shall
submit invoices to the Manager (as defined in the Management Contract), SSPI and
the Vendor in respect of such excess amounts within 90 days of the date hereof.
Once satisfied that such invoices accurately reflect actual costs incurred in
respect of the test procedures, the Vendor shall within 30 days after such
90-day period pay to the Manager, and direct the Manager to pay to SSPI, a
portion of such costs equivalent to his pro rata share of the aggregate number
of warrants and preference shares in SSPI issued to the Vendor under this
Agreement and the vendors under the Cimarrona Agreement and the Esmeralda
Agreement.
11.9 The Vendor shall be entitled to a portion, equivalent to his pro rata share
of the aggregate number of warrants and preference shares in SSPI issued to the
Vendor under this Agreement and the vendors under the Cimarrona Agreement and
the Esmeralda Agreement, of any revenues generated by the production or sale of
oil produced from El Segundo No. 1 well prior to the Closing. The Vendor shall
be entitled to require from GHK Company Colombia an accounting of any such
revenues within 90 days of the date hereof and SSPI shall within 30 days after
such 90-day period pay to the Vendor the portion of such proceeds set forth in
this Section 11.9.
12. CONTRACTUAL RIGHT OF ACTION FOR RESCISSION
12.1 In the event that the Vendor, in circumstances where he acquires the SSPI
Shares upon the conversion of the SSPI Preferred Shares as provided for in the
Final Prospectus, is or becomes entitled under applicable securities legislation
to the remedy of rescission by reason of the Final Prospectus or any amendment
thereto containing a misrepresentation, the Vendor shall be entitled to
rescission not only of the conversion of the SSPI Preferred Shares but also of
the transaction hereunder pursuant to which the SSPI Preferred Shares were
initially acquired. The foregoing is in addition to any other right or remedy
available to the Vendor under applicable securities legislation or otherwise at
law.
<PAGE>
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13. ISSUANCE OF SSPI SHARES
13.1 The Vendor hereby irrevocably directs SSPI to deliver such of the SSPI
Shares as are issuable upon the exercise of the SSPI Preferred Shares held by
Montreal Trust Company of Canada under the terms of the Escrow Agreement to
Montreal Trust Company of Canada to be held under the terms of the Escrow
Agreement.
14. COUNTERPARTS
14.1 This Agreement may be executed in any number of facsimile counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same document.
15. TIME OF THE ESSENCE
15.1 Time is of the essence of this Agreement.
16. ENTIRE AGREEMENT
16.1 This Agreement, together with the agreements and documents provided for
herein, contains the entire agreement between the parties hereto in respect of
the purchase and sale of the Vendor's Shares and there are no warranties,
representations, terms, conditions or collateral agreements, express or implied,
other than expressly set forth or provided for in this Agreement.
17. FURTHER ASSURANCES
17.1 The parties will execute and deliver such further documents and instruments
and do all such acts and things as may be reasonably necessary or requisite to
carry out the full intent and meaning of this Agreement and to effect the
transactions contemplated by this Agreement, and the parties will cooperate in
respect of any requirement to file an application with Investment Canada.
18. SUCCESSORS AND ASSIGNS
18.1 This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
19. NOTICE
19.1 Any notice required or permitted to be given under this Agreement will be
validly given if in writing and delivered or sent by pre-paid registered mail,
to the following addresses:
<PAGE>
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(a) If to the Vendor:
ROBERT A. HEFNER, III
2121 Kirby Drive #65E
Houston, Texas 77019
U.S.A.
(b) If to SSPI or SSPC:
SEVEN SEAS PETROLEUM INC.
Suite 960 - 1900 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Timothy Stephens
or to such other address as any Party may specify by notice in writing to the
other.
19.2 Any notice delivered on a business day will be deemed conclusively to have
been effectively given on the date notice was delivered.
19.3 Any notice sent by prepaid registered mail will be deemed conclusively to
have been effectively given on the third business day after posting; but if at
the time of posting or between the time of posting and the third business day
thereafter there is a strike, lockout or other labour disturbance affecting
postal service, then the notice will not be effectively given until actually
delivered.
20. VENDOR'S NOMINEE
20.1 The Vendor may, without SSPC's or SSPI's consent, elect to nominate a
company or other legal entity, including a company which may be hereafter
incorporated, to be the recipient of all or any part of the SSPI Preferred
Shares which are to be issued by SSPI and to which the Vendor shall be entitled
pursuant to Section 2.3 herein. Such nomination will not take effect until
communication thereof to SSPI, or to SSPI's solicitors. Once such communication
has been made, the nominee elected by the Vendor will be deemed to be the Vendor
hereunder for purposes of receiving the applicable SSPI Preferred Shares and for
all purposes after the Closing Date, but the Vendor will in no way be released
from its representations, warranties and obligations hereunder despite the
election or appointment of a nominee.
<PAGE>
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21. PROPER LAW
21.1 This Agreement will be governed by and construed in accordance with the
laws of the Province of British Columbia and the laws of Canada applicable
therein and the parties will attorn to the Courts thereof.
IN WITNESS WHEREOF the parties have caused this Agreement to be executed and
delivered this 26th day of July, 1996.
SIGNED, SEALED AND DELIVERED by )
ROBERT A. HEFNER, III in the presence of: )
)
- -------------------------------------- )
Signature )
) -------------------------------
- -------------------------------------- ) ROBERT A. HEFNER, III
Print Name )
)
- -------------------------------------- )
Address )
)
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
SEVEN SEAS PETROLEUM COLOMBIA INC.
Per: _________________________________
Authorized Signatory
SEVEN SEAS PETROLEUM INC.
Per: _________________________________
Authorized Signatory
<PAGE>
This is page 32 of an Agreement dated the 26th day of July, 1996 between ROBERT
A. HEFNER, III, SEVEN SEAS PETROLEUM COLOMBIA INC. AND SEVEN SEAS PETROLEUM INC.
CIMARRONA PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 26th day of July, 1996
BETWEEN:
BREENE M. KERR,
AND:
PETROLEUM PROPERTIES MANAGEMENT COMPANY,
AND:
GWEN D. SHARP,
AND:
MARK THOMSON BT.,
AND:
CHARLES B. ISRAEL,
AND:
JUSTIN B. ISRAEL,
(all of the above hereinafter collectively called the "Vendors")
AND:
SEVEN SEAS PETROLEUM INC., a company incorporated under the laws of
the Province of British Columbia with registered offices at 800 -
885 West Georgia Street, Vancouver, British
Columbia, Canada, V6C 3H1
(hereinafter called "SSPI")
AND:
SEVEN SEAS PETROLEUM COLOMBIA INC., a company incorporated under the
laws of the Cayman Islands, and having a business address of 1900
Post Oak Boulevard, Suite 960, Houston, Texas, 77056, in the United
States of America
(hereinafter called "SSPC")
<PAGE>
- 2 -
AND:
ROBERT A. HEFNER, III, Businessman, 2121 Kirby Drive
#65E, Houston, Texas, 77019, in the United States of America
(hereinafter called "Hefner")
WITNESSES THAT WHEREAS:
A. The following Vendors are the registered and beneficial owners of the
following Vendors' Interests in the Company;
====================================================================
NAME PERCENTAGE INTEREST IN THE
COMPANY
====================================================================
Breene M. Kerr 40.7407
- --------------------------------------------------------------------
Petroleum Properties Management 7.4074
Company
- --------------------------------------------------------------------
Gwen D. Sharp 7.4074
- --------------------------------------------------------------------
Mark Thomson Bt. 3.7037
- --------------------------------------------------------------------
Charles B. Israel 1.8519
- --------------------------------------------------------------------
Justin B. Israel 1.8519
====================================================================
which collectively forms a total 62.963% membership interest in the Company;
B. The Vendors have agreed to sell and SSPI has agreed to purchase the Vendors'
Interests on the terms and conditions detailed herein.
THEREFORE in consideration of the premises and the mutual covenants and
agreements herein set forth, the parties hereto covenant and agree each with the
other as follows:
1. INTERPRETATION
1.1 In this Agreement, including the schedules hereto, except as otherwise
expressly provided:
(a) "Agreement" means this agreement, including the preamble and the
Schedules hereto, as it may from time to time be supplemented or
amended;
<PAGE>
- 3 -
(b) "Association Contracts" means the association contracts between the
Company and Empress Colombiana de Petroles S.A. respecting the
Properties;
(c) "the Company" means Cimarrona Limited Liability Company;
(d) "Closing" means the completion of the transactions contemplated in
this Agreement in accordance with its terms;
(e) "Closing Certificate" means a closing certificate executed by, or on
behalf of, inter alia, the parties to this Agreement;
(f) "Closing Date" means the date of the closing of the transactions
contemplated herein;
(g) "Esmeralda" means Esmeralda Limited Liability Company;
(h) "Esmeralda Agreement" means the agreement of even date between the
members of Esmeralda on the one hand, and SSPI, SSPC and Seven Seas
Petroleum Holdings Inc. on the other hand, respecting the
acquisition by SSPI of the members' interests in Esmeralda;
(i) "Escrow Agreement" means the escrow agreement in the form attached
as Schedule "A" hereto;
(j) "Final Prospectus" means a final prospectus of SSPI which qualifies
INTER ALIA the exchange of the SSPI Special Warrants for the SSPI
Shares;
(k) "Financial Statements" mean the financial statements of the Company
attached as Schedule "J" hereto;
(l) "GHK Agreement" means the agreement of even date between, inter
alia, SSPI and Hefner providing for the purchase of all of the
shares of GHK Colombia;
(m) "GHK Colombia" means GHK Company Colombia Inc.;
(n) "Indenture" means the special warrant indenture between SSPI and
Montreal Trust in the form attached as Schedule "B" hereto;
(o) "JOA" means that joint operating agreement dated August 1, 1994
respecting the operatorship of the Properties;
(p) "Liens" means all liens, mortgages, debentures, charges,
hypothecations, pledges or other security interests or encumbrances
of whatever kind;
<PAGE>
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(q) "Management Contract" means that management contract of even date
between, inter alia, SSPI and the GHK Company L.L.C.;
(r) "Material Adverse Effect" means an adverse effect that is, or would
be, singly or in the aggregate material;
(s) "Montreal Trust" means the Montreal Trust Company of Canada;
(t) "1933 Act" means the SECURITIES ACT OF 1933 (United States) as
amended;
(u) "Preliminary Prospectus" means a preliminary prospectus of SSPI
which qualifies the exchange of the SSPI Special Warrants for the
SSPI Shares;
(v) "Properties" means the Dindal and Rio Seco areas located in the
Upper Magdalena Basin of Colombia described in the Association
Contracts;
(w) "Public Record" means, in respect of SSPI, the financial statements,
offering memoranda, material change reports, information circulars
and press releases and all other documents and information filed or
required to be filed with the Ontario Securities Commission or the
Alberta Securities Commission on or during the 12 months preceding
the date of this Agreement;
(x) "Registration Rights Agreement" means that registration rights
agreement between, inter alia, SSPI and the Vendors, in the form
attached as Schedule "K" hereto;
(y) "SSPI Financial Statements" means the audited, consolidated
financial statements of SSPI as at and for the year ended December
31, 1995 and the unaudited, consolidated financial statements of
SSPI for the six month period ended June 30, 1996;
(z) "SSPI Special Warrants" means a total of 7,305,143 special warrants
of SSPI to be issued to the Vendors in accordance with the terms of
the Indenture;
(aa) "SSPI Shares" means the common shares of SSPI to be issued upon
exercise of the SSPI Special Warrants;
(ab) "U.S. Person" has the meaning as set out in Regulation S under the
1933 Act;
(ac) "Vendor's Interest" means the membership interest of each Vendor in
the Company and "Vendors' Interests" means collectively the
membership interests of all the Vendors in the Company as set out in
recital A hereto;
<PAGE>
- 5 -
(ad) "Voting Support Agreement" means the shareholders voting support
agreement in the form attached as Schedule "C" hereto;
(ae) all references in this Agreement to a designated "Section" or other
subdivision or to a Schedule are to the designated Section or other
subdivision of, or Schedule to, this Agreement;
(af) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Section or other subdivision or Schedule;
(ag) the headings are for convenience only and do not form a part of this
Agreement and are not intended to interpret, define, or limit the
scope, extent or intent of this Agreement or any provision hereof;
(ah) the singular of any term includes the plural, and vice versa; the
use of any term is equally applicable to any gender and, where
applicable, a body corporate; the word "or" is not exclusive and the
word "including" is not limiting (whether or not non-limiting
language, such as "without limitation" or "but not limited to" or
words of similar import, is used with reference thereto);
(ai) in respect of the Company, any accounting term not otherwise defined
has the meanings assigned to it in accordance with United States tax
basis accounting practices;
(aj) in respect of SSPI, any accounting term not otherwise defined has
the meaning assigned to it in accordance with Canadian generally
accepted accounting principles; and
(ak) where any representation or warranty is made "to the knowledge of"
any party, such party will not be liable for a misrepresentation or
breach of warranty by reason of the fact, state of facts, or
circumstance in respect of which the representation or warranty is
given being untrue if such party proves it did not have actual
knowledge thereof.
(al) where any representation or warranty of the Vendors references
disclosure to either SSPI or SSPC, disclosure to one is deemed to be
disclosure to both.
<PAGE>
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1.2 The following are the Schedules to this Agreement:
SCHEDULE DESCRIPTION
A Escrow Agreement
B Special Warrant Indenture
C Voting Support Agreement
D Outstanding Indebtedness
E Managers of the Company
F Limited Liability Company Agreement
G Surviving Contracts
H Costs Allocation
I U.S. Securities Law Questionnaire
J Financial Statements
K Registration Rights Agreement
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, each of the Vendors
hereby sells and assigns to SSPI, and SSPI hereby purchases from each of the
Vendors, his, her or its Vendor's Interest free and clear of any Liens
2.2 SSPI hereby directs each Vendor to transfer his, her or its Vendor's
Interest to and into the name of SSPC and SSPC hereby acknowledges its
entitlement to and receipt of such Vendor's Interest from each Vendor.
2.3 The Purchase Price payable by SSPI for each Vendor's Interest shall be the
SSPI Special Warrants which are hereby issued and tendered to the Vendors in the
following amounts:
========================================================================
NAME NUMBER OF SPECIAL WARRANTS
OF SSPI
========================================================================
Breene M. Kerr 4,726,858
- ------------------------------------------------------------------------
Petroleum Properties Management Company 859,428
- ------------------------------------------------------------------------
Gwen D. Sharp 859,428
- ------------------------------------------------------------------------
Mark Thomson Bt. 429,715
- ------------------------------------------------------------------------
Charles B. Israel 214,857
- ------------------------------------------------------------------------
Justin B. Israel 214,857
========================================================================
2.4 Each Vendor hereby directs the SSPI Special Warrants issued and tendered to
him, her or it to be delivered to Hefner on his, her or its behalf and Hefner
hereby acknowledges receipt of same.
<PAGE>
- 7 -
3. AGENT AND ATTORNEY'S WARRANTIES AND REPRESENTATIONS
3.1 Hefner warrants and represents to SSPI, with the intent that SSPI will rely
thereon in entering into this Agreement and concluding the purchase and sale
contemplated herein, that he is the duly authorized agent and duly appointed
attorney of each of the Vendors will full power and authority on their behalf to
execute this Agreement and to execute all such other documents and do all such
other acts and things on behalf of the Vendors and each of them as is necessary
to give full force and effect to this Agreement.
4. VENDORS' WARRANTIES AND REPRESENTATIONS
4.1 Each of the Vendors severally warrants and represents to SSPI, with the
intent that SSPI will rely thereon in entering into this Agreement and in
concluding the purchase and sale contemplated herein, that:
(a) such Vendor is the registered holder and beneficial owner of the
Vendor's Interest set opposite the Vendor's name in recital "A"
herein, free and clear of all Liens, and the Vendor has no interest,
legal or beneficial, direct or indirect, in any shares of, or the
assets or business of, the Company other than such Vendor's Interest
as set out in recital "A";
(b) such Vendor has good and sufficient right and authority to enter
into this Agreement on the terms and conditions herein set forth and
to transfer the legal and beneficial title and ownership of the
Vendor's Interest as set out in recital "A" to SSPC;
(c) the Vendor either:
(i) is not a U.S. Person and is not acquiring the securities
offered hereby for the account or benefit of a U.S. Person; or
(ii) is a U.S. Person and has completed the questionnaire attached
as Schedule "I" hereto and in which case the Vendor represents
and warrants to the Purchaser as to the accuracy of all
matters set out therein;
(d) the Vendor is aware that neither SSPI Special Warrants nor the SSPI
Shares have been registered under the 1933 Act and may not be
offered or sold in the United States unless registered under the
1933 Act and the securities laws of all applicable states of the
United States unless an exemption from such registration
requirements is available or registration is not required pursuant
to Regulation S under the 1933 Act or registration is otherwise not
required under the 1933 Act and that SSPI has no obligation or
present intention of filing a registration statement under the 1933
Act in respect of the SSPI Special Warrants or the SSPI Shares;
<PAGE>
- 8 -
(e) if the Vendor is not a U.S. Person, the Vendor is further aware
that:
(i) no offers in respect of the SSPI Special Warrants were made by
any person to the Vendor while the Vendor was in the United
States;
(ii) the Vendor was outside the United States at the time of
execution and delivery of this Agreement;
(iii) the certificates representing the SSPI Special Warrants will
bear a legend stating that such securities have not been
registered under the 1933 Act or the securities laws of any
state of the United States and the SSPI Special Warrants may
not be exercised in the United States or by or on behalf of a
U.S. Person unless registered under the 1933 Act and the
securities laws of all applicable states of the United States
or an exemption from such registration requirements is
available; and
(iv) any person who exercises a SSPI Special Warrant will be
required to provide to SSPI:
(1) written certification that it is not a U.S. Person and
the SSPI Special Warrant is not being exercised within
the United States or on behalf of a U.S. Person; or
(2) a written opinion of counsel to the effect that the SSPI
Special Warrants and the SSPI Shares underlying such
securities have been registered under the 1933 Act and
applicable state securities laws or are exempt from
registration thereunder.
4.2 Subject to Section 12.2 hereof, each of the Vendors severally warrants and
represents as follows with the intent that SSPI will rely thereon in entering
into this Agreement and in concluding the purchase and sale contemplated herein
that:
(a) the Vendors' Interests, taken together represent a 62.963%
membership interest in the Company
(b) with the exception of this Agreement, no party has any agreement,
consensual or arising by law, present or future, contingent or
absolute, or capable of becoming an agreement:
(i) to require the Company to admit such party as a member of the
Company; or
<PAGE>
- 9 -
(ii) to require the Company to convert or exchange any securities
into a membership interest in the Company; or
(iii) to purchase or otherwise acquire any membership interest in
the Company;
(c) the Vendor does not have any specific information relating to the
Company which is not generally known and which, to the knowledge of
the Vendor, has not been disclosed to SSPI and which if known could
reasonably be expected to have a materially adverse effect on the
value of the Vendor's Interest;
(d) the Company is duly formed, validly existing and in good standing
under the laws of the State of Oklahoma;
(e) to the Vendors' knowledge, the limited liability company agreement
of the Company dated December 8, 1993, as amended, attached as
Schedule "F" hereto remains in full force and effect and has not
been amended or modified except or set forth in schedule "F";
(f) to the Vendor's knowledge, the managers of the Company are as
described in Schedule "E" and there are no officers of the Company;
(g) to the Vendor's knowledge, the Company is duly registered to carry
on business in all jurisdictions in which the Company carries on
business except where the failure to so register would not have a
Material Adverse Effect on the Company;
(h) to the Vendor's knowledge, the Company has the power, authority and
capacity to carry on its business as presently conducted by it;
(i) the Company holds a 25.38% participating interest under the
Association Contracts free and clear of all Liens and the Company
has no other material assets;
(j) the Company carries on no business other than holding the 25.38%
participating interest under the Association Contracts;
(k) to the Vendor's knowledge, the Company holds all licences and
permits required for the conduct in the ordinary course of its
business as presently conducted by it and all such licences and
permits are in good standing and the conduct and uses of the same by
the Company are in compliance with all laws, and other restrictions,
rules, regulations and ordinances applicable to the Company and its
business, save and except for breaches which do not have a Material
Adverse Effect on the Company or its business as presently conducted
and with the exception that no such representation and warranty is
given with respect to any permit, consent, licence, contract or
authority granted under or in connection with the Association
Contracts;
<PAGE>
- 10 -
(l) the making of this Agreement and the completion of the transactions
contemplated hereby and the performance of and compliance with the
terms hereof will not:
(i) conflict with or result in a breach of or violate any of the
terms, conditions, or provisions of the constating documents
of the Company;
(ii) to the Vendor's knowledge, conflict with or result in a breach
of or violate any of the terms, conditions or provisions of
any law, judgment, order, injunction, decree, regulation or
ruling of any court or governmental authority, domestic or
foreign, to which the Company or the Vendor is subject or
constitute or result in a default under any agreement,
contract or commitment to which the Company or the Vendor is a
party;
(iii) to the Vendor's knowledge, give to any person any remedy,
cause of action, right of termination, cancellation or
acceleration in or with respect to any understanding,
agreement, contract, or commitment, written, oral or implied,
to which the Company is a party with the written exception
that no such representation and warranty is made with respect
to the Association Contracts;
(iv) to the Vendor's knowledge, give to any government or
governmental authority including any governmental department,
commission, bureau, board, or administrative agency any right
of termination, cancellation, or suspension of, or constitute
a breach of or result in a default under any permit, license,
control, or authority issued to the Company and which is
necessary or desirable in connection with the conduct and
operation of the businesses currently conducted by the Company
with the exception that no such representation and warranty is
given with respect to any permit, consent, license, contract
or authority granted under or in connection with the
Association Contracts;
(v) to the Vendor's knowledge, constitute a default by the Company
or an event which, with the giving of notice or lapse of time
or both, might constitute an event of default or
non-observance under any agreement, contract, indenture or
other instrument relating to any indebtedness of the Company
which would give any party the right to accelerate the
maturity for the payment of any amount payable under that
agreement, contract, indenture, or other instrument with the
exception that no such representatives and warranty is given
with respect to any permit, licence, consent, contract or
authority granted under or in connection with the Association
Contracts;
so as to have a Material Adverse Effect on the Company;
<PAGE>
- 11 -
(m) the Financial Statements were prepared on a cash basis in accordance
with U.S. tax regulations applied on a basis consistent with prior
years and are true and correct in every material respect;
(n) to the Vendor's knowledge, there is no indebtedness of the Company,
including to the Vendor which is not disclosed or reflected in the
Company's Financial Statements other than as detailed in Schedule
"D";
(o) to the Vendor's knowledge, the Company has been assessed for income
tax for all years to and including the most recent fiscal year end
of the Company to which the Financial Statements are made up, and
the Company has withheld and remitted to all applicable tax
collecting authorities all amounts required to be remitted to all
tax collecting authorities respecting payments to employees or to
non-residents, or otherwise and has paid all instalments of
corporate taxes due and payable as of the date hereof;
(p) to the Vendor's knowledge, all tax returns and reports of the
Company required by law to be filed prior to the date hereof
including all income tax returns and all other corporate tax returns
required to be filed with any governmental taxing authority or board
have been filed and are true, complete and correct, and all taxes
and other government charges including all income, excise, sales,
business and property taxes and other rates, charges, assessment,
levies, duties, taxes, contributions, fees and licenses required to
be paid have been paid, and if not required to be paid as at the
date hereof, have been accrued in the Financial Statements;
(q) to the Vendor's knowledge, adequate provision has been made for
taxes payable by the Company which are not yet due and payable and
there are no agreements, waivers or other arrangements providing for
an extension of time with respect to the assessment or re-assessment
of any tax return by any taxing authority or for the filing of any
tax return by or payment of any tax, governmental charge or
deficiency by the Company, and to the knowledge of the Vendor, there
are no contingent tax liabilities or any grounds which would prompt
a re-assessment;
(r) to the Vendor's knowledge, no authorization, approval, order,
license, permit or consent of any governmental authority, regulatory
body or court, and no registration, declaration or filing by the
Vendor or the Company with any such governmental authority,
regulatory body or court remains outstanding in order for the Vendor
to complete the within purchase and sale, to duly perform and
observe the terms and provisions of this Agreement, and to render
this Agreement legal, valid, binding and enforceable in accordance
with its terms with the exception that no representation and
warranty is given as to any authorizations, approvals,
<PAGE>
- 12 -
order, licences, permits or consents granted under or in connection
with the Association Contracts;
(s) (i) to the Vendor's knowledge, the business of the Company as
currently carried on by it complies with all applicable laws,
judgments, decrees, orders, injunctions, rules, statutes and
regulations of all courts, arbitrators or governmental
authorities, including all environmental, health and safety
statutes and regulations except where the failure to comply
would not have a Material Adverse Effect on the Company;
(ii) to the Vendor's knowledge, the Company's business, assets or
properties are not subject to any judicial or administrative
proceeding alleging the violation of any applicable
environmental, health or safety law, judgment, decree, order,
injunction, rule, statute or regulation except where such
proceeding would not have a Material Adverse Effect on the
Company;
(t) to the Vendor's knowledge, since the date of the Company's most
recent Financial Statements there has not been any occurrence or
event which has had, or might reasonably be expected to have, a
Material Adverse Effect on the business of the Company as currently
carried on or the results of its operations;
(u) to the Vendor's knowledge, other than as disclosed in Schedule "G"
hereto, the Company does not have any material contract, agreement,
undertaking or arrangement, whether oral, written or implied, which
cannot be terminated on not more than one month's notice and the
Company does not have any outstanding material agreements, contracts
or commitments (whether written or oral) whatsoever relating to or
affecting the conduct of its business as currently carried on or any
of its assets or for the purchase, sale or lease of its assets with
the exception of this Agreement;
(v) there are no actions, suits, judgments, investigations or
proceedings outstanding or pending or to the knowledge of the Vendor
threatened against or affecting the Company at law or in equity or
before or by any court or federal, state, municipal or other
governmental authority, department, commission, board, tribunal,
bureau or agency and the Company is not a party to or threatened
with any litigation which in either case would have a Material
Adverse Effect on the Company;
(w) [intentionally left blank]
<PAGE>
- 13 -
(x) the Company has not guaranteed, or agreed to guarantee, any
indebtedness or other obligation of any party except in the ordinary
course of its business and, except as described in the Financial
Statements and under the Association Contracts;
(y) the Company has no employees;
(z) since the date of the most recent Financial Statements:
(i) no dividends of any kind or other distribution on any
membership interest in the Company has been declared or paid
by the Company;
(ii) except as required under the Association Contracts, no single
capital expenditure or commitment therefor has been made by
the Company other than as previously disclosed in writing to
SSPI; and
(iii) the Company has not increased the pay of or paid or agreed to
pay any pension, bonus, share of profits or other similar
benefit to or for the benefit of any agent of the Company,
except increases in the normal course of business.
<PAGE>
- 14 -
5. SSPI'S WARRANTIES AND REPRESENTATIONS
5.1 SSPI warrants and represents to the Vendors, with the intent that the
Vendors will rely thereon in entering into this Agreement and in concluding the
purchase and sale contemplated herein, that on the date hereof:
(a) SSPI has been duly and validly incorporated and is a validly
existing corporation in good standing under the laws of the Province
of British Columbia, with all necessary power, authority and
capacity to own its property and assets and carry on its business as
presently carried on by it and to complete the transactions provided
for herein;
(b) SSPI is a reporting issuer in good standing under the securities
laws of Ontario and Alberta and, since March 31, 1996, no material
change relating to SSPI has occurred with respect to which the
requisite material change report has not been filed under the
applicable securities laws in Ontario and Alberta and no such
disclosure has been made on a confidential basis;
(c) SSPI is not a reporting issuer under the securities laws of any
other province, state, country or other jurisdiction;
(d) SSPI has full corporate power and authority to issue the SSPI
Special Warrants and the SSPI Shares upon the exercise of the SSPI
Special Warrants; the SSPI Special Warrants have been duly and
validly created, authorized, allotted and issued, the SSPI Shares
issuable upon exercise of the SSPI Special Warrants have been duly
and validly authorized, allotted and reserved for issuance upon such
exercise and will, upon exercise in accordance with the terms of the
Indenture, be duly and validly issued as fully paid and
non-assessable shares;
(e) the authorized capital of SSPI consists of 100,000,000 common shares
without par value and 10,000,000 Class "A" preferred shares without
par value of which 12,995,463 common shares (and no Class "A"
preferred shares with the exception of the SSPI Class "A" Series I
preferred shares issued under the GHK Agreement) are issued and
outstanding as at the date hereof; a further 1,085,000 common shares
are reserved for issuance pursuant to the exercise of incentive
stock options; and a further 3,000,000 common shares are reserved
for issuance pursuant to the exercise of special warrants previously
issued by way of a private placement; as a result of which the total
issued and outstanding share capital of SSPI on a fully diluted
basis is 17,080,463;
(f) all alterations to the constating documents of SSPI since its
incorporation has been duly approved by the shareholders of SSPI and
registered with the appropriate authorities;
<PAGE>
- 15 -
(g) SSPI is duly registered to carry on business in all jurisdictions in
which it carries on business except where the failure to register
would not have a Material Adverse Effect on the condition (financial
or otherwise) business, properties, prospects or net worth of SSPI;
(h) SSPI has full corporate power and authority to enter into this
Agreement and the Indenture and to perform its obligations set out
herein and therein, and the Agreement and the Indenture have been
duly authorized, executed and delivered by SSPI and constitute
legal, valid and binding obligations of SSPI enforceable in
accordance with their terms;
(i) SSPI has the power, authority and capacity to carry on its business
as presently conducted by it;
(j) SSPI is not in default or breach of, and the execution and delivery
of this Agreement or the Indenture by SSPI and the performance of
the transactions contemplated thereby will not result in a breach
of, and do not create a state of facts which, after notice or lapse
of time or both, will result in a breach of, and do not and will not
conflict with, any of the terms, conditions or provisions of the
constating documents, resolutions or by-laws of SSPI;
(k) SSPI holds all licenses and permits required for the conduct in the
ordinary course of its business as presently conducted by it and all
such licenses and permits are in good standing and the conduct and
uses of the same by it are in compliance with all laws and other
restrictions, rules, regulations and ordinances applicable to it and
its business, save and except for breaches which do not have a
Material Adverse Effect on SSPI, or its business as currently
conducted, and neither the execution and delivery of this Agreement
or the Indenture nor the completion of the purchase and sale hereby
will give any person the right to terminate the said licenses or
permits or affect such compliance;
(l) SSPI has the right, power and authority to direct the transfer of
the Vendors' Interests to SSPC and SSPC has the right, power and
authority to receive same, and neither such direction nor reception
of the Vendors' Interests gives rise to any liability under taxation
or other laws;
(m) SSPI has obtained all consents and approvals required to complete
the transactions contemplated herein in accordance with the terms
and conditions hereof;
(n) the making of this Agreement and the Indenture and the completion of
the transactions contemplated hereby and thereby and the performance
of and compliance with the terms hereof and thereof do not and will
not:
<PAGE>
- 16 -
(i) conflict with or result in a breach of or violate any of the
terms, conditions or provisions of any law, judgment, order,
injunction, decree, regulation or ruling of any court or
governmental authority, domestic or foreign, to which SSPI is
subject;
(ii) give to any person any right, remedy, cause of action, right
of termination, cancellation or acceleration in or with
respect to any understanding, agreement, contract, or
commitment, written, oral or implied to which SSPI or any
predecessor or shareholder thereof is or was a party;
(iii) give to any government or governmental authority including any
governmental department, commission, bureau, board, or
administrative agency any right of termination, cancellation,
or suspension of, or constitute a breach of or result in a
default under any permit, license, control, or authority
issued to SSPI and which is necessary or desirable in
connection with the conduct and operation of the business
currently conducted by SSPI;
(iv) constitute a default by SSPI or an event which, with the
giving of notice or lapse of time or both, might constitute an
event of default or non-observance under any agreement,
contract, indenture or other instrument relating to any
indebtedness of SSPI which would give any person the right to
accelerate the maturity for the payment of any amount payable
under that agreement, contract, indenture, or other
instrument;
such that there would be a Material Adverse Effect on it;
(o) SSPI and its subsidiaries are the beneficial owners of or have the
right to acquire the interests in the properties, business and
assets referred to in the Public Record, which interests in the
properties, business and assets represent all interests of SSPI and
its subsidiaries in any properties, business or assets and any and
all agreements pursuant to which SSPI or its subsidiaries hold or
will hold any such interest in property, business or assets are in
good standing in all material respects according to their terms, and
the properties are in good standing in all material respects under
the applicable statues and regulations of the jurisdictions in which
they are situated;
(p) the Public Record is in all material respects accurate and omits no
facts, the omission of which makes the Public Record, or any
particulars therein, misleading or incorrect, as at the date they
were made;
(q) SSPI is not party to and has not granted and no person has any
agreement, warrant, option, right or privilege, consensual or
arising by law, present
<PAGE>
- 17 -
or future, contingent or absolute, capable of becoming an agreement,
warrant, option, right or privilege for the creation, purchase,
acquisition, subscription, issuance or allotment of any shares of
SSPI or securities convertible into or exchangeable for shares of
SSPI or to convert or exchange any securities into or for shares of
SSPI, or to require SSPI to purchase, redeem or otherwise acquire
any of the issued and outstanding shares in its capital except as
disclosed in the Public Record or as contemplated hereunder;
(r) no judgments, investigations, actions, suits, inquiries or
proceedings are outstanding or pending or, to the knowledge of SSPI,
are contemplated or threatened to which SSPI or its subsidiaries is
a party or to which the property of SSPI or its subsidiaries is
subject at law or in equity that would have a Material Adverse
Effect on the business, operations, condition (financial or
otherwise) of SSPI and its subsidiaries, on a consolidated basis;
(s) the SSPI Financial Statements were prepared in accordance with
Canadian general accepted accounting principles applied on a basis
consistent with prior years (in respect of any predecessors of SSPI)
and are true and correct in every material respect and present
fairly and accurately the financial condition and position of SSPI
and it subsidiaries as at the dates set out therein and the results
of its operations and the changes in its financial position for the
periods then ended, in accordance with Canadian generally accepted
accounting principles;
(t) except as disclosed in the Public Record, there has not been any
material change in the assets, liabilities or obligations (absolute,
accrued, contingent or otherwise) of SSPI and its subsidiaries, on a
consolidated basis, as set forth in the SSPI Financial Statements
and there has not been any material adverse change in the business,
operations or condition (financial or otherwise) or results of the
operations of SSPI and its subsidiaries, on a consolidated basis,
since June 30, 1996 and since that date there have been no material
facts, transactions, events or occurrences which could have a
Material Adverse Effect on the business of SSPI and its
subsidiaries, on a consolidated basis;
(u) none of SSPI's or any of its subsidiaries' businesses, assets or
properties are subject to any judicial or administrative proceeding
alleging the violation of any applicable law, judgment, decree,
order, injunction, rule, statute or regulation except where such
violation would not have a Material Adverse Effect on SSPI or its
subsidiaries;
(v) except as disclosed in Schedule "G", neither SSPI nor any of its
subsidiaries has any material contract, agreement, undertaking or
<PAGE>
- 18 -
arrangement, whether oral, written or implied, which cannot be
terminated on not more than one month's notice and neither SSPI nor
any of its subsidiaries has any outstanding material agreements,
contracts or commitments (whether written or oral) whatsoever
relating to or affecting the conduct of their businesses as
currently carried on or any of their assets or for the purchase,
sale or lease of any of their assets with the exception of this
Agreement;
(w) each of SSPI and its subsidiaries has been assessed for income tax
for all years to and including the fiscal year of each of SSPI and
its subsidiaries ended on December 31, 1995, and each of SSPI and
its subsidiaries has withheld and remitted to all applicable tax
collecting authorities all amounts required to be remitted to all
tax collecting authorities respecting payments to employees or to
non-residents, or otherwise and has paid all instalments or
corporate taxes due and payable as of the date hereof;
(x) all tax returns and reports of each of SSPI and its subsidiaries
required by law to be filed prior to the date hereof including all
income tax returns and all other corporate tax returns required to
be filed with any governmental taxing authority or board have been
filed and are true, complete and correct, and all taxes and other
government charges including all income, excise, sales, business and
property taxes and other rates, charges, assessment, levies, duties
taxes, contributions, fees, licenses, interest and penalties
required to be paid have been paid, and if not required to be paid
as at the date hereof, have been accrued in the SSPI Financial
Statements;
(y) adequate provision has been made for taxes payable by each of SSPI
and its subsidiaries which are not yet due and payable and there are
no agreements, waivers or other arrangements providing for an
extension of time with respect to the assessment or reassessment of
any taxing authority or board or the filing of any tax return by or
payment of any tax, governmental charge or deficiency by any of SSPI
or its subsidiaries, and there are no contingent tax liabilities or
any grounds which would prompt a re-assessment, including aggressive
treatment of income and expenses in filing earlier tax returns;
(z) no authorization, approval, order, license, permit or consent of any
governmental authority, regulatory body or court, and no
registration, declaration or filing by SSPI with any such
governmental authority, regulatory body or court is required in
order for SSPI to complete the within purchase and sale, to duly
perform and observe the terms and provisions of this Agreement and
to render this Agreement legal, valid, binding and enforceable in
accordance with its terms;
<PAGE>
- 19 -
(aa) SSPI has not guaranteed or agreed to guarantee any indebtedness or
other obligation of any party except as described in the SSPI
Financial Statements;
(ab) no order ceasing or suspending trading in securities of SSPI or
prohibiting the sale of securities by SSPI has been issued and no
proceedings for this purpose have been instituted, are pending,
contemplated or threatened;
(ac) SSPI has not, directly or indirectly, declared or paid any dividend
or declared or made any other distribution on any of its shares or
securities of any class, or, directly or indirectly, redeemed,
purchased or otherwise acquired any of its shares or securities or
agreed to do any of the foregoing;
(ad) since June 30, 1996, there has not been any occurrence or event
which has had, or might reasonably be expected to have, a Material
Adverse Effect on the business of SSPI as currently carried on or
the results of its operations;
(ae) SSPI has not increased the pay of or paid or agreed to pay any
pension, bonus, share of profits or other similar benefit of any
individual named on the "Summary Compensation Table" in the
Management Information
Circular of SSPI as at May 8, 1996;
(af) since June 30, 1996, no single capital expenditure or commitment
therefor has been made by SSPI other than as previously disclosed in
writing to the Vendor;
(ag) there is not, in the constating documents or by-laws of SSPI or in
any agreement, mortgage, note, debenture, indenture or other
instrument or document to which SSPI is a party, any restriction
upon or impediment to the declaration or payment of dividends by the
directors of SSPI or the payment of dividends by SSPI to the holders
of its common shares;
(ah) SSPI is not:
(i) in breach of any of the terms, covenants, conditions or
provisions of, is in default under, or has done or omitted to
do anything which, with the giving of notice or lapse of time
or both, would constitute a breach of or a default under any
contract to which it is a party;
(ii) in violation of nor are any present uses by SSPI of any of its
assets in violation of or contravention of any applicable law,
statute, order, rule or regulation;
<PAGE>
- 20 -
(iii) in breach or default under any judgment, injunction or other
order or aware of any judicial, administration, governmental,
or other authority or arbitrator by which SSPI is bound or to
which SSPI or any of its assets are subject except where such
breach or violation would not have a Material Adverse Effect;
(ai) Montreal Trust Company at its office in Calgary, Alberta has been
duly appointed as the transfer agent and registrar for all of the
outstanding common shares of SSPI;
(aj) each of the material contracts referred to in the Public Record to
which SSPI or its subsidiaries is a party has been duly authorized,
executed and delivered by the parties thereto and is a legal, valid
and binding obligation of the parties thereto enforceable in
accordance with their respective terms; and
(ak) SSPI is not a non-resident of Canada for the purposes of section 116
of the INCOME TAX ACT (Canada).
6. COVENANTS OF THE VENDORS
6.1 Each of the Vendors shall:
(a) duly and punctually perform all the obligations to be performed by
him, her or it under this Agreement; and
(b) execute all such documents and do all such things as shall be
reasonably necessary to give full effect to this Agreement.
7. COVENANTS OF SSPI
7.1 SSPI shall:
(a) use its best efforts to file the Preliminary Prospectus within two
weeks of the Closing Date and to obtain a receipt for the Final
Prospectus by September 30, 1996;
(b) use its best efforts to obtain a listing of SSPI's common shares on
a stock exchange recognized under the INCOME TAX ACT (Canada) by
September 30, 1996;
(c) ensure that at the respective times of filing and at all times
subsequent to the filing thereof during the distribution of the SSPI
Shares, the Preliminary Prospectus, and the Final Prospectus will
fully comply with the requirements of applicable securities
legislation;
<PAGE>
- 21 -
(d) duly and punctually perform all the obligations to be performed by
it under this Agreement, and cause SSPI to duly and punctually
perform all the obligations to be performed by it under this
Agreement;
(e) execute all such documents and shall do all such things as shall be
reasonably necessary to give full effect to this Agreement;
8. NON-MERGER
8.1 The representations, warranties, covenants and agreements of the Vendor
contained herein and those contained in the documents and instruments delivered
pursuant hereto will survive the Closing Date for a period of one year from the
date hereof, and notwithstanding the completion of the transactions herein
contemplated, the waiver of any condition contained herein (unless such waiver
expressly releases the Vendor of such representation, warranty, covenant or
agreement), or any investigation by SSPI, the same will remain in full force and
effect during that period.
8.2 The representations, warranties, covenants and agreements of SSPI contained
herein and those contained in the documents and instruments delivered pursuant
hereto will survive the Closing Date for a period of one year, and
notwithstanding the completion of the transactions herein contemplated, the
waiver of any condition contained herein (unless such waiver expressly releases
SSPI of such representation, warranty, covenant or agreement), or any
investigation by the Vendor, the same will remain in full force and effect
during that period.
9. CONDITIONS PRECEDENT
9.1 The obligations of SSPI to consummate the transactions herein contemplated
are subject to the fulfilment of each of the following conditions at the times
stipulated:
(a) the representations and warranties of Hefner in Section 3 and the
representations and warranties of the Vendors contained in Section 4
are true and correct in all respects;
(b) all covenants, agreements and obligations hereunder on the part of
the Vendors to be performed or complied with at or prior to the
Closing, including the Vendors' obligations to deliver the documents
and instruments herein provided for, shall have been performed and
complied with at and as of the Closing;
(c) all contracts, other than as detailed in Schedule "G", shall have
been terminated without further obligation to the Company;
(d) the Vendors shall have entered into the Escrow Agreement and shall
have executed all such other documents as may be required by the
Ontario Securities Commission providing for restrictions on the
resale of the SSPI Special Warrants and the SSPI Shares; and
<PAGE>
- 22 -
(e) the Esmeralda Agreement and the GHK Agreement shall have been
executed by all parties thereto, and all conditions precedent to the
consummation of the transactions contemplated therein for the
benefit of SSPI shall have been satisfied or waived.
9.2 The conditions set forth in Section 9.1 are for the exclusive benefit of
SSPI and may be waived by SSPI in writing in whole or in part at any time.
9.3 The obligations of the Vendors to consummate the transactions herein
contemplated are subject to the fulfilment of each of the following conditions:
(a) the representations and warranties of SSPI contained herein are true
and correct in all material respects; and
(b) all covenants, agreements and obligations hereunder on the part of
SSPI to be performed or complied with at or prior to the Closing,
including SSPI's obligations to deliver the documents and
instruments herein provided for, shall have been performed and
complied with as at the Closing;
(c) the terms of any escrow restrictions imposed by the Ontario
Securities Commission with respect to the resale of the SSPI Special
Warrants and the SSPI Shares shall be acceptable to the Vendors;
(d) SSPI shall have executed the Management Contract, the Registration
Rights Agreement, the GHK Agreement and the Esmeralda Agreement.
9.4 The conditions set forth in Section 9.3 are for the exclusive benefit of the
Vendor and may be waived by the Vendor in whole or in part at any time.
9.5 The obligations of the Vendor and SSPI to complete and give effect to the
transactions herein contemplated are further subject to the due execution of the
Closing Certificate by or on behalf of all parties whose execution is provided
for therein.
10. TRANSACTIONS OF THE VENDORS AT THE CLOSING
10.1 At the Closing, the Vendors will execute and deliver or cause to be
executed and delivered all documents, instruments, resolutions and certificates
as are necessary to effectively transfer the Vendors' Interests to SSPC, free
and clear of all Liens, including:
(a) such documents and consents as are required under the Limited
Liability Company agreement to effect the transfers of the Vendors'
Interests;
(b) documents as are required to evidence the admission of SSPC as a
member of the Company;
<PAGE>
- 23 -
(c) resignations in writing of all the managers of the Company;
(d) all records and books of account of the Company;
(e) the Escrow Agreement duly executed by each of the Vendors together
with duly executed copies of such other documents as may be required
under Section 9.1(d) of this Agreement;
(f) a closing Warranty and Certificate from each of the Vendors
confirming that the conditions to be satisfied by the Vendors unless
waived, set out in Section 9.1 and this Section 10.1 have been
satisfied at the Closing;
(g) a legal opinion from counsel to the Company addressed to SSPI in
form satisfactory to SSPI; and
(h) all such other documents and instruments as SSPI may reasonably
require including but not limited to all accounting information,
vouchers, receipts, accounting entries and diaries of the Company.
11. TRANSACTIONS OF SSPI AT THE CLOSING
11.1 At the Closing, SSPI will deliver or cause to be executed and delivered all
documents, instruments, resolutions and share certificates as are necessary to
effectively transfer the SSPI Special Warrants to the Vendors, free and clear of
all Liens, including:
(a) certified copies of resolutions of the directors of SSPI authorizing
the entering into of this Agreement and the carrying out of the
transactions contemplated herein and certified copies of resolutions
of the directors of SSPI authorizing the issuance of SSPI Special
Warrants and the SSPI Shares;
(b) duly issued special warrant certificates representing the SSPI
Special Warrants in the names of the Vendors as provided in Section
2.3 hereof;
(c) a Closing Warranty and Certificate from SSPI confirming that the
conditions to be satisfied by SSPI, unless waived, set out in
Section 9.3 have been satisfied at the Closing;
(d) a legal opinion from counsel to SSPI and SSPC addressed to the
Vendor and in form satisfactory to the Vendor;
(e) the Management Contract duly executed by SSPI;
(f) the Registration Rights Agreement duly executed by SSPI; and
<PAGE>
- 24 -
(g) all such other documents and instruments as the Vendor may
reasonably require with respect to SSPI, including but not limited
to:
(i) a draft form of the Preliminary Prospectus;
(ii) a letter from counsel to SSPI advising of the status of SSPI's
application to list its common shares on the Alberta Stock
Exchange; and
(iii) a letter from SSPI and Yorkton Securities Inc. discussing the
plans of Yorkton Securities Inc. to carry out a private
placement for SSPI.
12. INDEMNITY AND POSTCLOSING ADJUSTMENTS
12.1 Subject to Section 12.2 herein, each of the Vendors will indemnify and
hold harmless SSPI from and against:
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfilment of any
covenant on the part of such Vendor under this Agreement or from any
misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to SSPI hereunder;
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing; and
and if any action or claim shall be asserted against SSPI in respect of which
indemnity may be sought hereunder, SSPI shall promptly notify the appropriate
Vendors in writing and the appropriate Vendors shall assume the defence thereof
at their expense through legal counsel acceptable to SSPI. No party shall effect
a settlement of such action or claim without the written consent of the other
party, such consent not to be unreasonably withheld or delayed.
12.2 The maximum extent of the liability of each of the Vendors for all claims
individually or in the aggregate under Section 12.1 herein (with the exception
of liability arising directly or indirectly by reason of a misrepresentation or
breach of warranty as it relates to the representations and warranties contained
in Section 4.1) shall be limited in the aggregate to the market value, as at the
date of a claim for indemnity, of the SSPI Special Warrants or SSPI shares of
such Vendor, as the case may be, acquired pursuant to this Agreement and then
held subject to the Escrow Agreement as at such date, and the Vendors shall have
no further personal liability to SSPI in this regard.
12.3 In circumstances where more than one Vendor is liable under Section 12.1 as
a result of a misrepresentation or breach of warranty contained in Section 4.2,
the liability of such Vendors shall be apportioned such that each Vendor who is
liable bears that Portion of the entire
<PAGE>
- 25 -
such liability, limited in the aggregate as stated in Section 12.2, as is equal
to the percentage of the total number of SSPI Special Warrants issued under this
Agreement as are acquired by such Vendor pursuant to this Agreement in relation
to the total number of Special Warrants acquired by all the Vendors who are
liable.
12.4 Subject to the maximum limit on liability in Section 12.2, each Vendor can
satisfy any liability referred to in Section 12.2 and Section 12.3 herein by
either paying the amount thereof to SSPI or surrendering or causing to be
surrendered to SSPI such of the Vendor's SSPI Special Warrants or SSPI Shares or
the rights thereto then held subject to the Escrow Agreement as at the date of
receipt of a claim for indemnity as have a market value equal to the amount of
the liability.
12.5 In circumstances where a Vendor is liable under Section 12.1 in respect of
a misrepresentation or breach of warranty as it relates to a representation or
warranty contained in Section 4.1, SSPI agrees that it shall first exhaust
recourse against the SSPI Special Warrants or SSPI Shares of such Vendor, as the
case may be, then held subject to the Escrow Agreement, to satisfy such
liability in which case the provisions of Section 12.4 apply mutatis mutandis,
and SSPI will only further seek recourse against such Vendor generally in
circumstances where the market value of such SSPI Special Warrants or SSPI
Shares, as the case may be, is not sufficient to satisfy such liability under
Section 12.1.
12.6 For the purposes of Section 12.2 and Section 12.4 herein the "market value"
of the SSPI Special Warrants or SSPI shares or the rights thereto shall be
deemed to be equal to the weighted average of the closing prices at which SSPI's
common shares have traded on the Alberta Stock Exchange or, if such shares are
not then listed on the Alberta Stock Exchange, on such stock exchange or
electronic trading facility on which the shares then trade as may be selected by
the board of directors of SSPI, during the 20 most recent trading days ending on
the trading day immediately prior to the date of a claim for indemnity.
12.7 The provisions of this Section 12 and apply mutatis mutandis to Hefner with
respect to any misrepresentation or breach of warranty on the part of Hefner
under this Agreement.
12.8 SSPI will indemnify and hold harmless the Vendors from and against:
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfilment of any
covenant on the part of SSPI under this Agreement or from any
misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to the Vendors hereunder;
and
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing;
and if any action or claim shall be asserted against the Vendors in respect of
which indemnity may be sought hereunder, the Vendors shall notify SSPI in
writing and SSPI shall assume the
<PAGE>
- 26 -
defence thereof at its expense through legal counsel acceptable to the Vendors.
No party shall effect a settlement of such action or claim without the written
consent of the other party, such consent not to be unreasonably withheld or
delayed.
12.9 SSPI shall bear the costs relating to the test procedures in respect of the
El Segundo No. 1 well as detailed in Schedule "J". To the extent such costs
exceed the amounts set forth in Schedule "J", the Vendors, together with the
vendors under the Esmeralda Agreement and GHK Agreement, shall reimburse SSPI
for the excess pursuant to Section 12.10 hereof.
12.10 If the costs relating to the test procedures in respsct of El Segundo No
1 well exceed the amounts set forth in Schedule "J", GHK Company Colombia shall
submit invoices to the Manager (as defined in the Management Contract), SSPI and
the Vendors in respect of such excess amounts within 90 days of the date hereof.
Once satisfied that such invoices accurately reflect actual costs incurred in
respect of the test procedures, the Vendors shall within 30 days after such
90-day period pay to the Manager, and direct the Manager to pay to SSPI, a
portion of such costs equivalent to their pro rata share of the aggregate number
of warrants and preference shares in SSPI issued to the Vendors under this
Agreement and the vendors under the Esmeralda Agreement and the GHK Agreement.
12.11 The Vendors shall be entitled to a portion, equivalent to their pro rata
share of the aggregate number of warrants and preference shares in SSPI issued
to the Vendors under this Agreement and the vendors under the Esmeralda
Agreement and the GHK Agreement, of any revenues generated by the production or
sale of oil produced from El Segundo No. 1 well prior to the Closing. The
Vendors shall be entitled to require from GHK Company Colombia an accounting of
any such revenues within 90 days of the date hereof and SSPI shall within 30
days after such 90-day period pay to the Vendors the portion of such proceeds
set forth in this Section 12.11.
13. ISSUANCE OF SSPI SHARES
13.1 The Vendors hereby irrevocably direct SSPI to deliver such of the SSPI
shares as are issuable upon the exercise of the SSPI Special Warrants held by
Montreal Trust under the terms of the Escrow Agreement to Montreal Trust to be
held under the terms of the Escrow Agreement.
14. RIGHT OF RESCISSION
14.1 SSPI shall have the right to rescind this Agreement in circumstances where
any approvals which are required to be obtained by the parties hereto under the
Association Contracts are not obtained.
15. COUNTERPARTS
15.1 This Agreement may be executed in any number of facsimile counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same document.
16. TIME OF THE ESSENCE
16.1 Time is of the essence of this Agreement.
17. ENTIRE AGREEMENT
17.1 This Agreement, together with the agreements and documents provided for
herein, contains the entire agreement between the parties hereto in respect of
the purchase and sale of the Vendors' Interests and there are no warranties,
representations, terms, conditions or collateral agreements, express or implied,
other than expressly set forth or provided for in this Agreement.
18. FURTHER ASSURANCES
18.1 The parties will execute and deliver such further documents and instruments
and do all such acts and things as may be reasonably necessary or requisite to
carry out the full intent and meaning of this Agreement and to effect the
transactions contemplated by this Agreement, and the parties will cooperate in
respect of any requirement to file an application with Investment Canada.
<PAGE>
- 27 -
19. SUCCESSORS AND ASSIGNS
19.1 This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
20. NOTICE
20.1 Any notice required or permitted to be given under this Agreement will be
validly given if in writing and delivered or sent by pre-paid registered mail,
to the following addresses:
(a) If to the Vendors:
c/o Robert A. Hefner III
2121 Kirby Drive, #65E
Houston, Texas 77019
U.S.A.
(b) If to SSPI and SSPC:
SEVEN SEAS PETROLEUM INC.
Suite 960 - 1900 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Timothy Stephens
or to such other address as any Party may specify by notice in writing to the
other.
20.2 Any notice delivered on a business day will be deemed conclusively to have
been effectively given on the date notice was delivered.
20.3 Any notice sent by prepaid registered mail will be deemed conclusively to
have been effectively given on the third business day after posting; but if at
the time of posting or between the time of posting and the third business day
thereafter there is a strike, lockout or other labour disturbance affecting
postal service, then the notice will not be effectively given until actually
delivered.
21. VENDORS' NOMINEES
21.1 The Vendors or any of them may, without SSPI's consent, elect to nominate a
company or other legal entity, including a company which may be hereafter
incorporated, to be the recipient of all or any part of the SSPI Special
Warrants which are to be issued by SSPI and to which the Vendor shall be
entitled pursuant to Section 2.3 herein. Such nomination will not take effect
until communication thereof to SSPI, or to SSPI's solicitors. Once such
communication has been made, the nominee elected by such Vendor will be deemed
to be such Vendor hereunder for purposes of receiving the applicable SSPI
Special Warrants and for all purposes after the Closing Date, but the Vendor
will in no way be released from its representations, warranties and obligations
hereunder despite the election or appointment of a nominee.
<PAGE>
- 28 -
22. PROPER LAW
22.1 This Agreement will be governed by and construed in accordance with the
laws of the Province of British Columbia and the laws of Canada applicable
therein and the parties will attorn to the Courts thereof.
IN WITNESS WHEREOF the parties have caused this Agreement to be executed and
delivered this 26th day of July, 1996.
SIGNED, SEALED AND DELIVERED on )
behalf of BREENE M. KERR by his lawful )
attorney Robert A. Hefner, III in the )
presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) BREENE M. KERR, by his attorney
- -------------------------------------- ) Robert A. Hefner, III
Print Name )
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
PETROLEUM PROPERTIES
MANAGEMENT CO. by its lawful attorney
Robert A. Hefner, III
Per: _________________________________
Authorized Signatory
<PAGE>
- 29 -
SIGNED, SEALED AND DELIVERED on )
behalf of GWEN D. SHARP by her lawful )
attorney Robert A. Hefner, III in the )
presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) GWEN D. SHARP, by her attorney
- -------------------------------------- ) Robert A. Hefner, III
Print Name )
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
SIGNED, SEALED AND DELIVERED on behalf )
of MARK THOMSON BT by his lawful attorney )
Robert A. Hefner, III in the presence of: )
)
- -------------------------------------- )
Signature ) -------------------------------
- -------------------------------------- ) MARK THOMSON BT, by his
Print Name ) attorney Robert A. Hefner, III
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
)
<PAGE>
- 30 -
SIGNED, SEALED AND DELIVERED on )
behalf of CHARLES B. ISRAEL by his )
lawful attorney Robert A. Hefner, III )
in the presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) CHARLES B. ISRAEL, by his
- -------------------------------------- ) attorney Robert A. Hefner, III
Print Name )
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
SIGNED, SEALED AND DELIVERED on )
behalf of JUSTIN B. ISRAEL by his )
lawful attorney Robert A. Hefner, III )
in the presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) JUSTIN B. ISRAEL, by his attorney
- -------------------------------------- ) Robert A. Hefner, III
Print Name )
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
SEVEN SEAS PETROLEUM INC.
Per: _________________________________
Authorized Signatory
SEVEN SEAS PETROLEUM COLOMBIA INC.
Per: _________________________________
Authorized Signatory
<PAGE>
- 31 -
SIGNED, SEALED AND DELIVERED by )
ROBERT A. HEFNER, III in the presence of: )
)
- -------------------------------------- )
Signature )
- -------------------------------------- ) -------------------------------
Print Name ) ROBERT A. HEFNER, III
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
This is page 32 of an Agreement dated the 26th day of July, 1996 between BREENE
M. KERR, PETROLEUM PROPERTIES MANAGEMENT COMPANY, GWEN D. SHARP, MARK THOMSON
BT., CHARLES B. ISRAEL, JUSTIN B. ISRAEL, ROBERT A. HEFNER, III, SEVEN SEAS
PETROLEUM COLOMBIA INC. and SEVEN SEAS PETROLEUM INC.
EXHIBIT 10(g)
ESMERALDA L.L.C. PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 26th day of July, 1996
BETWEEN:
JOSE FRANCISCO AMBROSI FILARDI,
AND:
FRANCISCO JAVIER MUNOZ CALLE,
AND:
RUDOLF KLING,
AND:
FAR RIVER CORPORATION,
AND:
VICTORIA OWEN DE PANERO,
AND:
SOUTHAMERICAN HOLDING, CORP.,
AND:
ENCHANTED INTERNATIONAL INC.,
AND:
NAKURU HOLDINGS, INC.,
AND:
FERNANDO LOBO-GUERRERO OSORIO,
AND:
MORAGA, S.A.,
<PAGE>
- 2 -
AND:
SHARMOR, INC.,
AND:
MAURICIO TORO,
AND: THE GHK CORPORATION
(all of the above hereinafter collectively called the "Vendors")
AND:
ROBERT A. HEFNER, III
(hereinafter called "Hefner")
AND:
SEVEN SEAS PETROLEUM INC., a company incorporated under the laws of
the Province of British Columbia with registered offices at 800 -
885 West Georgia Street, Vancouver, British Columbia, Canada, V6C
3H1
(hereinafter called "SSPI")
AND:
SEVEN SEAS PETROLEUM HOLDINGS INC., a company incorporated under the
laws of the Cayman Islands and having a business address of 1900
Post Oak Boulevard, Suite 960, Houston, Texas, 77056, in the United
States of America
(hereinafter called "SSPH")
AND:
SEVEN SEAS PETROLEUM COLOMBIA INC., a company incorporated under the
laws of the Cayman Islands, and having a business address of 1900
Post Oak Boulevard, Suite 960, Houston, Texas, 77056, in the United
States of America
<PAGE>
- 3 -
(hereinafter called "SSPC")
WITNESSES THAT WHEREAS:
A. The Vendors are the registered and beneficial owners of the following
Vendors' Interests in the Company;
====================================================================
PERCENTAGE INTEREST IN THE
NAME COMPANY
====================================================================
Jose Francisco Ambrosi Filardi 1.7650
- --------------------------------------------------------------------
Francisco Javier Munoz Calle 3.0987
- --------------------------------------------------------------------
Rudolf Kling 6.5228
- --------------------------------------------------------------------
Far River Corporation 6.5228
- --------------------------------------------------------------------
Victoria Owen de Panero 5.0110
- --------------------------------------------------------------------
Southamerican Holding, Corp. 2.4710
- --------------------------------------------------------------------
Enchanted International Inc. 6.5228
- --------------------------------------------------------------------
Nakuru Holdings, Inc. 6.5228
- --------------------------------------------------------------------
Fernando Lobo-Guerrero Osorio 2.3927
- --------------------------------------------------------------------
Moraga, S.A. 1.7650
- --------------------------------------------------------------------
Sharmor, Inc. 6.5228
- --------------------------------------------------------------------
Mauricio Toro 2.3927
- --------------------------------------------------------------------
The GHK Corporation 50.0000
====================================================================
which collectively form the entire membership interest in the Company;
B. The Vendors have agreed to sell and SSPI has agreed to purchase the Vendors'
Interests on the terms and conditions detailed herein.
THEREFORE in consideration of the premises and the mutual covenants and
agreements herein set forth, the parties hereto covenant and agree each with the
other as follows:
1. INTERPRETATION
1.1 In this Agreement, including the schedules hereto, except as
otherwise expressly provided:
<PAGE>
- 4 -
(a) "Agreement" means this agreement, including the preamble and the
Schedules hereto, as it may from time to time be supplemented or
amended;
(b) "Association Contracts" means the association contracts between the
Company and Empress Colombiana de Petroles S.A. respecting the
Properties;
(c) "Cimarrona" means Cimarrona Limited Liability Company;
(d) "Cimarrona Agreement" means the agreement of even date between
certain members of Cimarrona on the one hand and SSPI and SSPC on
the other hand respecting the acquisition of a 62.963% membership
interest in Cimarrona;
(e) "Closing" means the completion of the transactions contemplated in
this Agreement in accordance with its terms;
(f) "Closing Certificate" means a closing certificate executed by, or on
behalf of, INTER ALIA, the parties to this Agreement;
(g) "Closing Date" means the date of the closing of the transactions
contemplated herein;
(h) the "Company" means Esmeralda Limited Liability Company;
(i) "Escrow Agreement" means the escrow agreement in the form attached
as Schedule "A" hereto;
(j) "Final Prospectus" means a final prospectus of SSPI which qualifies
INTER ALIA the exchange of the SSPI Special Warrants for the SSPI
Shares;
(k) "Financial Statements" mean the financial statements of the Company
attached as Schedule "J" hereto;
(l) "GHK Agreement" means the agreement of even date between, inter
alia, SSPI and Hefner providing for the purchase of all of the
shares of GHK Colombia;
(m) "GHK Colombia" means GHK Company Colombia;
(n) "Indenture" means the special warrant indenture between SSPI and
Montreal Trust in the form attached as Schedule "B" hereto;
<PAGE>
- 5 -
(o) "JOA" means that joint operating agreement dated August 1, 1994
respecting the operatorship of the Properties;
(p) "Liens" means all liens, mortgages, debentures, charges,
hypothecations, pledges or other security interests or encumbrances
of whatever kind;
(q) "Management Contract" means that management contract of even date
between, INTER ALIA, SSPI and GHK Company LLC;
(r) "Material Adverse Effect" means an adverse effect that is, or would
be, singly or in the aggregate material;
(s) "Montreal Trust" means the Montreal Trust Company of Canada;
(t) "1933 Act" means the SECURITIES ACT OF 1933 (United States) as
amended;
(u) "Preliminary Prospectus" means a preliminary prospectus of SSPI
which qualifies the exchange of the SSPI Special Warrants for the
SSPI Shares;
(v) "Properties" means the Dindal and Rio Seco areas located in the
Upper Magdalena Basin of Colombia described in the Association
Contracts;
(w) "Public Record" means, in respect of SSPI, the financial statements,
offering memoranda, material change reports, information circulars
and press releases and all other documents and information filed or
required to be filed with the Ontario Securities Commission or the
Alberta Securities Commission on or during the 12 months preceding
the date of this Agreement;
(x) "Registration Rights Agreement" means that registration rights
agreement between, INTER ALIA, SSPI and the Vendors, in the form
attached as Schedule "K" hereto;
(y) "SSPI Financial Statements" means the audited, consolidated
financial statements of SSPI as at and for the year ended December
31, 1995 and the unaudited, consolidated financial statements of
SSPI for the six month period ended June 30, 1996;
(z) "SSPI Special Warrants" means a total of 4,469,028 special warrants
of SSPI to be issued to the Vendors in accordance with the terms of
the Indenture;
(aa) "SSPI Shares" means the common shares of SSPI to be issued upon
exercise of the SSPI Special Warrants;
<PAGE>
- 6 -
(ab) "U.S. Person" has the meaning as set out in Regulation S under the
1933 Act;
(ac) "Vendor's Interest" means the membership interests of each of the
Vendors in the Company and "Vendors' Interests" means collectively
the membership interests of all the Vendors in the Company as set
out in recital A hereto;
(ad) "Voting Support Agreement" means the shareholders voting support
agreement in the form attached as Schedule "C" hereto;
(ae) all references in this Agreement to a designated "Section" or other
subdivision or to a Schedule are to the designated Section or other
subdivision of, or Schedule to, this Agreement;
(af) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Section or other subdivision or Schedule;
(ag) the headings are for convenience only and do not form a part of this
Agreement and are not intended to interpret, define, or limit the
scope, extent or intent of this Agreement or any provision hereof;
(ah) the singular of any term includes the plural, and vice versa; the
use of any term is equally applicable to any gender and, where
applicable, a body corporate; the word "or" is not exclusive and the
word "including" is not limiting (whether or not non-limiting
language, such as "without limitation" or "but not limited to" or
words of similar import, is used with reference thereto);
(ai) in respect of the Company, any accounting term not otherwise defined
has the meanings assigned to it in accordance with United States tax
basis accounting practices;
(aj) in respect of SSPI, any accounting term not otherwise defined has
the meaning assigned to it in accordance with Canadian generally
accepted accounting principles;
(ak) where any representation or warranty is made "to the knowledge of"
any party, such party will not be liable for a misrepresentation or
breach of warranty by reason of the fact, state of facts, or
circumstance in respect of which the representation or warranty is
given being untrue if such party proves it did not have actual
knowledge thereof; and
<PAGE>
- 7 -
(al) where any representation or warranty references disclosure to any of
SSPI, SSPC or SSPH, disclosure to one is deemed to be disclosure to
all.
1.2 The following are the Schedules to this Agreement:
SCHEDULE DESCRIPTION
-------- -----------
A Escrow Agreement
B Special Warrant Indenture
C Voting Support Agreement
D Outstanding Indebtedness
E Managers of the Company
F Limited Liability Company Agreement
G Surviving Contracts
H Costs Allocation
I U.S. Securities Law Questionnaire
J Financial Statements
K Registration Rights Agreement
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, each of the Vendors
hereby sells and assigns to SSPI, and SSPI hereby purchases from each of the
Vendors his, her or its Vendor's Interest free and clear of any Liens.
2.2 SSPI hereby directs each Vendor to transfer his, her or its Vendor's
Interest to and into the name of SSPC as to 50% of such Vendor's Interest and to
and into the name of SSPH as to 50% of such Vendor's Interest and each of SSPI
and SSPH hereby acknowledges its entitlement to and receipt of such Vendor's
Interest from each Vendor.
2.3 The Purchase Price payable by SSPI for each Vendor's Interest shall be the
SSPI Special Warrants which are hereby issued and tendered to the Vendors in the
following amounts:
====================================================================
NUMBER OF SPECIAL WARRANTS
NAME OF SSPI
====================================================================
- --------------------------------------------------------------------
Jose Francisco Ambrosi Filardi 78,879
- --------------------------------------------------------------------
Francisco Javier Munoz Calle 138,479
- --------------------------------------------------------------------
Rudolf Kling 291,505
- --------------------------------------------------------------------
Far River Corporation 291,505
- --------------------------------------------------------------------
Victoria Owen de Panero 156,464
- --------------------------------------------------------------------
<PAGE>
- 8 -
- --------------------------------------------------------------------
Southamerican Holding, Corp. 110,430
- --------------------------------------------------------------------
Enchanted International Inc. 291,505
- --------------------------------------------------------------------
Nakuru Holdings, Inc. 291,505
- --------------------------------------------------------------------
Fernando Lobo-Guerrero Osorio 106,929
- --------------------------------------------------------------------
Moraga, S.A. 78,879
- --------------------------------------------------------------------
Sharmor, Inc. 291,505
- --------------------------------------------------------------------
Mauricio Toro 106,929
- --------------------------------------------------------------------
The GHK Corporation 2,234,514
====================================================================
2.4 Each Vendor hereby directs the SSPI Special Warrants issued and tendered to
him, her or it to be delivered to Hefner on his, her or its behalf and Hefner
hereby acknowledges receipt of same.
3. HEFNER'S WARRANTIES AND REPRESENTATIONS
3.1 Hefner warrants and represents to SSPI, with the intent that SSPI will rely
thereon in entering into this Agreement and concluding the purchase and sale
contemplated herein, that he is the duly authorized agent and duly appointed
attorney of each of the Vendors with full power and authority on their behalf to
execute this Agreement and to execute all such other documents and do all such
other acts and things on behalf of the Vendors and each of them as is necessary
to give full force and effect to this Agreement.
4. AGENT AND ATTORNEY'S WARRANTIES AND REPRESENTATIONS
4.1 Each of the Vendors severally warrants and represents to SSPI, with the
intent that SSPI will rely thereon in entering into this Agreement and in
concluding the purchase and sale contemplated herein, that:
(a) such Vendor is the registered holder and beneficial owner of the
Vendor's Interest set opposite the Vendor's name in recital "A"
herein, free and clear of all Liens, and the Vendor has no interest,
legal or beneficial, direct or indirect, in any shares of, or the
assets or business of, the Company other than such Vendor's Interest
as set out in recital "A", and in the case of The GHK Corporation,
also other than the Management Contract and any interest arising
from Hefner's ownership interest in GHK Colombia;
<PAGE>
- 9 -
(b) such Vendor has good and sufficient right and authority to enter
into this Agreement on the terms and conditions herein set forth and
to transfer the legal and beneficial title and ownership of the
Vendor's Interest as set out in recital "A" to SSPC and SSPH;
(c) the Vendor either:
(i) is not a U.S. Person and is not acquiring the securities
offered hereby for the account or benefit of a U.S. Person; or
(ii) is a U.S. Person and has completed the questionnaire attached
as Schedule "I" hereto and in which case the Vendor represents
and warrants to the Purchaser as to the accuracy of all
matters set out therein;
(d) the Vendor is aware that neither SSPI Special Warrants nor the SSPI
Shares have been registered under the 1933 Act and may not be
offered or sold in the United States unless registered under the
1933 Act and the securities laws of all applicable states of the
United States unless an exemption from such registration
requirements is available or registration is not required pursuant
to Regulation S under the 1933 Act or registration is otherwise not
required under the 1933 Act and that SSPI has no obligation or
present intention of filing a registration statement under the 1933
Act in respect of the SSPI Special Warrants or the SSPI Shares;
(e) if the Vendor is not a U.S. Person, the Vendor is further aware
that:
(i) no offers in respect of the SSPI Special Warrants were made by
any person to the Vendor while the Vendor was in the United
States;
(ii) the Vendor was outside the United States at the time of
execution and delivery of this Agreement;
(iii) the certificates representing the SSPI Special Warrants will
bear a legend stating that such securities have not been
registered under the 1933 Act or the securities laws of any
state of the United States and the SSPI Special Warrants may
not be exercised in the United States or by or on behalf of a
U.S. Person unless registered under the 1933 Act and the
securities laws of all applicable states of the United States
or an exemption from such registration requirements is
available; and
(iv) any person who exercises a SSPI Special Warrant will be
required to provide to SSPI:
<PAGE>
- 10 -
(1) written certification that it is not a U.S. Person and
the SSPI Special Warrant is not being exercised within
the United States or on behalf of a U.S. Person; or
(2) a written opinion of counsel to the effect that the SSPI
Special Warrants and the SSPI Shares underlying such
securities have been registered under the 1933 Act and
applicable state securities laws or are exempt from
registration thereunder.
4.2 Subject to Section 12.2 hereof, each of the Vendors severally warrants and
represents as follows with the intent that SSPI will rely thereon in entering
into this Agreement and in concluding the purchase and sale contemplated herein
that:
(a) the Vendors' Interests, taken together represent the entire
ownership interest in the Company;
(b) with the exception of this Agreement, no party has any agreement,
consensual or arising by law, present or future, contingent or
absolute, or capable of becoming an agreement:
(i) to require the Company to admit such party as a member of the
Company; or
(ii) to require the Company to convert or exchange any securities
into or for a membership interest in the Company; or
(iii) to purchase or otherwise acquire any membership interest in
the Company;
(c) the Vendor does not have any specific information relating to the
Company which is not generally known and which, to the knowledge of
the Vendor, has not been disclosed to SSPI and which if known could
reasonably be expected to have a Material Adverse Effect on the
value of the Company;
(d) the Company is duly formed, validly existing and in good standing
under the laws of the State of Oklahoma;
(e) to the Vendor's knowledge, the limited liability company agreement
of the Company dated December 8, 1993, as amended, attached as
Schedule "F" hereto remains in full force and effect and has not
been amended or modified;
(f) to the Vendor's knowledge, the managers of the Company are as
described in Schedule "E" and there are no officers of the Company;
<PAGE>
- 11 -
(g) to the Vendor's knowledge, the Company is duly registered to carry
on business in all jurisdictions in which the Company carries on
business except where the failure to so register would not have a
Material Adverse Effect on the Company;
(h) to the Vendor's knowledge, the Company has the power, authority and
capacity to carry on its business as presently conducted by it;
(i) the Company holds a 9.776% participating interest under the
Association Contracts free and clear of all Liens and has no other
material assets;
(j) the Company carries on no business other than holding the 9.776%
participating interest under the Association Contracts;
(k) to the Vendor's knowledge, the Company holds all licences and
permits required for the conduct in the ordinary course of its
business as presently conducted by it and all such licences and
permits are in good standing and the conduct and uses of the same by
the Company are in compliance with all laws, and other restrictions,
rules, regulations and ordinances applicable to the Company and its
business, save and except for breaches which do not have a Material
Adverse Effect on the Company or its business as presently
conducted; and with the exception that no representation and
warranty is given with respect to any permit, license, consent,
contracts or authority granted under or in connection with the
associaton contracts.
(l) the making of this Agreement and the completion of the transactions
contemplated hereby and the performance of and compliance with the
terms hereof will not:
(i) conflict with or result in a breach of or violate any of the
terms, conditions, or provisions of the constating documents
of the Company;
(ii) to the Vendor's knowledge, conflict with or result in a breach
of or violate any of the terms, conditions or provisions of
any law, judgment, order, injunction, decree, regulation or
ruling of any court or governmental authority, domestic or
foreign, to which the Company or the Vendor is subject or
constitute or result in a default under any agreement,
contract or commitment to which the Company or the Vendor is a
party with the exception that no such representation and
warranty is given with respect to any permit, licence,
consent, contracts or authority granted under or in connection
with the Association Contracts;
<PAGE>
- 12 -
(iii) to the Vendor's knowledge, give to any person any remedy,
cause of action, right of termination, cancellation or
acceleration in or with respect to any understanding,
agreement, contract, or commitment, written, oral or implied,
to which the Company is a party with the written exception
that no such representation and warranty is made with respect
to the Association Contracts;
(iv) to the Vendor's knowledge, give to any government or
governmental authority including any governmental department,
commission, bureau, board, or administrative agency any right
of termination, cancellation, or suspension of, or constitute
a breach of or result in a default under any permit, license,
control, or authority issued to the Company and which is
necessary or desirable in connection with the conduct and
operation of the businesses currently conducted by the Company
with the exception that no such representation and warranty is
given with respect to any permit, license, contract or
authority granted under or in connection with the Association
Contracts;
(v) to the Vendor's knowledge, constitute a default by the Company
or an event which, with the giving of notice or lapse of time
or both, might constitute an event of default or
non-observance under any agreement, contract, indenture or
other instrument relating to any indebtedness of any of the
Company which would give any party the right to accelerate the
maturity for the payment of any amount payable under that
agreement, contract, indenture, or other instrument with the
exception that no such representation and warranty is given
with respect to any permit, licence, contract or authority
granted under or in connection with the Association Contracts;
so as to have a Material Adverse Effect on the Company;
(m) the Financial Statements were prepared on a cash basis in accordance
with U.S. tax regulations applied on a basis consistent with prior
years and are true and correct in every material respect;
(n) to the Vendor's knowledge, there is no indebtedness of the Company,
including to the Vendor, which is not disclosed or reflected in the
Company's Financial Statements other than as detailed in Schedule
"D";
(o) to the Vendor's knowledge, the Company has been assessed for income
tax for all years to and including the most recent fiscal year end
of the Company to which the Financial Statements are made up, and
the Company has withheld and remitted to all applicable tax
collecting authorities
<PAGE>
- 13 -
all amounts required to be remitted to all tax collecting
authorities respecting payments to employees or to non-residents, or
otherwise and has paid all instalments of corporate taxes due and
payable as of the date hereof;
(p) to the Vendor's knowledge, all tax returns and reports of the
Company required by law to be filed prior to the date hereof
including all income tax returns and all other corporate tax returns
required to be filed with any governmental taxing authority or board
have been filed and are true, complete and correct, and all taxes
and other government charges including all income, excise, sales,
business and property taxes and other rates, charges, assessment,
levies, duties, taxes, contributions, fees and licenses required to
be paid have been paid, and if not required to be paid as at the
date hereof, have been accrued in the Financial Statements;
(q) to the Vendor's knowledge, adequate provision has been made for
taxes payable by the Company which are not yet due and payable and
there are no agreements, waivers or other arrangements providing for
an extension of time with respect to the assessment or re-assessment
of any tax return by any taxing authority or for the filing of any
tax return by or payment of any tax, governmental charge or
deficiency by the Company, and to the knowledge of the Vendor, there
are no contingent tax liabilities or any grounds which would prompt
a re-assessment;
(r) to the Vendor's knowledge, no authorization, approval, order,
license, permit or consent of any governmental authority, regulatory
body or court, and no registration, declaration or filing by the
Vendor or the Company with any such governmental authority,
regulatory body or court remains outstanding in order for the Vendor
to complete the within purchase and sale, to duly perform and
observe the terms and provisions of this Agreement, and to render
this Agreement legal, valid, binding and enforceable in accordance
with its terms with the exception that no representation and
warranty is given as to any authorizations, approvals, order,
licenses, permits or consents required under the terms of the
Association Contracts;
(s) (i) to the Vendor's knowledge, the business of the Company as
currently carried on by it complies with all applicable laws,
judgments, decrees, orders, injunctions, rules, statutes and
regulations of all courts, arbitrators or governmental
authorities, including all environmental, health and safety
statutes and regulations except where the failure to comply
would not have a Material Adverse Effect on the Company;
(ii) to the Vendor's knowledge, the Company' business, assets or
properties are not subject to any judicial or administrative
<PAGE>
- 14 -
proceeding alleging the violation of any applicable
environmental, health or safety law, judgment, decree, order,
injunction, rule, statute or regulation except where such
proceeding would not have a Material Adverse Effect on the
Company;
(t) to the Vendor's knowledge, since the date of the Company's most
recent Financial Statements there has not been any occurrence or
event which has had, or might reasonably be expected to have, a
Material Adverse Effect on the business of the Company as currently
carried on or the results of its operations;
(u) to the Vendor's knowledge, other than as disclosed in Schedule "G"
hereto, the Company does not have any material contract, agreement,
undertaking or arrangement, whether oral, written or implied, which
cannot be terminated on not more than one month's notice and the
Company does not have any outstanding material agreements, contracts
or commitments (whether written or oral) whatsoever relating to or
affecting the conduct of its business as currently carried on or any
of its assets or for the purchase, sale or lease of its assets with
the exception of this Agreement;
(v) there are no actions, suits, judgments, investigations or
proceedings outstanding or pending or to the knowledge of the Vendor
threatened against or affecting the Company at law or in equity or
before or by any court or federal, state, municipal or other
governmental authority, department, commission, board, tribunal,
bureau or agency and the Company is not a party to or threatened
with any litigation which in either case would have a Material
Adverse Effect on the Company;
(w) [ intentionally left black]
(x) the Company has not guaranteed, or agreed to guarantee, any
indebtedness or other obligation of any party except in the ordinary
course of its business, and except as described in the Financial
Statements or under the Association Contracts;
(y) the Company has no employees;
(z) since the date of the most recent Financial Statements:
(i) no dividends of any kind or other distribution on any
membership interest in the Company has been declared or paid
by the Company;
(ii) except as required under the Association Contracts, no single
capital expenditure or commitment therefor has been made by
the Company other than as previously disclosed in writing to
SSPI; and
<PAGE>
- 15 -
(iii) the Company has not increased the pay of or paid or agreed to
pay any pension, bonus, share of profits or other similar
benefit to or for the benefit of any agent of the Company,
except increases in the normal course of business.
5. SSPI'S WARRANTIES AND REPRESENTATIONS
5.1 SSPI warrants and represents to the Vendors, with the intent that the
Vendors will rely thereon in entering into this Agreement and in concluding the
purchase and sale contemplated herein, that on the date hereof:
(a) SSPI has been duly and validly incorporated and is a validly
existing corporation in good standing under the laws of the Province
of British Columbia, with all necessary power, authority and
capacity to own its property and assets and carry on its business as
presently carried on by it and to complete the transactions provided
for herein;
(b) SSPI is a reporting issuer in good standing under the securities
laws of Ontario and Alberta and, since March 31, 1996, no material
change relating to SSPI has occurred with respect to which the
requisite material change report has not been filed under the
applicable securities laws in Ontario and Alberta and no such
disclosure has been made on a confidential basis;
(c) SSPI is not a reporting issuer under the securities laws of any
other province, state, country or other jurisdiction;
(d) SSPI has full corporate power and authority to issue the SSPI
Special Warrants and the SSPI Shares upon the conversion of the SSPI
Special Warrants; the SSPI Special Warrants have been duly and
validly created, authorized, allotted and issued, the SSPI Shares
issuable upon conversion of the SSPI Special Warrants have been duly
and validly authorized, allotted and reserved for issuance upon such
conversion and will, upon conversion in accordance with the terms of
the Indenture, be duly and validly issued as fully paid and
non-assessable shares;
(e) the authorized capital of SSPI consists of 100,000,000 common shares
without par value and 10,000,000 Class "A" preferred shares without
par value of which 12,995,463 common shares (and no Class "A"
preferred shares with the exception of the Class "A" preferred
shares to be issued under the GHK Agreement) are issued and
outstanding as at the date hereof; a further 1,085,000 shares are
reserved for issuance pursuant to the exercise of incentive stock
options; and a further 3,000,000 shares are reserved for issuance
pursuant to the exercise of special warrants previously
<PAGE>
- 16 -
issued by way of a private placement; as a result of which the total
issued and outstanding share capital of SSPI on a fully diluted
basis is 17,500,463;
(f) all alterations to the constating documents of SSPI since its
incorporation has been duly approved by the shareholders of SSPI and
registered with the appropriate authorities;
(g) SSPI is duly registered to carry on business in all jurisdictions in
which it carries on business except where the failure to register
would not have a Material Adverse Effect on the condition (financial
or otherwise) business, properties, prospects or net worth of SSPI;
(h) SSPI has full corporate power and authority to enter into this
Agreement and the Indenture and to perform its obligations set out
herein and therein, and the Agreement and the Indenture have been
duly authorized, executed and delivered by SSPI and constitute a
legal, valid and binding obligation of SSPI enforceable in
accordance with their terms;
(i) SSPI has the power, authority and capacity to carry on its business
as presently conducted by it;
(j) SSPI is not in default or breach of, and the execution and delivery
of this Agreement or the Indenture by SSPI and the performance of
the transactions contemplated thereby will not result in a breach
of, and do not create a state of facts which, after notice or lapse
of time or both, will result in a breach of, and do not and will not
conflict with, any of the terms, conditions or provisions of the
constating documents, resolutions or by-laws of SSPI;
(k) SSPI holds all licenses and permits required for the conduct in the
ordinary course of its business as presently conducted by it and all
such licenses and permits are in good standing and the conduct and
uses of the same by it are in compliance with all laws and other
restrictions, rules, regulations and ordinances applicable to it and
its business, save and except for breaches which do not have a
Material Adverse Effect on SSPI, or its business as currently
conducted, and neither the execution and delivery of this Agreement
or the Indenture nor the completion of the purchase and sale hereby
will give any person the right to terminate the said licenses or
permits or affect such compliance;
(l) SSPI has the right, power and authority to direct the transfer of
the Vendors' Interests to SSPC and SSPH and those companies have the
right,power and authority to receive same, and neither such
direction nor reception of the Vendors' Interests gives rise to any
liability under taxation or other laws;
<PAGE>
- 17 -
(m) SSPI has obtained all consents and approvals required to complete
the transactions contemplated herein in accordance with the terms
and conditions hereof;
(n) the making of this Agreement and the Indenture and the completion of
the transactions contemplated hereby and thereby and the performance
of and compliance with the terms hereof and thereof do not and will
not:
(i) conflict with or result in a breach of or violate any of the
terms, conditions or provisions of any law, judgment, order,
injunction, decree, regulation or ruling of any court or
governmental authority, domestic or foreign, to which SSPI is
subject;
(ii) give to any person any right, remedy, cause of action, right
of termination, cancellation or acceleration in or with
respect to any understanding, agreement, contract, or
commitment, written, oral or implied to which SSPI or any
predecessor or shareholder thereof is or was a party;
(iii) give to any government or governmental authority including any
governmental department, commission, bureau, board, or
administrative agency any right of termination, cancellation,
or suspension of, or constitute a breach of or result in a
default under any permit, license, control, or authority
issued to SSPI and which is necessary or desirable in
connection with the conduct and operation of the business
currently conducted by SSPI;
(iv) constitute a default by SSPI or an event which, with the
giving of notice or lapse of time or both, might constitute an
event of default or non-observance under any agreement,
contract, indenture or other instrument relating to any
indebtedness of SSPI which would give any person the right to
accelerate the maturity for the payment of any amount payable
under that agreement, contract, indenture, or other
instrument;
such that there would be a Material Adverse Effect on it;
(o) SSPI and its subsidiaries are the beneficial owners of or have the
right to acquire the interests in the properties, business and
assets referred to in the Public Record, which interests in the
properties, business and assets represent all interests of SSPI and
its subsidiaries in any properties, business or assets and any and
all agreements pursuant to which SSPI or its subsidiaries hold or
will hold any such interest in property, business or assets are in
good standing in all material respects according to their terms, and
the properties are in good standing in all material respects under
the
<PAGE>
- 18 -
applicable statues and regulations of the jurisdictions in which
they are situated;
(p) the Public Record is in all material respects accurate and omits no
facts, the omission of which makes the Public Record, or any
particulars therein, misleading or incorrect, as at the date they
were made;
(q) SSPI is not party to and has not granted and no person has any
agreement, warrant, option, right or privilege, consensual or
arising by law, present or future, contingent or absolute, capable
of becoming an agreement, warrant, option, right or privilege for
the creation, purchase, acquisition, subscription, issuance or
allotment of any shares of SSPI or securities convertible into or
exchangeable for shares of SSPI or to convert or exchange any
securities into or for shares of SSPI, or to require SSPI to
purchase, redeem or otherwise acquire any of the issued and
outstanding shares in its capital except as disclosed in the Public
Record or as contemplated hereunder;
(r) no judgments, investigations, actions, suits, inquiries or
proceedings are outstanding or pending or, to the knowledge of SSPI,
are contemplated or threatened to which SSPI or its subsidiaries is
a party or to which the property of SSPI or its subsidiaries is
subject at law or in equity that would have a Material Adverse
Effect on the business, operations, condition (financial or
otherwise) of SSPI and its subsidiaries, on a consolidated basis;
(s) the SSPI Financial Statements were prepared in accordance with
Canadian general accepted accounting principles applied on a basis
consistent with prior years (in respect of any predecessors of SSPI)
and are true and correct in every material respect and present
fairly and accurately the financial condition and position of SSPI
and it subsidiaries as at the dates set out therein and the results
of its operations and the changes in its financial position for the
periods then ended, in accordance with Canadian generally accepted
accounting principles;
(t) except as disclosed in the Public Record, there has not been any
material change in the assets, liabilities or obligations (absolute,
accrued, contingent or otherwise) of SSPI and its subsidiaries, on a
consolidated basis, as set forth in the SSPI Financial Statements
and there has not been any material adverse change in the business,
operations or condition (financial or otherwise) or results of the
operations of SSPI and its subsidiaries, on a consolidated basis,
since June 30, 1996 and since that date there have been no material
facts, transactions, events or occurrences which could have a
Material Adverse Effect on the business of SSPI and its
subsidiaries, on a consolidated basis;
<PAGE>
- 19 -
(u) none of SSPI's or any of its subsidiaries' businesses, assets or
properties are subject to any judicial or administrative proceeding
alleging the violation of any applicable environmental, health or
safety law, judgment, decree, order, injunction, rule, statute or
regulation except where such violation would not have a Material
Adverse Effect on SSPI or its subsidiaries;
(v) except as disclosed in Schedule "G", neither SSPI nor any of its
subsidiaries has any material contract, agreement, undertaking or
arrangement, whether oral, written or implied, which cannot be
terminated on not more than one month's notice and neither SSPI nor
any of its subsidiaries has any outstanding material agreements,
contracts or commitments (whether written or oral) whatsoever
relating to or affecting the conduct of their businesses as
currently carried on or any of their assets or for the purchase,
sale or lease of any of their assets with the exception of this
Agreement;
(w) each of SSPI and its subsidiaries has been assessed for income tax
for all years to and including the fiscal year of each of SSPI and
its subsidiaries ended on December 31, 1995, and each of SSPI and
its subsidiaries has withheld and remitted to all applicable tax
collecting authorities all amounts required to be remitted to all
tax collecting authorities respecting payments to employees or to
non-residents, or otherwise and has paid all instalments or
corporate taxes due and payable as of the date hereof;
(x) all tax returns and reports of each of SSPI and its subsidiaries
required by law to be filed prior to the date hereof including all
income tax returns and all other corporate tax returns required to
be filed with any governmental taxing authority or board have been
filed and are true, complete and correct, and all taxes and other
government charges including all income, excise, sales, business and
property taxes and other rates, charges, assessment, levies, duties
taxes, contributions, fees, licenses, interest and penalties
required to be paid have been paid, and if not required to be paid
as at the date hereof, have been accrued in the SSPI Financial
Statements;
(y) adequate provision has been made for taxes payable by each of SSPI
and its subsidiaries which are not yet due and payable and there are
no agreements, waivers or other arrangements providing for an
extension of time with respect to the assessment or reassessment of
any taxing authority or board or the filing of any tax return by or
payment of any tax, governmental charge or deficiency by any of SSPI
or its subsidiaries, and there are no contingent tax liabilities or
any grounds which would prompt a re-assessment, including aggressive
treatment of income and expenses in filing earlier tax returns;
<PAGE>
- 20 -
(z) no authorization, approval, order, license, permit or consent of any
governmental authority, regulatory body or court, and no
registration, declaration or filing by SSPI with any such
governmental authority, regulatory body or court is required in
order for SSPI to complete the within purchase and sale, to duly
perform and observe the terms and provisions of this Agreement and
to render this Agreement legal, valid, binding and enforceable in
accordance with its terms;
(aa) SSPI has not guaranteed or agreed to guarantee any indebtedness or
other obligation of any party except as described in the SSPI
Financial Statements;
(ab) no order ceasing or suspending trading in securities of SSPI or
prohibiting the sale of securities by SSPI has been issued and no
proceedings for this purpose have been instituted, are pending,
contemplated or threatened;
(ac) SSPI has not, directly or indirectly, declared or paid any dividend
or declared or made any other distribution on any of its shares or
securities of any class, or, directly or indirectly, redeemed,
purchased or otherwise acquired any of its shares or securities or
agreed to do any of the foregoing;
(ad) since June 30, 1996, there has not been any occurrence or event
which has had, or might reasonably be expected to have, a Material
Adverse Effect on the business of SSPI as currently carried on or
the results of its operations;
(ae) SSPI has not increased the pay of or paid or agreed to pay any
pension, bonus, share of profits or other similar benefit of any
individual named on the "Summary Compensation Table" in the
Management Information
Circular of SSPI as at May 8, 1996;
(af) since June 30, 1996, no single capital expenditure or commitment
therefor has been made by SSPI other than as previously disclosed in
writing to the Vendor;
(ag) there is not, in the constating documents or by-laws of SSPI or in
any agreement, mortgage, note, debenture, indenture or other
instrument or document to which SSPI is a party, any restriction
upon or impediment to the declaration or payment of dividends by the
directors of SSPI or the payment of dividends by SSPI to the holders
of its common shares;
(ah) SSPI is not:
(i) in breach of any of the terms, covenants, conditions or
provisions of, is in default under, or has done or omitted to
do anything which,
<PAGE>
- 21 -
with the giving of notice or lapse of time or both, would
constitute a breach of or a default under any contract to
which it is a party;
(ii) in violation of nor are any present uses by SSPI of any of its
assets in violation of or contravention of any applicable law,
statute, order, rule or regulation;
(iii) in breach or default under any judgment, injunction or other
order or aware of any judicial, administration, governmental,
or other authority or arbitrator by which SSPI is bound or to
which SSPI or any of its assets are subject except where such
breach or violation would not have a Material Adverse Effect;
(ai) Montreal Trust Company at its office in Calgary, Alberta has been
duly appointed as the transfer agent and registrar for all of the
outstanding common shares of SSPI;
(aj) each of the material contracts referred to in the Public Record to
which SSPI or its subsidiaries is a party has been duly authorized,
executed and delivered by the parties thereto and is a legal, valid
and binding obligation of the parties thereto enforceable in
accordance with their respective terms; and
(ak) SSPI is not a non-resident of Canada for the purposes of section 116
of the INCOME TAX ACT (Canada).
6. COVENANTS OF THE VENDORS
6.1 Each of the Vendors shall:
(a) duly and punctually perform all the obligations to be performed by
him, her or it under this Agreement; and
(b) execute all such documents and do all such things as shall be
reasonably necessary to give full effect to this Agreement.
7.1 SSPI shall:
(a) use its best efforts to file the Preliminary Prospectus within two
weeks of the Closing Date and to obtain a receipt for the Final
Prospectus by September 30, 1996;
<PAGE>
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(b) use its best efforts to obtain a listing of SSPI's common shares on
a stock exchange recognized under the INCOME TAX ACT (Canada) by
September 30, 1996;
(c) ensure that at the respective times of filing and at all times
subsequent to the filing thereof during the distribution of the SSPI
Shares, the Preliminary Prospectus and the Final Prospectus will
fully comply with the requirements of applicable securities
legislation;
(d) duly and punctually perform all the obligations to be performed by
it under this Agreement, and cause SSPI to duly and punctually
perform all the obligations to be performed by it under this
Agreement;
(e) execute all such documents and shall do all such things as shall be
reasonably necessary to give full effect to this Agreement;
8. NON-MERGER
8.1 The representations, warranties, covenants and agreements of the Vendors
contained herein and those contained in the documents and instruments delivered
pursuant hereto will survive the Closing Date for a period of one year from the
date hereof, and notwithstanding the completion of the transactions herein
contemplated, the waiver of any condition contained herein (unless such waiver
expressly releases the Vendors of such representation, warranty, covenant or
agreement), or any investigation by SSPI, the same will remain in full force and
effect during that period.
8.2 The representations, warranties, covenants and agreements of SSPI contained
herein and those contained in the documents and instruments delivered pursuant
hereto will survive the Closing Date for a period of one year, and
notwithstanding the completion of the transactions herein contemplated, the
waiver of any condition contained herein (unless such waiver expressly releases
SSPI of such representation, warranty, covenant or agreement), or any
investigation by the Vendor, the same will remain in full force and effect
during that period.
9. CONDITIONS PRECEDENT
9.1 The obligations of SSPI to consummate the transactions herein contemplated
are subject to the fulfilment of each of the following conditions at the times
stipulated:
(a) the representations and warranties of Hefner contained in Section 3
and the representations and warranties of the Vendors contained in
Section 4 herein are true and correct in all respects;
(b) all covenants, agreements and obligations hereunder on the part of
the Vendors to be performed or complied with at or prior to the
Closing, including the Vendors' obligations to deliver the documents
and instruments
<PAGE>
- 23 -
herein provided for, shall have been performed and complied with at
and as of the Closing;
(c) all contracts, other than as detailed in Schedule "G", shall have
been terminated without further obligation to the Company;
(d) the Vendors shall have entered into the Escrow Agreement and shall
have executed all such other documents as may be required by the
Ontario Securities Commission providing for restrictions on the
resale of the SSPI Special Warrants and the SSPI Shares; and
(e) the Cimarrona Agreement and the GHK Agreement shall have been
executed by all parties thereto, and all conditions precedent to the
consummation of the transactions contemplated therein for the
benefit of SSPI shall have been satisfied or waived.
9.2 The conditions set forth in Section 9.1 are for the exclusive benefit of
SSPI and may be waived by SSPI in writing in whole or in part at any time.
9.3 The obligations of the Vendors to consummate the transactions herein
contemplated are subject to the fulfilment of each of the following conditions:
(a) the representations and warranties of SSPI contained herein are true
and correct in all material respects; and
(b) all covenants, agreements and obligations hereunder on the part of
SSPI to be performed or complied with at or prior to the Closing,
including SSPI's obligations to deliver the documents and
instruments herein provided for, shall have been performed and
complied with as at the Closing;
(c) the terms of any escrow restrictions imposed by the Ontario
Securities Commission with respect to the resale of the SSPI Special
Warrants and the SSPI Shares shall be acceptable to the Vendors;
(d) SSPI shall have executed the Management Contract, the Registration
Rights Agreement, the GHK Agreement and the Cimarrona Agreement.
9.4 The conditions set forth in Section 9.3 are for the exclusive benefit of the
Vendors and may be waived by the Vendors in whole or in part at any time.
9.5 The obligations of the Vendors and SSPI to complete and give effect to the
transactions herein contemplated are further subject to the due execution of the
Closing Certificate by or on behalf of all parties whose execution is provided
for therein.
<PAGE>
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10. TRANSACTIONS OF THE VENDORS AT THE CLOSING
10.1 At the Closing, the Vendors will execute and deliver or cause to be
executed and delivered all documents, instruments, resolutions and certificates
as are necessary to effectively transfer the Vendors' Interests to SSPC and
SSPH, free and clear of all Liens, including:
(a) such documents and consents as are required under the Limited
Liability Company agreement to effect the transfers of the Vendors'
Interests;
(b) documents as are required to evidence the admission of SSPC and SSPH
as members of the Company;
(c) resignations in writing of all the managers of the Company;
(d) all records and books of account of the Company;
(e) the Escrow Agreement duly executed by each of the Vendors together
with duly executed copies of such other documents as may be required
under Section 9.1(d) of this Agreement;
(f) a closing Warranty and Certificate from each of the Vendors
confirming that the conditions to be satisfied by the Vendors unless
waived, set out in Section 9.1 and this Section 10.1 have been
satisfied at the Closing;
(g) a legal opinion from counsel to the Company addressed to SSPI in
form satisfactory to SSPI; and
(h) all such other documents and instruments as SSPI may reasonably
require including but not limited to all accounting information,
vouchers, receipts, accounting entries and diaries of the Company.
11. TRANSACTIONS OF SSPI AT THE CLOSING
11.1 At the Closing, SSPI will deliver or cause to be executed and delivered all
documents, instruments, resolutions and share certificates as are necessary to
effectively transfer the SSPI Special Warrants to the Vendors, free and clear of
all Liens, including:
(a) certified copies of resolutions of the directors of SSPI authorizing
the entering into of this Agreement and the carrying out of the
transactions contemplated herein and certified copies of resolutions
of the directors of SSPI authorizing the issuance of SSPI Special
Warrants and the SSPI Shares;
(b) duly issued special warrant certificates representing the SSPI
Special Warrants in the names of the Vendors as provided in Section
2.3 hereof;
<PAGE>
- 25 -
(c) a Closing Warranty and Certificate from SSPI confirming that the
conditions to be satisfied by SSPI, unless waived, set out in
Section 9.3 have been satisfied at the Closing;
(d) a legal opinion from counsel to SSPI, SSPC and SSPH addressed to the
Vendors and in form satisfactory to the Vendors;
(e) the Management Contract duly executed by SSPI;
(f) the Registration Rights Agreement duly executed by SSPI; and
(g) all such other documents and instruments as the Vendor may
reasonably require with respect to SSPI, including but not limited
to:
(i) a draft form of the Preliminary Prospectus;
(ii) a letter from counsel to SSPI advising of the status of SSPI's
application to list its common shares on the Alberta Stock
Exchange; and
(iii) a letter from SSPI and Yorkton Securities Inc. discussing the
plans of Yorkton Securities Inc. to carry out a private
placement for SSPI.
12. INDEMNITY
12.1 Subject to Section 12.2 herein, each of the Vendors will indemnify and hold
harmless SSPI from and against:
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfilment of any
covenant on the part of such Vendor under this Agreement or from any
misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to SSPI hereunder;
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing; and
and if any action or claim shall be asserted against SSPI in respect of which
indemnity may be sought hereunder, SSPI shall promptly notify the appropriate
Vendors, as the case may be, in writing and the appropriate Vendors, as the case
may be, shall assume the defence thereof at their expense through legal counsel
acceptable to SSPI. No party shall effect a settlement of such action or claim
without the written consent of the other party, such consent not to be
unreasonably withheld or delayed.
<PAGE>
- 26 -
12.2 The maximum extent of the liability of each of the Vendors for all claims
individually or in the aggregate under Section 12.1 herein (with the exception
of liability arising directly or indirectly by reason of a misrepresentation or
breach of warranty as it relates to the representations and warranties contained
in Section 4.1) shall be limited in the aggregate to the market value, as at the
date of a claim for indemnity, or the SSPI Special Warrants or SSPI shares of
such Vendor, as the case may be, acquired pursuant to this Agreement and then
held subject to the Escrow Agreement as at such date, and the Vendors shall have
no further personal liability to SSPI in this regard.
12.3 In circumstances where more than one Vendor is liable under Section 12.1 as
a result of a misrepresentation or breach of warranty contained in Section 4.2,
the liability of such Vendors shall be apportioned such that each Vendor who is
liable bears that portion of the entire liability, limited in the aggregate as
stated in Section 12.2, as is equal to the percentage of the SSPI Special
Warrants acquired by such Vendor pursuant to this Agreement in relation to the
total number of Special Warrants acquired by all the Vendors who are liable.
12.4 Subject to the maximum limit on liability in Section 12.2, each Vendor can
satisfy any liability referred to in Section 12.2 and Section 12.3 herein by
either paying the amount thereof to SSPI or surrendering or causing to be
surrendered to SSPI such of the Vendor's SSPI Special Warrants or SSPI Shares or
the rights thereto then held subject to the Escrow Agreement as at the date of
receipt of a claim for indemnity as have a market value equal to the amount of
the liability.
12.5 In circumstances where a Vendor is liable under Section 12.1 in respect of
a misrepresentation or breach of warranty as it relates to a representation or
warranty contained in Section 4.1, SSPI agrees that it shall first exhaust
recourse against the SSPI Special Warrants or SSPI Shares of such Vendor, as the
case may be, then held subject to the Escrow Agreement, to satisfy such
liability in which case the provisions of Section 12.4 apply mutatis mutandis,
and SSPI will only further seek recourse against such Vendor generally in
circumstances where the market value of such SSPI Special Warrants or SSPI
Shares, as the case may be, is not sufficient to satisfy such liability under
Section 12.1.
12.6 For the purposes of Section 12.2 and Section 12.4 herein the "market value"
of the SSPI Special Warrants or SSPI shares or the rights thereto shall be
deemed to be equal to the weighted average of the closing prices at which SSPI's
common shares have traded on the Alberta Stock Exchange or, if such shares are
not then listed on the Alberta Stock Exchange, on such stock exchange or
electronic trading facility on which the shares then trade as may be selected by
the board of directors of SSPI, during the 20 most recent trading days ending on
the trading day immediately prior to the date of a claim for indemnity.
12.7 The provisions of Section 12 apply mutatis mutandis to Hefner with respect
to any misrepresentation or breach of warranty on the part of Hefner under this
Agreement.
12.8 SSPI will indemnify and hold harmless the Vendors from and against:
<PAGE>
- 27 -
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfilment of any
covenant on the part of SSPI under this Agreement or from any
misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to the Vendors hereunder;
and
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing;
and if any action or claim shall be asserted against the Vendors in respect of
which indemnity may be sought hereunder, the Vendors shall notify SSPI in
writing and SSPI shall assume the defence thereof at its expense through legal
counsel acceptable to the Vendors. No party shall effect a settlement of such
action or claim without the written consent of the other party, such consent not
to be unreasonably withheld or delayed.
12.9 SSPI shall bear the costs relating to the test procedures in respect of the
El Segundo No. 1 well as detailed in Schedule "J". To the extent such costs
exceed the amounts set forth in Schedule "J", the Vendors, together with the
vendors under the Cimarrona Agreement and the GHK Agreement, shall reimburse
SSPI for the excess pursuant to Section 12.10 hereof.
12.10 If the costs relating to the test procedures in respect of El Segundo No.
1 well exceed the amounts set forth in schedule "J", GHK Company Columbia shall
submit invoices to the Manager (as defined in the Management Contract), SSPI,
and the Vendors in respect of such excess amounts within 90 days of the date
hereof. Once satisfied that such invoices accurately reflect actual costs
incurred in respect of the test procedures, the Vendors shall within 30 days
after such 90-day period pay to the Manager, and direct the Manager to pay to
SSPI, a portion of such costs equivalent to their pro rata share of the
aggregate number of warrants and preference shares in SSPI issued to the Vendors
under this Agreement and the vendors under Cimarrona Agreement and the GHK
Agreement.
12.11 The Vendors shall be entitled to a portion, equivalent to their pro rata
share of the aggregate number of warrants and preference shares in SSPI issued
to the Vendors under this Agreement and the vendors under the Cimarrona
Agreement and the GHK Agreement, of any revenues generated by the production or
sale of oil produced from the el Segundo No. 1 well prior to the Closing. The
Vendors shall be entitled to require from GHK Company Columbia an accounting of
any such revenues within 90 days of the date hereof and SSPI shall within 30
days after such 90-day period pay to the Vendors the portion of such proceeds
set forth in this Section 12.11.
13. ISSUANCE OF SSPI SHARES
13.1 The Vendors hereby irrevocably direct SSPI to deliver such of the SSPI
shares as are issuable upon the exercise of the SSPI Special Warrants held by
Montreal Trust under the terms of the Escrow Agreement to Montreal Trust to be
held under the terms of the Escrow Agreement.
<PAGE>
- 28 -
14. COUNTERPARTS
14.1 This Agreement may be executed in any number of facsimile counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same document.
15. TIME OF THE ESSENCE
15.1 Time is of the essence of this Agreement.
16. ENTIRE AGREEMENT
16.1 This Agreement, together with the agreements and documents provided for
herein, contains the entire agreement between the parties hereto in respect of
the purchase and sale of the Vendors' Interests and there are no warranties,
representations, terms, conditions or collateral agreements, express or implied,
other than expressly set forth or provided for in this Agreement.
17. FURTHER ASSURANCES
17.1 The parties will execute and deliver such further documents and instruments
and do all such acts and things as may be reasonably necessary or requisite to
carry out the full intent and meaning of this Agreement and to effect the
transactions contemplated by this Agreement, and the parties will cooperate in
respect of any requirement to file an application with Investment Canada.
18. SUCCESSORS AND ASSIGNS
18.1 This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
19. NOTICE
19.1 Any notice required or permitted to be given under this Agreement will be
validly given if in writing and delivered or sent by pre-paid registered mail,
to the following addresses:
(a) If to the Vendors:
c/o Robert A. Hefner III
2121 Kirby Drive, #65E
Houston, Texas 77019
U.S.A.
<PAGE>
- 29 -
(b) If to SSPI, SSPC or SSPH:
SEVEN SEAS PETROLEUM INC.
Suite 960 - 1900 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Timothy Stephens
or to such other address as any Party may specify by notice in writing to the
other.
19.2 Any notice delivered on a business day will be deemed conclusively to have
been effectively given on the date notice was delivered.
19.3 Any notice sent by prepaid registered mail will be deemed conclusively to
have been effectively given on the third business day after posting; but if at
the time of posting or between the time of posting and the third business day
thereafter there is a strike, lockout or other labour disturbance affecting
postal service, then the notice will not be effectively given until actually
delivered.
20. VENDORS' NOMINEES
20.1 The Vendors or any of them may, without SSPI's consent, elect to nominate a
company or other legal entity, including a company which may be hereafter
incorporated, to be the recipient of all or any part of the SSPI Special
Warrants which are to be issued by SSPI and to which the Vendor shall be
entitled pursuant to Section 2.3 herein. Such nomination will not take effect
until communication thereof to SSPI, or to SSPI's solicitors. Once such
communication has been made, the nominee elected by such Vendor will be deemed
to be such Vendor hereunder for purposes of receiving the applicable SSPI
Special Warrants and for all purposes after the Closing Date, but the Vendor
will in no way be released from its representations, warranties and obligations
hereunder despite the election or appointment of a nominee.
<PAGE>
- 30 -
21. PROPER LAW
21.1 This Agreement will be governed by and construed in accordance with the
laws of the Province of British Columbia and the laws of Canada applicable
therein and the parties will attorn to the Courts thereof.
IN WITNESS WHEREOF the parties have caused this Agreement to be executed and
delivered this 26th day of July, 1996.
SIGNED, SEALED AND DELIVERED by )
ROBERT A. HEFNER, III in the presence of: )
)
- -------------------------------------- )
Signature )
- -------------------------------------- ) -------------------------------
Print Name ) ROBERT A. HEFNER, III
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
SIGNED, SEALED AND DELIVERED on behalf )
of JOSE FRANCISCO AMBROSI FILARDI by )
his lawful attorney )
Robert A. Hefner, III in the presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) JOSE FRANCISCO AMBROSI
- -------------------------------------- ) FILARDI, by his attorney
Print Name ) Robert A. Hefner, III
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
<PAGE>
- 31 -
SIGNED, SEALED AND DELIVERED on behalf )
of FRANCISCO JAVIER MUNOZ CALLE by )
his lawful attorney )
Robert A. Hefner, III in the presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) FRANCISCO JAVIER MUNOZ
- -------------------------------------- ) CALLE, by his attorney
Print Name ) Robert A. Hefner, III
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
SIGNED, SEALED AND DELIVERED on behalf )
of RUDOLF KLING by his lawful attorney )
Robert A. Hefner, III in the presence of: )
)
- -------------------------------------- )
Signature ) -------------------------------
- -------------------------------------- ) RUDOLF KLING, by his attorney
Print Name ) Robert A. Hefner, III
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
FAR RIVER CORPORATION by its lawful
attorney Robert A. Hefner, III
Per: _________________________________
Authorized Signatory
<PAGE>
- 32 -
SIGNED, SEALED AND DELIVERED on behalf )
of VICTORIA OWEN DE PANERO by her )
lawful attorney Robert A. Hefner, III )
in the presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) VICTORIA OWEN DE PANERO, by
- -------------------------------------- ) her attorney Robert A. Hefner, III
Print Name )
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
SOUTHAMERICAN HOLDING, CORP. by
its lawful attorney Robert A. Hefner, III
Per: _________________________________
Authorized Signatory
ENCHANTED INTERNATIONAL INC. by
its lawful attorney Robert A. Hefner, III
Per: _________________________________
Authorized Signatory
NAKURU HOLDINGS, INC. by its lawful
attorney Robert A. Hefner, III
Per: _________________________________
Authorized Signatory
<PAGE>
- 33 -
SIGNED, SEALED AND DELIVERED on behalf )
of FERNANDO LOBO-GUERRERO OSORIO by )
his lawful attorney )
Robert A. Hefner, III in the presence of:)
)
- -------------------------------------- ) -------------------------------
Signature ) FERNANDO LOBO-GUERRERO
- -------------------------------------- ) OSORIO, by his attorney
Print Name ) Robert A. Hefner, III
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation
MORAGA, S.A. by its lawful attorney Robert
A. Hefner, III
Per: _________________________________
Authorized Signatory
SHARMOR, INC. by its lawful attorney
Robert A. Hefner, III
Per: _________________________________
Authorized Signatory
<PAGE>
- 34 -
SIGNED, SEALED AND DELIVERED on )
behalf of MAURICIO TORO by his )
lawful attorney Robert A. Hefner, III )
in the presence of: )
)
- -------------------------------------- ) -------------------------------
Signature ) MAURICIO TORO, by his attorney
- -------------------------------------- ) Robert A. Hefner, III
Print Name )
- -------------------------------------- )
Address )
- -------------------------------------- )
)
- -------------------------------------- )
Occupation )
THE GHK CORPORATION
Per: _________________________________
Authorized Signatory
SEVEN SEAS PETROLEUM INC.
Per: _________________________________
Authorized Signatory
SEVEN SEAS PETROLEUM COLOMBIA
INC.
Per: _________________________________
Authorized Signatory
SEVEN SEAS PETROLEUM HOLDINGS
INC.
Per: _________________________________
Authorized Signatory
<PAGE>
- 35 -
This is page 35 of an Agreement dated the 26th day of July, 1996 between Jose
Francisco Ambrosi Filardi, Francisco Javier Munoz Calle, Rudolf Kling, Far River
Corporation, Victoria Owen de Panero, Southamerican Holding, Corp., Enchanted
International Inc., Nakuru Holdings, Inc., Fernando Lobo-Guerrero Osorio,
Moraga, S.A., Sharmor, Inc., Mauricio toro, Robert A. Hefner, III, The GHK
Corporation Seven Seas Petroleum Colombia Inc., Seven Seas Petroleum Inc. and
Seven Seas Petroleum Holdings Inc.
EXHIBIT 10(h)
EXECUTION COPY
------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Made as of July , 1996
Between
SEVEN SEAS PETROLEUM INC.
as Company
and
THE OTHER PARTIES LISTED ON THE SIGNATURE PAGES HEREOF
as Participants
------------------------------------------------------------
MCMILLAN BINCH
---------
BARRISTERS & SOLICITORS
<PAGE>
EXECUTION COPY
TABLE OF CONTENTS
SECTION 1 -- DEFINITIONS......................................................2
SECTION 2 -- REQUIRED QUALIFICATIONS..........................................3
SECTION 3 -- PIGGYBACK RIGHTS.................................................5
SECTION 4 -- QUALIFICATION PROCEDURES.........................................6
SECTION 5 -- EXPENSES.........................................................7
SECTION 6 -- INDEMNIFICATION AND CONTRIBUTION.................................8
SECTION 7 -- LISTING ON SECURITIES EXCHANGE...................................9
SECTION 8 -- CERTAIN LIMITATIONS ON QUALIFICATION RIGHTS......................9
SECTION 9 -- SELECTION OF MANAGING UNDERWRITERS..............................10
SECTION 10 -- SUPPLYING INFORMATION..........................................10
SECTION 11 -- CLOSING CERTIFICATE............................................10
SECTION 12 -- ASSIGNMENT.....................................................10
SECTION 13 -- MISCELLANEOUS..................................................10
13.1 Amendment........................................................10
13.2 Successors and Assigns...........................................11
13.3 No Third Party Beneficiaries.....................................11
13.4 Severability.....................................................11
13.5 Counterparts.....................................................11
13.6 Descriptive Headings.............................................11
13.7 Governing Law....................................................11
13.8 Notices..........................................................11
13.9 Further Assurances...............................................11
(i)
<PAGE>
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
This Agreement is made as of July , 1996, between
SEVEN SEAS PETROLEUM INC.
"Company"
and
THE OTHER PARTIES LISTED ON THE SIGNATURE
PAGES HEREOF
"Participants"
RECITALS
A. The Company has issued to the Participants special warrants and preferred
shares convertible into common shares of the Company and the Participants other
than Brian Egolf have transferred special warrants to Brian Egolf; and
B. The Participants desire to provide for certain sale rights and prospectus
qualification requirements in respect of the Participant Shares;
FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1 -- DEFINITIONS
1.1 In this Agreement:
(a) BUSINESS DAY means a day other than Saturday, Sunday or any day on which
Banks located in Toronto or in Vancouver are either permitted or required to
close.
(b) COMMISSION means the Ontario Securities Commission or such other provincial
securities regulatory authority having jurisdiction in the circumstances.
(c) COMMON SHARES means the common shares of the Company.
(d) PARTICIPANTS means the persons other than the Company listed as parties on
the signature pages hereof and any Permitted Transferee, but subject to any such
person or
<PAGE>
EXECUTION COPY
- 3 -
Permitted Transferee ceasing to be a Participant at such time as such person or
Permitted Transferee ceases to own any Common Shares or Warrants.
(e) PARTICIPANT SHARES means, collectively or individually, Common Shares owned
by the Participants.
(f) PERMITTED TRANSFEREE means a Person who acquires Participant Shares under
Section 12.1 of this Agreement.
(g) PERSON means an individual, partnership, corporation, association, joint
stock company, trust, joint venture, unincorporated organization or governmental
entity or any department, agency or political subdivision thereof.
(h) PREFERRED SHARES means the voting convertible preferred shares of the
Company.
(i) PROSPECTUS means a prospectus filed with the Commission.
(j) REPORTING ISSUER has the meaning ascribed to such term under the SECURITIES
ACT.
(k) REQUIRED QUALIFICATION has the meaning ascribed to such term in Section 2
hereof.
(l) SHAREHOLDERS VOTING SUPPORT AGREEMENT means the agreement made as of the
date hereof between the Company, Robert A. Hefner III, Breene M. Kerr, Albert E.
Whitehead, George H. Plewes and Timothy T. Stevens with respect to the exercise
by those parties other than the Company of the voting rights attached to their
shares in the Company.
(m) SECURITIES ACT means the SECURITIES ACT (Ontario), as amended, the
regulations thereunder and any related regulation thereto, or any other
applicable securities act of any other province of Canada, the regulations
thereunder and any related regulation thereto.
(n) WARRANTS means the special warrants issued under the Warrant Indenture and
the Preferred Shares.
(o) WARRANT INDENTURE means the special warrant indenture dated as of the date
of this Agreement between the Company and Montreal Trust Company of Canada.
SECTION 2 -- REQUIRED QUALIFICATIONS
2.1 If:
(a) the Company has not obtained on or before September 30, 1996 a final
receipt for a Prospectus qualifying the exchange of the Warrants for
Common Shares without condition or restriction on the resale of such
Common Shares; or
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(b) staff of any Commission exercises its discretion to refuse to issue
a final receipt for a Prospectus qualifying the exchange of the
Warrants for Common Shares without condition or restriction on the
resale of such Common Shares,
then a Participant shall have the right, to be exercised in accordance with the
terms of this Agreement, to required the Company to use its best efforts to
qualify the Participant's Shares for resale to the public under a Prospectus for
which a final receipt has been received from the Commission in each province in
which the Company is, at the date of such Prospectus, a Reporting Issuer (a
"Required Qualification").
2.2 After receipt of a written request from a Participant requesting a Required
Qualification, the Company shall promptly notify all other Participants in
writing of the receipt of such request and each such Participant may elect (by
written notice sent to the Company within 10 Business Days after the date of
such holder's receipt of the Company's notice) to have its Participant Shares
included in the Required Qualification. Thereupon the Company shall, as
expeditiously as is possible, use its best efforts to file a preliminary
Prospectus and a final Prospectus and obtain receipts therefor under the
Securities Act of each province in which the Company is at the time a Reporting
Issuer qualifying all Participant Shares which the Company has been so requested
to qualify by Participants for sale, all to the extent required to permit the
disposition of the Participant Shares so qualified.
2.3 The rights of Participants under sections 2.1 and 2.2 are subject to the
limitations set forth in sections 8.1 and 8.2.
2.4 The Company shall have the opportunity to include in any Required
Qualification common shares of the Company, provided, however, that any such
shares shall not be included in such Required Qualification unless the Company
agrees to use the managing underwriter selected pursuant to Section 9.1 for the
distribution of the Participant Shares to be offered in such Required
Qualification.
If the managing underwriter of a Required Qualification shall advise the
Company in writing that, in its opinion, the distribution of Participant Shares
and other shares requested to be included in such Required Qualification would
materially and adversely affect the distribution of such securities at a price
deemed acceptable by the holders of a majority of the Participant Shares to be
included in such Required Qualification, then the Company will include in such
qualification, to the extent of the number of equity securities which the
Company is advised can be sold in such offering:
FIRST, Participant Shares, allocated pro rata on the basis of the
number of Participant Shares requested to be registered by
Participants, and
SECOND, other shares allocated in such manner as the Company shall
determine.
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Except as otherwise provided in Section 5.1 all expenses of such
qualification shall be borne by the Company.
2.5 A Required Qualification shall not be deemed to have been effected
(a) unless a final Prospectus with respect thereto has been receipted
and the Common Shares have not become subject to a cease-trade
order, injunction or other requirement of the Commission or other
governmental agency or court for any reason for the shorter of such
period as is necessary to distribute the Participant Shares of the
holders requiring such Required Qualification and qualified
thereunder and 90 days, provided, however, that a Required
Qualification which does not receive a final receipt after the
Company has filed a Prospectus with respect thereto solely by reason
of the refusal to proceed of the holders of Participant Shares shall
be deemed to have been effected by the Company, or
(b) if the conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such
qualification are not satisfied, other than by reason of some act or
omission by the holders of Participant Shares requiring such
Required Qualification.
SECTION 3 -- PIGGYBACK RIGHTS
3.1 If, so long as the Shareholders Voting Support Agreement is in effect, the
Company at any time proposes to file on its behalf (it shall be deemed a Company
proposal hereunder to file a Prospectus if the shareholders of the Company shall
agree at any time to make such a filing) or on behalf of any of its holders of
Common Shares other than the Participants (the "demanding security holders") a
Prospectus under the Securities Act in order to qualify the sale to the public
of Common Shares (a "Public Offering") or the Company proposes to effect any
prospectus-exempt sale of any of its securities (a "Private Placement"), it will
give written notice to all Participants at least 30 days before the initial
filing with the Commission of such Prospectus or immediately upon determining to
effect a Private Placement, as the case may be, which notice shall set forth the
proposal for disposition of the securities proposed to be sold by the Company.
The notice shall offer to include in such Public Offering or Private Placement
such Participant Shares or Warrants as such Participants may request subject to
Section 3.2 hereof. Where the Company proposes to file on its behalf only (and
not on behalf of any demanding security holders) a prospectus to qualify a
Public Offering or proposes to effect a Private Placement and where the managing
underwriter of such proposed Public Offering or Private Placement shall advise
the Company in writing that, in its opinion, the inclusion of any Participant
Shares or Warrants in the Public Offering or Private Placement concurrently with
the securities being qualified or offered for sale by the Company would
materially and adversely affect the distribution of such securities by the
Company at a price deemed acceptable by the Company, then the Company shall not
be obliged to give written notice to
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the Participants pursuant to this Section 3.1 and shall not be obliged to
include in such Public Offering or Private Placement any Participant Shares or
Warrants.
3.2 Each Participant desiring to have its Participant Shares or Warrants
qualified or offered for sale under this Section 3 shall advise the Company in
writing within 30 days (if a Public Offering) or 15 days (if a Private
Placement) after the date of receipt of such offer from the Company, setting
forth the amount of Participant Shares or Warrants for which qualification or
offering for sale is requested. The Company shall thereupon include in such
Public Offering or Private Placement the Participant Shares or Warrants for
which qualification or offering for sale is so requested and shall use its best
efforts to effect the qualification or offering for sale under the Securities
Act of such Participant Shares or Warrants; provided, that no Participant Shares
or Warrants will be included in such qualification or offering for sale unless
such Participant agrees to use the managing underwriter selected by the Company,
and provided further that the Company, without liability to any Participant, may
terminate such Public Offering or Private Placement at any time. If the managing
underwriter of a proposed Public Offering or Private Placement shall advise the
Company in writing that, in its opinion, the distribution of the Participant
Shares or Warrants requested to be included in the Public Offering or Private
Placement concurrently with the securities being qualified or offered for sale
by the Company would materially and adversely affect the distribution of such
securities by the Company at a price deemed acceptable by the Company, then all
selling security holders (other than the Company, if it is effecting such
qualification for securities to be offered by it for its own account) shall
reduce the amount of securities each intended to distribute through such
offering on a pro rata basis in an aggregate amount recommended by the managing
underwriter. For greater certainty, the aggregate amount so recommended may be
equal to the entire amount of securities that such selling security holders
intended to so distribute. Except as otherwise provided in Section 5.1 all
expenses of such qualification shall be borne by the Company.
SECTION 4 -- QUALIFICATION PROCEDURES
4.1 If the Company is required by the provisions hereof to use its best efforts
to effect the qualification or offering for sale to the public of any of the
Participant Shares or Warrants, the Company will, as expeditiously as possible:
(a) prepare and file a preliminary Prospectus with respect to such
Participant Shares and use its best efforts to cause the Commission
to issue a receipt for a final Prospectus as required for the
disposition of such Participant Shares by the holders thereof or
prepare and complete such other offering document as may be
necessary or advisable in order to effect a Private Placement of
Participant Shares or Warrants, as the case may be;
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(b) prepare and file with the Commission such supplements or amendments
to such Prospectus as may be necessary to keep such Prospectus
accurate in all material respects and to comply with the provisions
of the Securities Act with respect to the sale of all Participant
Shares covered by such Prospectus until such time as all such
Participant Shares have been disposed of in a public offering;
(c) furnish to such selling Participants such number of copies of a
Prospectus, including a preliminary Prospectus, in conformity with
the requirements of the Securities Act, and such other documents
(including any other offering documents), as such selling
Participants may reasonably request;
(d) use its best efforts to qualify the Participant Shares covered by
such Prospectus under such other securities laws of such
jurisdictions within Canada where the Company is a Reporting Issuer
on the date of the request as each Participant shall reasonably
request and do such other reasonable acts and things as may be
required of it to enable such Participant to consummate the
disposition in such jurisdiction of the Participant Shares covered
by such Prospectus;
(e) furnish, at the request of any Participant requesting qualification
or offering for sale to the public of Participant Shares or
Warrants, on the date that such Participant Shares or Warrants are
delivered to the underwriters for sale pursuant to such
qualification or offering, (i) an opinion, dated such date, of the
independent counsel representing the Company for the purposes of
such qualification or offering, addressed to the underwriters,
covering such legal matters in respect of which such opinion is
being given as such Participants may reasonably request; and (ii) a
letter dated such date, from the independent chartered accountants
of the Company, addressed to the underwriters, stating that they are
independent chartered accountants and that, in the opinion of such
accountants, the financial statements and other financial data of
the Company included in the Prospectus or other offering document,
or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act. Such letter from the independent chartered
accountants shall additionally cover such other financial matters
(including information as to the period ending not more than five
Business Days prior to the date of such letter) with respect to the
qualification in respect of which such letter is being given as such
Participants may reasonably request; and
(f) enter into customary agreements (including an underwriting agreement
in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
Participant Shares or Warrants.
It shall be a condition precedent to the obligation of the Company to take
any action pursuant to this Agreement in respect of the Participant Shares or
Warrants which are to be
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qualified or offered at the request of any Participant that such Participant
shall furnish to the Company such information regarding the Participant Shares
or Warrants held by such Participant as the Company shall reasonably request and
as shall be required in connection with the action taken by the Company.
SECTION 5 -- EXPENSES
5.1 All expenses incurred in complying with this Agreement, including, without
limitation, all filing fees, printing expenses, fees and disbursements of
counsel for the Company, the reasonable fees and expenses of one counsel for the
selling Participants (selected by the Participants owning a majority of the
Participant Shares being qualified), expenses of any special audits incident to
or required by any such qualification and expenses of complying with the
securities laws of any jurisdictions pursuant to Section 4.1(d), shall be paid
by the Company, except to the extent that any expenses are required by
applicable law to be paid by the Participants, and to the extent that the
Company shall not be liable for any fees, discounts or commissions to any
underwriter or any fees or disbursements of counsel for any underwriter in
respect of the Participant Shares or Warrants sold by such Participant.
SECTION 6 -- INDEMNIFICATION AND CONTRIBUTION
6.1 In the event of any qualification of any of the Participant Shares or
Warrants under the Securities Act pursuant to this Agreement, the Company shall
indemnify and hold harmless each Participant, such Participant's directors and
officers, if any, and each other Person (including each underwriter) who
participated in the offering of such Participant Shares or Warrants and each
other Person, if any, who controls such Participant or such other participating
Person within the meaning of the Securities Act, against any losses, claims,
damages or liabilities, joint or several, to which such Participant or any such
director or officer or participating Person or controlling Person may become
subject under the Securities Act or any other statute or at common law, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any alleged untrue statement of any material
fact contained in any Prospectus or other offering document, or any amendment
thereto, under which such Participant Shares or Warrants were qualified, or (ii)
any alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
reimburse such Participant or such director, officer or participating Person for
any legal or any other expenses reasonably incurred by such Participant or such
director, officer or participating Person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any untrue
statement or omission made in such Prospectus or other offering memorandum or
amendment thereto in reliance upon and in conformity with written information
furnished to the Company by such Participant specifically for use therein or (in
the case of any qualification pursuant to Section 2) so furnished for such
purposes by any underwriter. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such Participant
or such
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director, officer or participating Person or controlling Person, and shall
survive the transfer of such Participant Shares or Warrants by such Participant.
6.2 Each Participant shall indemnify and hold harmless the Company, its
directors and officers and each other Person, if any, who controls the Company
within the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several, to which the Company or any such director or
officer or any such Person may become subject under the Securities Act or any
other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
information in writing provided to the Company by such Participant contained in
any Prospectus or other offering document under which Participant Shares or
Warrants were qualified under the Securities Act at the request of such
Participant, or any amendment thereto and which information constituted an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein necessary to make the statements therein not misleading;
provided, however, the aggregate amount which may be recovered by the Company,
its directors and officers and each other Person who controls the Company within
the meaning of the Securities Act pursuant to the indemnification provided for
in this Section 6 shall be limited to the total price at which the Participant
Shares or Warrants sold by such Participant were offered to the public.
6.3 If the indemnification provided for in this Agreement from the indemnifying
party is unavailable to an indemnified party hereunder in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and
indemnified parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6.3 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. No
Person guilty of fraudulent misrepresentation shall be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation.
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SECTION 7 -- LISTING ON SECURITIES EXCHANGE
7.1 The Company will, where necessitated by an offering pursuant to Section 3,
give the proper notice to, and make application to, any securities exchange on
which the Common Shares are listed for the necessary additional listing of all
Common Shares issued thereby.
SECTION 8 -- CERTAIN LIMITATIONS ON QUALIFICATION RIGHTS
8.1 Notwithstanding the other provisions of this Agreement the Company shall not
be obligated to qualify for sale to the public by way of a Public Offering the
Participant Shares or Warrants of any Participant if in the opinion of counsel
to the Company reasonably satisfactory to such Participant and its counsel (or,
if the Participant has engaged an investment banking firm, to such investment
banking firm and its counsel), the sale or other disposition of such
Participant's Participant Shares or Warrants, in the manner proposed by such
Participant (or by such investment banking firm), may be effected without
qualifying such Participant Shares or Warrants under the Securities Act.
8.2 The rights of a Participant under sections 2.1 and 2.2 may only be exercised
three times provided, however, that if the Common Shares become listed and
posted for trading on The Toronto Stock Exchange or the Montreal Exchange, such
rights may only be exercised two times.
SECTION 9 -- SELECTION OF MANAGING UNDERWRITERS
9.1 The managing underwriter or underwriters for any offering of Participant
Shares or Warrants to be qualified pursuant to Section 2 shall be selected by
the holders of a majority of the Participant Shares or Warrants initiating such
Required Qualification and shall be reasonably acceptable to the Company. The
Company shall select the managing underwriter or underwriters for any offering
of securities in which Participant Shares or Warrants are included pursuant to
Section 3.2 hereof.
SECTION 10 -- SUPPLYING INFORMATION
10.1 The Company shall cooperate with each Participant in supplying such
information as may be reasonably necessary for such Participant to complete and
file any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act for the sale of Participant Shares or Warrants; provided,
however, that the Company shall not be required by the terms hereof to become a
Reporting Issuer in any province in which it is not a Reporting Issuer at the
time of the sale.
SECTION 11 -- CLOSING CERTIFICATE
11.1 The obligations of the parties under this Agreement are subject to the due
execution
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and completion of a closing certificate by, or on behalf of, INTER ALIA, the
parties to this Agreement.
SECTION 12 -- ASSIGNMENT
12.1 This Agreement and the rights acquired hereunder may be assigned by the
Participants without the prior written consent of the Company to any person who
acquires Participant Shares or Warrants except that the rights contained in
Section 3 are not assignable.
SECTION 13 -- MISCELLANEOUS
13.1 AMENDMENT. The provisions of this Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated except by a written
instrument signed by the Company and Participants holding at least a majority of
the Participant Shares or Warrants and any such written instrument shall be
binding on all parties hereto when so signed even if the other parties hereto
have not executed or consented to the same, and shall also bind all Permitted
Transferees.
13.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, all
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will bind and enure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
13.3 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to be for the
benefit of and shall not be enforceable by any Person not a party hereto,
including, without limitation, any shareholders of the Company not parties
hereto.
13.4 SEVERABILITY. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
13.5 COUNTERPARTS. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall constitute an original, but all of which taken
together shall constitute one and the same Agreement.
13.6 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
13.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Province of British Columbia.
13.8 NOTICES. All notices, elections, and other communications given or
delivered under or
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by reason of the provisions of this Agreement shall be in writing and shall be
deemed to have been given only when delivered (personally or by facsimile
transmission) or mailed (by certified mail return receipt requested, first class
postage prepaid) to the parties at the address or facsimile number indicated
opposite the name of such party on the signature pages hereof. All such notices,
elections and other communications that are addressed as provided in this
Section 13.8 shall (i) if delivered personally, be deemed given upon delivery
(ii) if delivered by facsimile transmission, be deemed given when sent and
confirmation of receipt is received, and (iii) if delivered by mail in the
manner described above, be deemed given upon the receipt thereof. Any party from
time to time may change its address or facsimile number for the purpose of
notices to that party by giving notice to the other parties hereto specifying a
new address.
13.9 FURTHER ASSURANCES. Each party hereto shall do and perform or cause to be
done and performed all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party hereto reasonably may request in order to carry out the intent
and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
The parties have executed this Agreement.
Address for Notices:
______________________________ SEVEN SEAS PETROLEUM INC.
______________________________
______________________________ By: _________________________
Name:
Facsimile No.: _______________ Title:
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Address for Notices: SIGNED, SEALED AND DELIVERED
MR. ROBERT A. HEFNER III BY Robert A. Hefner, III for
The GHK Company and on behalf of:
6305 Waterford Boulevard JOSE FRANCISCO AMBROSI FILARDI
Suite 470 FRANCISCO JAVIER MUNOZ CALLE
Oklahoma City, Oklahoma RUDOLF KLING
73118 FAR RIVER CORPORATION
Facsimile No.: (970) 925-2061 VICTORIA OWEN DE PANERO
SOUTHAMERICAN HOLDING, CORP.
ENCHANTED INTERNATIONAL INC.
NAKURU HOLDINGS, INC.
FERNANDO LOBO-GUERRERO OSORIO
MORAGA, S.A.
SHARMOR, INC.
MAURICIO TORO
in the presence of:
_______________________ _________________________
Witness: BY ROBERT A. HEFNER, III,
as attorney
Address for Notices:
MR. ROBERT A. HEFNER III
The GHK Company _______________________ _________________________
6305 Waterford Boulevard Witness: BY ROBERT A. HEFNER, III,
Suite 470
Oklahoma City, Oklahoma
73118
Facsimile No.: (970) 925-2061
Address for Notices: THE GHK CORPORATION
MR. ROBERT A. HEFNER III
The GHK Company _________________________
6305 Waterford Boulevard By:
Suite 470 Name:
Oklahoma City, Oklahoma Title:
73118
Facsimile No.: (970) 925-2061
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Address for Notices: SIGNED, SEALED AND DELIVERD
MR. ROBERT A. HEFNER III by Robert A. Hefner, III for
The GHK Company and on behalf of:
6305 Waterford Boulevard BREENE M. KERR
Suite 470 PETROLEUM PROPERTIES
Oklahoma City, Oklahoma MANAGEMENT COMPANY
73118 GWEN D. SHARP
Facsimile No.: (970) 925-2061 MARK THOMSON BT.
Address for Notices: CHARLES B. ISRAEL
JUSTIN B. ISRAEL
- -------------------------------
---------------------- -------------------------
- ------------------------------- Witness BY ROBERT A. HEFNER, III.
as attorney
- ------------------------------- ---------------------- -------------------------
Witness: BRIAN EGOLF
Facsimile No.: ________________
EXHIBIT 10(i)
EXECUTION COPY
------------------------------------------------------------
SHAREHOLDERS VOTING SUPPORT AGREEMENT
Made as of July 26, 1996
Between
SEVEN SEAS PETROLEUM INC.
and
ROBERT A. HEFNER III
and
BREENE M. KERR
and
ALBERT E. WHITEHEAD
and
GEORGE H. PLEWES
and
TIMOTHY T. STEPHENS
---------
MCMILLAN BINCH
BARRISTERS & SOLICITORS
<PAGE>
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TABLE OF CONTENTS
RECITALS.....................................................................1
SECTION 1 - DEFINITIONS.....................................................2
Block .................................................................2
Board .................................................................2
Company Act............................................................2
Meeting................................................................2
Preferred Shares.......................................................2
Slate .................................................................2
Warrant Indenture......................................................2
SECTION 2 - INTERPRETATION...................................................2
2.1 Gender/Numbers...................................................2
2.2 Headings.........................................................2
2.3 Proper Law.......................................................2
2.4 Reclassification of Securities...................................2
SECTION 3 - EXERCISE OF VOTING POWER.........................................3
3.1 Exercise of Voting Power.........................................3
3.2 Nominations......................................................3
SECTION 4 - TRANSFERS OF SHARES..............................................3
4.1 Ordinary Course Sales............................................3
4.2 Excluded Shares..................................................3
SECTION 5 - TERMINATION......................................................4
5.1 Termination......................................................4
SECTION 6 - CLOSING CERTIFICATE..............................................4
6.1 Closing Certificate..............................................4
SECTION 7 - MISCELLANEOUS....................................................4
7.1 Amendment........................................................4
7.2 Successors and Assigns...........................................4
7.3 No Third Party Beneficiaries.....................................5
7.4 Severability.....................................................5
7.5 Counterparts.....................................................5
(i)
<PAGE>
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SHAREHOLDERS VOTING SUPPORT AGREEMENT
This Agreement is made as of July 26, 1996, between
SEVEN SEAS PETROLEUM INC.
("Company")
and
ROBERT A. HEFNER III
("Hefner")
and
BREENE M. KERR
("Kerr")
and
ALBERT E. WHITEHEAD
("Whitehead")
and
GEORGE H. PLEWES
("Plewes")
and
TIMOTHY T. STEPHENS
("Stephens", and together with Hefner, Kerr,
Whitehead and Plewes, the "Shareholders")
RECITALS
A. The Shareholders wish to establish their respective rights and obligations in
respect of certain matters pertaining to the voting and disposition of voting
shares of the Company;
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FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1 - DEFINITIONS
(a) "BLOCK" means ten thousand or more Warrants or underlying common shares of
the Company.
(b) "BOARD" means the board of directors of the Company.
(c) "COMPANY ACT" means the COMPANY ACT (British Columbia), R.S.B.C. 1979,
chapter 59, as amended, or such other statute as the Company may exist
under from time to time.
(d) "MEETING" means a meeting of the shareholders of the Company duly called
in accordance with the terms of the Company Act.
(e) "PREFERRED SHARES" means the voting convertible preferred shares of the
Company.
(f) "SLATE" means the slate of directors proposed by the Chief Executive
Officer of the Company for election to the Board.
(g) "WARRANT INDENTURE" means the warrant indenture agreement dated as of the
date of this Agreement between the Company and Montreal Trust Company of
Canada.
(h) "WARRANTS" means the special warrants issued pursuant to the Warrant
Indenture and the Preferred Shares.
SECTION 2 - INTERPRETATION
2.1 GENDER/NUMBERS. Words importing the singular number only shall include the
plural and vice versa and words importing the use of any gender shall include
both genders.
2.2 HEADINGS. The article and section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
2.3 PROPER LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the Province of British Columbia and the federal
laws of Canada applicable therein.
2.4 RECLASSIFICATION OF SECURITIES. The provisions of this Agreement shall
apply, MUTATIS MUTANDIS, to the Warrants convertible into common shares of the
Company, or those common shares of the Company acquired upon the exercise of the
conversion right contained in the Warrant Indenture.
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EXECUTION COPY
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SECTION 3 - EXERCISE OF VOTING POWER
3.1 EXERCISE OF VOTING POWER. Until termination of this Agreement under section
5.1, at any Meeting called for the purpose of electing directors of the Company,
each of the Shareholders shall vote or cause to be voted all voting shares of
the Company owned or controlled by him on the date of such meeting in favour of
the election of the Slate.
3.2 NOMINATIONS. If, in connection with any Meeting called for the purpose of
electing directors of the Company, management of the Company fails to nominate a
Slate, the Shareholders shall be entitled to nominate and vote for individuals
as they so choose.
SECTION 4 - TRANSFERS OF SHARES
4.1 ORDINARY COURSE SALES. Hefner and Kerr are free to sell any or all Warrants
or common shares of the Company acquired on conversion of the Warrants, provided
that, subject to section 4.2, in the event of a proposed sale by Hefner or Kerr
of any Block, Yorkton Securities or such other investment dealer as may be
designated by the Board from time to time will be afforded the first opportunity
to sell such Block. If Yorkton Securities (or any other such designated dealer)
cannot sell the Block on a timely basis and at a price acceptable to Hefner or
Kerr, as the case may be, Hefner or Kerr will be entitled, acting in good faith,
to conclude a sale to a third party provided that such sale is not to a person,
or one or more of a group of persons acting in concert, who is acquiring the
Block in connection with a takeover bid other than in the circumstances
described in sub-clause 4.2(b). If Hefner or Kerr does not provide Yorkton
Securities (or any other such designated dealer) with the first opportunity to
sell the Block, he will, as a condition of such sale to a third party, require
the third party purchaser to agree to be bound by the terms of this Agreement.
4.2 EXCLUDED SHARES.
(a) The Warrants, and the common shares of the Company issuable on the
conversion thereof, received by Hefner and Kerr on the date hereof and not
subject to the escrow agreement dated as of the date of this Agreement between,
among others, Hefner, Kerr, the Company and Montreal Trust Company of Canada,
shall not be subject to the selling restrictions contained in section 4.1.
(b) If a take-over bid or other offer is made generally to shareholders of
the Company by an arms-length third party for all or a portion of the common
shares of the Company, Hefner and Kerr will be free to tender to such bid or
offer any common shares owned by them and shall not be required to comply with
the selling restrictions contained in section 4.1.
<PAGE>
EXECUTION COPY
- 4 -
SECTION 5 - TERMINATION
5.1 TERMINATION. This Agreement shall terminate on the first to occur of any of
the following:
(a) the failure of the Company to appoint Brian Egolf and Hefner as
directors of the Company within 45 days of the date of this
Agreement;
(b) the failure of the Company to purchase and maintain during the term
of this Agreement directors and officers insurance coverage as
provided in Section 6.1(h) of the GHK Company Columbia Share
Purchase Agreement of July 26, 1996;
(c) Brian Egolf and Hefner are not included in a Slate or are not
elected as directors of the Company in any election of directors;
(d) any two of Whitehead, Plewes or Stephens are not included in a Slate
or are not elected as directors of the Company or cease to be
officers or directors of the Company;
(e) the Company issues an aggregate number of securities during any six
month period which is in excess of 25% of the outstanding share
capital of the Company at the beginning of such period and does not
obtain approval therefor from the shareholders of the Company; and
(f) July 19, 1998.
SECTION 6 - CLOSING CERTIFICATE
6.1 CLOSING CERTIFICATE. The obligations of the parties under this Agreement are
subject to the due execution and completion of a closing certificate by, or on
behalf of, INTER ALIA, the parties to this Agreement..
SECTION 7 - MISCELLANEOUS
7.1 AMENDMENT. The provisions of this Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated except by a written
instrument signed by all the parties hereto or their respective successors and
assigns.
7.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, all
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will
<PAGE>
EXECUTION COPY
- 5 -
bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not.
7.3 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to be for the
benefit of and shall not be enforceable by any person not a party hereto,
including, without limitation, any shareholders of the Company not parties
hereto.
7.4 SEVERABILITY. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
7.5 COUNTERPARTS. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall constitute an original, but all of which taken
together shall constitute one and the same Agreement.
The parties have executed this Agreement.
SEVEN SEAS PETROLEUM INC.
------------------------------
By:
Name:
Title:
ROBERT A HEFNER III
------------------------------
THE GHK CORPORATION
------------------------------
By:
Name:
Title:
------------------------------
BREENE M. KERR
By his agent
------------------------------
<PAGE>
EXECUTION COPY
- 6 -
ALBERT E. WHITEHEAD
------------------------------
GEORGE H. PLEWES
------------------------------
TIMOTHY T. STEPHENS
------------------------------
EXHIBIT 10 (J)
GHK/SEVEN SEAS
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT has been made and entered into
this ___ day of July, 1996, by and among GHK COMPANY COLOMBIA ("GHK Colombia"),
an Oklahoma corporation, SEVEN SEAS PETROLEUM, INC. ("Seven Seas"), a
corporation organized under the laws of the Province of British Columbia,
Canada, and THE GHK COMPANY L.L.C. (the "Manager"), an Oklahoma limited
liability company, with reference to the following circumstances.
A. GHK Colombia is a wholly-owned subsidiary of Seven Seas Petroleum
Colombia, Inc. ("SS Colombia") which in turn is wholly owned by Seven Seas. GHK
Colombia has a branch in Colombia, South America, and holds a participating
interest in the Dindal and Rio Seco association contracts with Empresa
Colombiana de Petroleos SA (the "Association") and is the operator of the
Association and also operator under a Joint Operating Agreement dated August 1,
1994 (the "JOA"), among it and the other participating interest owners in the
Association.
B. The parties have agreed, subject to the terms of this Agreement,
that (i) the Manager provide from its offices in Oklahoma City and Denver
administrative services and support to GHK Colombia in connection with its
activities in the Association and under the JOA, and (ii) certain employees of
the Manager (the "Service Group") shall serve as directors and officers of GHK
Colombia, namely:
NAME OFFICE
Robert A. Hefner III President and Director
Larry A. Ray Executive Vice President
and Director
Robert S. May Vice President (Finance)
and Assistant Treasurer
Jane Ryder Assistant Secretary
Russ D. Cunningham Vice President (Geology)
It should be noted that Robert A. Hefner III (i) is to become a director of
Seven Seas, (ii) was the sole stockholder of GHK Colombia prior to the date
first above written and (iii) is the principal owner of the Manager. It is also
understood that Al Whitehead is Chairman of the Board, and that Timothy T.
Stephens and David F. DeCort also serve as directors of GHK Colombia.
C. The parties intend, subject to this Agreement, that the Service
Group shall act on behalf of GHK Colombia in performing its duties and
responsibilities as a member of the Association and as operator under the JOA,
subject to the direction of the directors of GHK Colombia.
<PAGE>
ACCORDINGLY, premises considered and for the purpose of providing a
basis among which the Manager will provide certain administrative services and
make available certain of its employees to GHK Colombia, the parties have
entered into this Agreement.
1. MANAGER SERVICES. The Manager will make available, on an as
needed basis, the Service Group, together with its offices and facilities in
Oklahoma City, Oklahoma, and Denver, Colorado, U.S.A. to provide such services
and administrative support as may be required to enable GHK Colombia to perform
its duties and obligations as the operator of the Association and under the JOA.
The services shall be performed, in part, by causing the Service Group to serve
as directors and officers of GHK Colombia as hereinafter provided.
2. SERVICE GROUP. Members of the Service Group shall serve as
officers and directors of GHK Colombia without compensation or benefits and the
Manager shall be solely responsible for matters relating to their compensation
and for other associated issues relating to employment including but not limited
to payroll taxes, income taxes, unemployment and workman's compensation and
health, accident and other insurances. Subject to the direction of the Board of
Directors of GHK Colombia, the Service Group shall have such authority to act on
behalf of GHK Colombia as are usual and customary for the offices and positions
that they hold; provided, however, no person shall be hired as an employee of
GHK Colombia without specific authorization from the Board of Directors. The
Manager will cause the Service Group to perform their duties as officers and
managers of GHK Colombia in such a way as to enable GHK Colombia to perform its
duties as operator and conduct operations under the JOA and the Association. The
Manager shall cause the Service Group to devote such part of their time as is
reasonably needed to fulfill these duties and manage GHK Colombia and its
business in such a way as to be, at all times during the term of this Agreement,
in compliance with its duties and obligations as a member and operator of the
Association and as operator under the JOA. It is understood that the performance
of such duties will not require the full time services of any member of the
Service Group and nothing in this Agreement shall be construed to prohibit any
member of the Service Group from performing services for the Manager in
connection with its other business activities or to engage in any other activity
that they see fit, subject only to the obligations provided under this
Agreement.
3. SEVEN SEAS FINANCIAL SUPPORT. Seven Seas shall, as the sole
shareholder of GHK Colombia, elect Messrs. Hefner and Ray as directors of GHK
Colombia and shall cause the GHK Colombia directors to elect members of the
Service Group to the offices herein agreed upon. Seven Seas shall also provide
GHK Colombia capital funds sufficient for it to pay all obligations incurred by
it in connection with the performance of its duties under the Association, the
JOA and hereunder.
-2-
<PAGE>
4. MANAGER COMPENSATION. As compensation for services, GHK Colombia
will pay the Manager a monthly sum equal to 100% of the overhead charges
authorized under the JOA, plus $15,000. In addition, GHK Colombia will reimburse
the Manager and members of the Service Group for all direct expenses and
third-party costs incurred and paid by them in connection with the performance
of their duties hereunder or as officers and managers of GHK Colombia. Except as
authorized by the directors of GHK Colombia, neither the Manager nor any member
of the Service Group shall be authorized to incur costs and expenses not
authorized under the JOA. There shall be no duplication of reimbursed direct
expenses and third party costs and JOA overhead charges. GHK Colombia will not
be liable to the Manager for the termination by the Manager of any of the
Manager's employees, including those performing services for the benefit of GHK
Colombia hereunder. Seven Seas hereby guarantees the obligations of GHK Colombia
under this paragraph.
5. INDEMNIFICATION. Neither the Manager nor any member of the
Service Group shall be liable or responsible for damages to GHK Colombia or
Seven Seas for any acts taken or performed or for any omission to act, if such
conduct does not constitute willful misconduct or gross negligence. In any
threatened, pending or completed action, suit or investigation in which the
Manager or any member of the Service Group was or is a party by virtue of its or
their activities under this Agreement or in connection with any member of the
Service Group serving as an officer, employee, director, agent or manager of GHK
Colombia, then GHK Colombia and Seven Seas, jointly and severally, shall
indemnify the Manager, its members, officers, employees and agents against all
judgments, settlements, penalties, fines or expenses, including attorneys' fees
incurred by the Manager or any member of the Service Group in connection
therewith, so long as the Manager's, or the member of the Service Group's,
action or failure to act does not constitute willful misconduct or gross
negligence.
6. TERM. This Agreement shall continue in effect until the earlier
to occur of (i) the drilling and completion of both the second year well under
the Rio Seco Association Contract and the fourth year well under the Dindal
Association Contract or (ii) such time as "commerciality" is established under
either the Dindal or Rio Seco Association Contracts; provided, however, GHK
Colombia, Seven Seas, or Manager may terminate this Agreement at any time upon
180 days' prior written notice. Upon termination of this Agreement, the Manager
shall cause the members of the Service Group to tender their resignations as
officers and directors of GHK Colombia. Such resignations shall release the
Company from further obligations relating to compensation and other employee
benefits.
7. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
-3-
<PAGE>
8. NO ASSIGNMENT. No party may assign its rights or delegate its
duties under this Agreement without the prior written consent of the other
parties.
9. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, each of which shall be considered an original for all
purposes but all of which shall constitute one and the same agreement.
EXECUTED as of the day and year first above written.
GHK COMPANY COLOMBIA
By
President
SEVEN SEAS PETROLEUM, INC.
By
President
THE GHK COMPANY L.L.C.
By
Manager
-4-
EXHIBIT (10)(K)
ESCROW AGREEMENT FOR A NATURAL RESOURCE COMPANY
THIS AGREEMENT made in triplicate this 26th day of July 1996 AMONG:
Those parties listed on
Schedule `A' hereto
(hereinafter jointly and
severally called the
"Vendors")
and
Montreal Trust Company of Canada
600, 530-8th Avenue, S.W., Calgary,
AB, T2P 3S8 (hereinafter called the
"Trustee")
and
Seven Seas Petroleum Inc. of
80-885 West Georgia Street,
Vancouver, BC V6C 3H1
(hereinafter called the
"Issuer")
WHEREAS the Vendors or predecessors in title of one or more of them and the
Issuer (among others) entered into an agreement dated as of the 26th day of
July, 1996, whereby the Vendors or such predecessors agreed to sell or otherwise
transfer certain working interests in the Dindal and Rio Seco association
contracts located in Colombia (the "Property") to a wholly-owned subsidiary of
the Issuer, the consideration for such property being at least in part the
issuance of securities by the Issuer or the transfer of securities of the Issuer
to the Vendors or such predecessors, the number of securities subject to this
agreement (the "escrowed securities") and the names of the Vendors presently
owning or to receive such securities, being respectively and more particularly
described in Schedule "A" attached to and forming part of this agreement;
AND WHEREAS in furtherance of complying with the requirements of the SECURITIES
ACT, the Vendors are desirous of depositing in escrow certain securities in the
Issuer owned or to be received by them;
<PAGE>
2
AND WHEREAS the Trustee has agreed to undertake and perform its duties according
to the terms and conditions hereof;
NOW THEREFORE this agreement witnesseth that in consideration of the aforesaid
agreements and other good and valuable consideration (the receipt and
sufficiency of which parties do hereby respectively acknowledge each to the
other), the Vendors jointly and severally covenant and agree with the Issuer and
with the Trustee and the Issuer and the Trustee covenant and agree each with the
other and with the Vendors jointly and severally as follows:
(1) Each of the Vendors hereby places and deposits in escrow those of the
Vendor's securities of the Issuer which are represented by the certificates
described or referred to in Schedule "A" hereto, with the Trustee and hereby
undertakes and agrees forthwith to deliver those certificates (including any
replacement securities or certificates if and when such are issued or allotted)
to the Trustee for deposit in escrow.
(2) The parties hereby agree that the securities and the beneficial ownership of
or any interest in them and the certificates representing them (including any
replacement securities or certificates) shall not be sold, assigned,
hypothecated, alienated, released from escrow, transferred within escrow or
otherwise in any manner dealt with, except in accordance with the terms of this
agreement or any written consent, order or direction in writing of the Ontario
Securities Commission (hereinafter referred to as the "Commission") or except as
may be required by reason of the death or bankruptcy of any Vendor, in which
cases the Trustee shall hold the said certificates, subject to this agreement,
for whatever person, firm or corporation shall be legally entitled to be or
become the registered owner thereof.
(3) The Vendors hereby direct the Trustee to retain their respective securities
and the certificates (including any replacement securities or certificates)
representing the same and not to do or cause anything to be done to release the
same from escrow or to allow any transfer, hypothecation or alienation thereof
except in accordance with the terms of this agreement or any written consent,
order or direction of the Commission. The Trustee hereby accepts the
responsibilities placed on it hereby and agrees to perform the same in
accordance with the terms hereof and any written consent, orders or directions
of the Commission. Nothing in this agreement shall prevent the Vendors from
exchanging the escrowed securities (which, initially, shall be special warrants
or convertible securities of the Issuer) in accordance with their terms for
common shares of the Issuer and the Trustee shall take such steps and perform
such acts as may be
<PAGE>
3
necessary in order to effect any such exchange upon receipt of a written
direction from the Vendor or the Vendor's representative in respect of its
escrowed securities provided that the Issuer's common shares delivered to the
Trustee in exchange for the escrowed securities shall be held by the Trustee in
accordance with the terms of this agreement as if they were the escrowed
securities.
(4) If during the period in which any of the said securities are retained in
escrow pursuant hereto, any dividend is received by the Trustee in respect of
the escrowed securities, any such dividend shall be forthwith paid or
transferred to the respective registered owner entitled thereto.
(5) All voting rights attached to the escrowed securities shall at all times be
exercised by the respective registered owners thereof.
(6) The Vendors and the Issuer hereby jointly and severally agree to and do
hereby release and indemnify and save harmless the Trustee from and against all
claims, suits, demands, costs, damages and expenses which may be occasioned by
reason of the Trustee's compliance in good faith with the terms hereof.
(7) The Issuer hereby acknowledges the terms and conditions of this agreement
and agrees to take all reasonable steps to facilitate its performance and to pay
the Trustee's proper charges for its services as trustee of this escrow.
(8) The written consent, order or direction of the Commission as to a release
from escrow of all or part of the said securities, shall terminate this
agreement only in respect to those securities so released.
(9) Subject to any other release consented to by the Commission, the escrowed
securities shall be released from the terms of this agreement on the earlier of:
a. on each of the first three anniversaries of the date of the
initial issuance of the escrowed securities: one third of the
escrowed securities so that after the third anniversary of
such date all of the escrowed securities shall be released
from the terms of this agreement; and
b. such date, from time to time, as a Vendor or the Issuer
provides staff of the Commission with technical reports
acceptable to the Director that establish a determinate value
for the Property (as at April 25, 1996) of U.S. $118,908,000
or more;
<PAGE>
4
provided that proportionate releases from escrow will be
permitted based on interim technical reports that establish a
determinate value of less than U.S. $118,908,000.
(10) If the Trustee should wish to resign, it shall give at least six months
notice to the Issuer, who may, with the written consent of the Commission, by
writing appoint another Trustee in its place and such appointment shall be
binding on the Vendors and the new Trustee shall assume and be bound by the
obligations of the Trustee hereunder.
(11) This agreement may be executed in several parts in the same form and such
parts as so executed shall together form one original agreement, and such parts
if more than one shall be read together and construed as if all the signing
parties hereto had executed one copy of this agreement.
(12) Wherever the singular or masculine are used throughout this agreement, the
same shall be construed as being the plural or feminine or neuter where the
context so requires.
(13) This agreement shall enure to the benefit of and be binding upon the
parties hereto, their and each of their heirs, executors, administrators,
successors and assigns.
<PAGE>
5
IN WITNESS WHEREOF the parties hereto have executed these presents the day and
year first above written.
Seven Seas Petroleum Inc.
By:
SIGNED, SEALED AND DELIVERED by )
Robert A. Hefner, III for and )
on behalf of: )
JOSE FRANCISCO AMBROSI FILARDI )
FRANCISCO JAVIER MUNOZ CALLE )
RUDOLF KLING )
FAR RIVER CORPORATION )
VICTORIA OWEN DE PANERO )
SOUTHAMERICAN HOLDING, CORP. )
ENCHANTED INTERNATIONAL INC. )
NAKURU HOLDINGS, INC. )
FERNANDO LOBO-GUERRERO OSORIO )
MORAGA, S.A. )
SHARMOR, INC. )
MAURICIO TORO )
)
)
Witness ) BY ROBERT A. HEFNER, III
as attorney
)
Witness ) ROBERT A. HEFNER, III
The GHK Corporation
By:
<PAGE>
6
SIGNED, SEALED AND DELIVERED BY )
Robert A. Hefner, III for and )
on behalf of: )
BREENE M. KERR )
PETROLEUM PROPERTIES )
MANAGEMENT COMPANY )
GWEN D. SHARP )
MARK THOMSON BT. )
CHARLES B. ISRAEL )
JUSTIN B. ISRAEL )
)
)
Witness BY ROBERT A. HEFNER, III
as attorney
EXHIBIT 10(L)
ESCROW AGREEMENT
THIS Agreement made the 21st day of January, 1997
BETWEEN:
ALBERT E. WHITEHEAD, 9 East 4th Street, Suite 305, Tulsa,
Oklahoma, 74103 - 5109
(herein called the "Security Holder")
OF THE FIRST PART
AND:
MONTREAL TRUST COMPANY, of Suite 600, 530 - 8th Avenue S.W.,
Calgary, Alberta, T2P 3S8, Canada
(herein called the "Trustee")
OF THE SECOND PART
AND:
SEVEN SEAS PETROLEUM INC., of Suite 960, Three Post Oak
Central, 1990 Post Oak Boulevard, Houston, Texas, 77056,
U.S.A.
(herein called the "Issuer")
OF THE THIRD PART
WHEREAS:
A. The Security Holder presently owns securities of the Issuer;
B. In furtherance of complying with the requirements of the Toronto
Stock Exchange ( the "Exchange" ), the security holder is desirous of depositing
in escrow certain securities of the Issuer owned or to be received by him;
C. The Trustee has agreed to undertake and perform its duties according
to the terms and conditions hereof;
<PAGE>
- 2 -
NOW THEREFORE this Agreement witnesseth that in consideration of the aforesaid
agreements, and of the sum of one dollar ($1.00) now paid by the parties hereto,
each to the other (receipt of which sum the parties do hereby respectively
acknowledge each to the other) the Security Holder covenants and agrees with the
Issuer and with the Trustee and the Issuer and the Trustee covenant and agree
each with the other and with the Security Holder as follows:
1. The Security Holder hereby places and deposits in escrow those of his
securities of the Issuer referred to in Schedule "A" hereto with the Trustee and
hereby undertakes and agrees forthwith to deliver those certificates (including
any replacement securities or certificates if and when such are issued or
allotted) to the Trustee for deposit in escrow.
2. The securities shall, subject to the provisions of paragraph 3
hereof, be released from escrow as follows:
1/3 on June 29, 1996;
1/3 on June 29, 1997; and
1/3 on June 29, 1998.
3 The parties hereby agree that the securities and the beneficial
ownership of or any interest in them and the certificates representing them
(including any replacement certificates) shall not be sold, assigned,
hypothecated, alienated, released from escrow, transferred within escrow, or
otherwise in any manner dealt with other than as provided for in paragraph 2,
without the express consent, order or direction in writing of the Exchange being
first had and obtained or except as may be required by reason of the death or
bankruptcy of the Security Holder, in which cases the Trustee shall hold the
said certificates subject to this Agreement, for whatever person, firm or
corporation shall be legally entitled to be or become the registered owner
thereof.
4 The Security Holder hereby directs the Trustee to retain his
securities and the certificates (including any replacement securities or
certificates) representing the same and not to do or cause anything to be done
to release the same from escrow or to allow any transfer, hypothecation or
alienation thereof other than as provided for in paragraph 2 except with and as
directed by the written consent, order or direction of the Exchange. The Trustee
hereby accepts the responsibilities placed on it hereby and agrees to perform
the same in accordance with the terms hereof and the written consents, orders or
directions of the Exchange.
5 If during the period in which any of the said securities are
retained in escrow pursuant hereto, any dividend is received by the Trustee in
respect of the escrowed securities, any such dividend shall be forthwith paid or
transferred to the Security Holder entitled thereto.
6 All voting rights attached to the escrowed securities shall at all
times be exercised by the respective registered owners thereof.
7 The parties hereby agree that the Exchange may, in certain
circumstances, including but not limited to the suspension from trading or
delisting of the Issuer by the Exchange, require that all or any of the
securities then in escrow be tendered to the Issuer by
<PAGE>
- 3 -
way of gift or for cancellation. Any such securities shall remain in escrow
subject to the terms and conditions of this Agreement until the securities are
fully and effectually cancelled or otherwise transferred for the benefit of the
Issuer. Where the securities cannot be cancelled, they shall be held for benefit
of the Issuer by the Trustee and remain in escrow subject to the terms and
conditions of this Agreement but they shall not be voted and any dividends shall
be donated back for the benefit of the Issuer.
8 The Issuer and Security Holder hereby agree to and do hereby release
and indemnify and save harmless the Trustee from and against all claims, suits,
demands, costs, damages and expenses which may be occasioned by reason of the
Trustee's compliance in good faith with the terms hereof.
9 The Issuer hereby acknowledges the terms and conditions of this
Agreement and agrees to take all reasonable steps to facilitate its performance
and to pay the trustee's proper charges for its services as trustee of this
escrow.
10 If the Trustee should wish to resign, it shall give at least three
months notice to the Issuer, which may, with the written consent of the
Exchange, by writing appoint another Trustee in its place and such appointment
shall be binding on the Security Holder and the new Trustee shall assume and be
bound by the obligations of the Trustee hereunder.
11 The release from escrow of all or part of the said securities shall
terminate this Agreement only in respect to those securities so released. For
greater certainty, this clause does not apply to securities transferred within
escrow.
12. If the Issuer is delisted by the Exchange, thereafter any consent,
order or direction of the Exchange herein required will, instead, require the
consent, order or direction of the Ontario Securities Commission and the
Commission may require that escrowed securities be tendered to the Issuer by way
of gift or for cancellation pursuant to paragraph 6 hereof.
13. This Agreement may be executed in several parts in the same form and
such parts as so executed shall together form one original agreement, and such
parts if more than one shall be read together and construed as if all the
signing parties hereto had executed one copy of this Agreement.
14. Wherever the singular or masculine are used throughout this
Agreement, the same shall be construed as being the plural or feminine or neuter
where the context so requires.
<PAGE>
- 4 -
15. This Agreement shall enure to the benefit of and be binding upon the
parties hereto, their and each of their heirs, executors, administrators,
successors and assigns.
IN WITNESS WHEREOF the parties hereto have executed these presents
the day and year first above written.
SIGNED, SEALED AND DELIVERED by )
ALBERT E. WHITEHEAD in the presence of: )
)
/s/ GALE L. STATON )
Signature )
Gale L. Staton ) /s/ ALBERT E. WHITEHEAD
Print Name ) ALBERT E. WHITEHEAD
2442 N. Erie PL. )
Address )
Tulsa, Ok 74115-3397 )
)
Executive Secretary )
Occupation )
MONTREAL TRUST COMPANY
Per:/s/______________________________
Authorized Signatory
SEVEN SEAS PETROLEUM INC.
Per:/s/______________________________
Authorized Signatory
<PAGE>
SCHEDULE "A"
===================================================================
NAME OF BENEFICIAL NUMBER OF
SECURITY HOLDER OWNER SECURITIES
===================================================================
- -------------------------------------------------------------------
Albert E. Whitehead Albert E. Whitehead 500,000
===================================================================
EXHIBIT 10(M)
SEVEN SEAS PETROLEUM INC.
AMENDED 1996 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Amended 1996 Stock Option Plan (this "Plan) is to
provide a means whereby selected employees, senior officers and directors of
Seven Seas Petroleum Inc. (the "Company"), or of any affiliate thereof, may be
granted incentive stock options to purchase Common Shares (as defined in Section
3) of the Company, in order to attract and retain the services or advice of such
employees, senior officers and directors, and to provide added incentive to such
persons by encouraging share ownership in the Company.
2. ADMINISTRATION
This Plan shall be administered by the Board of Directors of the
Company (the "Board") or, in the event the Board shall appoint and/or authorize
a committee to administer this Plan, by such committee. The administrator of
this Plan shall hereinafter be referred to as the "Plan Administrator".
In the event a member of the Board (or the committee) may be
eligible, subject to the restrictions set forth in Section 4, to participate in
or receive or hold options under this Plan, no member of the Board or the
committee shall vote with respect to the granting of an option hereunder to
himself or herself, as the case may be.
The members of any committee serving as Plan Administrator shall be
appointed by the Board for such term as the Board may determine. The Board may
from time to time remove members from, or add members to, the committee.
Vacancies on the committee, however caused, may be filled by the Board.
2.1 PROCEDURES
The Board shall designate one of the members of the Plan
Administrator as chairman. The Plan Administrator may hold meetings at such
times and places as it shall determine. The acts of a majority of the members of
the Plan Administrator present at meetings at which a quorum exists, or acts
reduced to or approved in writing by all Plan Administrator members, shall be
valid acts of the Plan Administrator.
2.2 RESPONSIBILITIES
Except for the terms and conditions explicitly set forth in this
Plan, the Plan Administrator shall have the authority, in its discretion, to
determine all matters relating to the options to be granted under this Plan,
including selection of the individuals to be granted options, the number of
shares to be subject to each option, the exercise price, and all other terms
<PAGE>
- 2 -
and conditions of the options. Grants under this Plan need not be identical in
any respect, even when made simultaneously. The interpretation and construction
by the Plan Administrator of any terms or provisions of this Plan or any option
issued hereunder, or of any rule or regulation promulgated in connection
herewith, shall be conclusive and binding on all interested parties.
3. SHARES SUBJECT TO THIS PLAN
The shares subject to this Plan shall be the Company's common
shares, without par value (the "Common Shares"), presently authorized but
unissued or subsequently acquired by the Company. Subject to adjustment as
provided in Section 6, the aggregate amount of Common Shares to be delivered
upon the exercise of all options granted under this Plan shall not exceed
3,000,000 shares as such Common Shares were constituted on the effective date of
this Plan. If any option granted under this Plan shall expire or be cancelled or
terminated for any reason without having been exercised in full, the unpurchased
shares subject thereto shall thereupon again be available for purposes of this
Plan.
4. ELIGIBILITY
An incentive stock option may be granted only to any individual who,
at the time the option is granted, is an employee, senior officer or director of
the Company or an affiliate of the Company as that term is defined in the
BUSINESS CORPORATIONS ACT (Yukon Territory) (an "Affiliate"), a trustee on
behalf of such individual, or an entity, all of the voting securities of which
are beneficially owned by an employee or director. Any party to whom an option
is granted under this Plan shall be referred to hereinafter as an "Optionee".
5. TERMS AND CONDITIONS OF OPTIONS
Options granted under this Plan shall be evidenced by written
agreements which shall contain such terms, conditions, limitations and
restrictions as the Plan Administrator shall deem advisable and which are not
inconsistent with this Plan. Notwithstanding the foregoing, options shall
include or incorporate by reference the following terms and conditions:
5.1 NUMBER OF SHARES AND PRICE
The maximum number of shares that may be reserved pursuant to the
exercise of each option and the price per share at which such option is
exercisable (the "Exercise Price") shall be as established by the Plan
Administrator, provided that the number of shares that may be reserved pursuant
to the exercise of options and granted to any person shall not exceed 5% of the
issued and outstanding share capital of the Company, and further provided that
the Plan Administrator shall act in good faith to establish the exercise price
which shall be not less than the closing price of the Company's shares on the
Toronto Stock Exchange on the day immediately preceding the date of grant of
such options.
<PAGE>
- 3 -
5.2 TERM AND MATURITY
The term of each incentive stock option shall be as established by
the Plan Administrator and, if not so established, shall be 5 years from the
date it is granted but in no event shall it exceed 10 years.
To ensure that the Company or Affiliate will achieve the purpose and
receive the benefits contemplated in this Plan, the Plan Administrator may, in
respect of any options granted to any Optionee hereunder, establish a schedule
for the exercise of such option (a "Vesting Schedule").
5.3 EXERCISE
Subject to any Vesting Schedule each option may be exercised in
whole or in part at any time and from time to time; provided, however, that no
fewer than 100 shares (or the remaining shares then purchasable under the
option, if less than 100 shares) may be purchased upon any exercise of option
rights hereunder and that only whole shares will be issued pursuant to the
exercise of any option. During an Optionee's lifetime, any options granted under
this Plan are personal to him or her and are exercisable solely by such
Optionee. Options shall be exercised by delivery to the Company of notice of the
number of shares with respect to which the option is exercised, together with
payment of the exercise price.
5.4 PAYMENT OF EXERCISE PRICE
Payment of the option exercise price shall be made in full at the
time the notice of exercise of the option is delivered to the Company and shall
be in cash, bank certified or cashier's cheque, personal cheque (unless at the
time of exercise the Plan Administrator in a particular case determines not to
accept a personal cheque), or such other forms of payment as the Company may
accept, for the Common Shares being purchased.
The Plan Administrator can determine at any time before exercise
that additional forms of payment will be permitted. To the extent permitted by
the Plan Administrator and applicable laws and regulations (including, but not
limited to, federal tax law, securities laws and regulations and provincial
company law), an option may be exercised by delivery of Common Shares of the
Company held by an Optionee having a fair market value equal to the exercise
price, such fair market value to be determined in good faith by the Plan
Administrator; provided, however, that payment in Common Shares held by an
Optionee shall not be made unless the Common Shares shall have been owned by the
Optionee for a period of at least six months.
5.5 WITHHOLDING TAX REQUIREMENT
The Company or any Affiliate shall have the right to retain and
withhold from any payment of cash or Common Shares under this Plan the amount of
taxes required by any government to be withheld or otherwise deducted and paid
with respect to such payment. At its discretion, the Company may require an
Optionee receiving Common Shares to reimburse
<PAGE>
- 4 -
the Company for any such taxes required to be withheld by the Company and
withhold any distribution in whole or in part until the Company is so
reimbursed. In lieu thereof, the Company shall have the right to withhold from
any other cash amounts due or to become due from the Company to the Optionee an
amount equal to such taxes. The Company may also retain and withhold or the
Optionee may elect, subject to approval by the Company at its sole discretion,
to have the Company retain and withhold a number of shares having a market value
not less than the amount of such taxes required to be withheld by the Company to
reimburse the Company for any such taxes and cancel (in whole or in part) any
such shares so withheld.
5.6 NON-TRANSFERABILITY OF OPTIONS
Options granted under this Plan and the rights and privileges
conferred hereby may not be transferred, assigned, pledged or hypothecated in
any manner (whether by operation of law or otherwise) other than by will or by
the applicable laws of descent and distribution and shall not be subject to
execution, attachment or similar process. Any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of any option under this Plan or any
right or privilege conferred hereby, contrary to the provisions of this Plan, or
the sale or levy or any attachment or similar process upon the rights and
privileges conferred hereby shall be null and void. In the event of the death of
an Optionee the option may be exercised by the personal representative of the
Optionee's estate or by the person or persons to whom the Optionee's rights pass
by will or by the applicable laws of descent and distribution.
5.7 TERMINATION OF RELATIONSHIP
If the Optionee's relationship with the Company or any Affiliate
ceases for any reason other than termination for cause, death or total
disability, and unless by its terms the option sooner terminates or expires,
then the Optionee may exercise, for a ninety day period that portion of the
Optionee's option which is exercisable at the time of such cessation, but the
Optionee's option shall terminate at the end of such period following such
cessation as to all shares for which it has not theretofore been exercised,
unless such provision is waived in the agreement evidencing the option or by
resolution adopted at any time by the Plan Administrator. If an Optionee's
relationship with the Company or any Affiliate changes (i.e., from employee to
nonemployee, such as a consultant), such change shall constitute a termination
of an Optionee's relationship with the Company or any Affiliate and the
Optionee's option shall terminate in accordance with this subsection 5.7. Upon
the expiration of the ninety day period following cessation of an Optionee's
relationship with the Company or any Affiliate, the Plan Administrator shall
have sole discretion in a particular circumstance to extend the exercise period
following such cessation beyond that specified above, subject to any extension
being pre-cleared by The Toronto Stock Exchange.
If an Optionee is terminated for cause, any option granted hereunder
shall automatically terminate as of the first discovery by the Company of any
reason for termination for cause, and such Optionee shall thereupon have no
right to purchase any shares pursuant to such option. "Termination for cause"
shall mean dismissal for dishonesty, conviction or confession of a crime
punishable by law (except minor violation), fraud, misconduct or disclosure of
confidential information. If an Optionee's relationship with the Company or any
<PAGE>
- 5 -
Affiliate is suspended pending an investigation of whether or not the Optionee
shall be terminated for cause, all the Optionee's rights under any option
granted hereunder likewise shall be suspended during the period of
investigation.
If an Optionee's relationship with the Company or any Affiliate
ceases because of a total disability, no further vesting shall occur after the
cessation, the Optionee's option shall not terminate until the end of the
24-month period following such cessation (unless by its terms it sooner
terminates and expires). As used in this Plan, the term "total disability"
refers to a mental or physical impairment of the Optionee which is expected to
last for a continuous period of 12 months or more and which causes the Optionee
to be unable, in the opinion of the Company and two independent physicians, to
perform his or her duties for the Company and to be engaged in any substantial
gainful activity. Total disability shall be deemed to have occurred on the first
day after the Company and the two independent physicians have furnished their
opinion of total disability to the Plan Administrator.
For purposes of this subsection 5.7 a transfer of relationship
between the Company and any Affiliate shall not be deemed to constitute a
cessation of relationship with the Company or any of its Affiliates. For
purposes of this subsection 5.7, with respect to incentive stock options,
employment shall be deemed to continue while the Optionee is on military leave,
sick leave or other bona fide leave of absence (as determined by the Plan
Administrator). The foregoing notwithstanding, employment shall not be deemed to
continue beyond the first 90 days of such leave, unless the Optionee's
reemployment rights are guaranteed by statute or by contract.
5.8 DEATH OF OPTIONEE
If an Optionee dies while he or she has a relationship with the
Company or any Affiliate or within the ninety day period (or 24-month period in
the case of totally disabled Optionees) following cessation of such
relationship, any option held by such Optionee to the extent that the Optionee
would have been entitled to exercise such option, no further vesting occurring
after the date of death, may be exercised within one year after his or her death
by their personal representative of his or her estate or by the person or
persons to whom the Optionee's rights under the option shall pass by will or by
the applicable laws of descent and distribution but in any event, options may
not be exercised any later than the expiry date of such option.
5.9 NO STATUS AS SHAREHOLDER
Neither the Optionee nor any party to whom the Optionee's rights and
privileges under the option may pass shall be, or have any of the rights or
privileges of, a shareholder of the Company with respect to any of the shares
issuable upon the exercise of any option granted under this Plan unless and
until such option has been exercised.
<PAGE>
- 6 -
5.10 CONTINUATION OF EMPLOYMENT
Nothing in this Plan or in any option granted pursuant to this Plan
shall confer upon any Optionee any right to continue in the employ of the
Company or of an Affiliate, or to interfere in any way with the right of the
Company or of any such Affiliate to terminate his or her employment or other
relationship with the Company at any time.
5.11 MODIFICATION AND AMENDMENT OF OPTION
Subject to the terms and conditions and within the limitations of
this Plan, the Plan Administrator may modify or amend outstanding options
granted under this Plan, subject to the prior approval of The Toronto Stock
Exchange. The modification or amendment of an outstanding option shall not,
without the consent of the Optionee, impair or diminish any of his or her rights
or any of the obligations of the Company under such option. Except as otherwise
provided in this Plan, no outstanding option shall be terminated without the
consent of the Optionee.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
The aggregate number and class of shares for which options may be
granted under this Plan, the number and class of shares covered by each
outstanding option and the exercise price per share thereof (but not the total
price), and each such option, shall all be proportionately adjusted for any
increase or decrease in the number of issued Common Shares of the Company
resulting from a split-up or consolidation of shares or any like capital
adjustment, or the payment of any share dividend out of the ordinary course.
6.1 EFFECT OF LIQUIDATION OR REORGANIZATION
(a) Cash, Shares or Other Property for Shares
Except as provided in subsection 6.1(b) upon a merger (other than a
merger of the Company in which the holders of Common Shares
immediately prior to the merger have the same proportionate
ownership of Common Shares in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or the
creation of a holding company) or liquidation of the Company, as a
result of which the shareholders of the Company, receive cash,
shares or other property in exchange for or in connection with their
Common Shares, any option granted hereunder shall terminate, but the
Optionee shall have the right immediately prior to any such merger,
consolidation, acquisition of property or shares, separation,
reorganization or liquidation to exercise such Optionee's option to
the extent the vesting requirements set forth in the option
agreement have been satisfied.
<PAGE>
- 7 -
(b) Conversion of Options on Shares for Share Exchange
If the shareholders of the Company receive shares in the capital of
another corporation ("Exchange Shares") in exchange for their Common
Shares in any transaction involving a merger (other than a merger of
the Company in which the holders of Common Shares immediately prior
to the merger have the same proportionate ownership of Common Shares
in the surviving corporation immediately after the merger),
consolidation, acquisition of property or shares, separation or
reorganization (other than a mere reincorporation or the creation of
a holding company), all options granted hereunder shall be converted
into options to purchase Exchange Shares unless the Company and the
corporation issuing the Exchange Shares, in their sole discretion,
determine that any or all such options granted hereunder shall not
be converted into options to purchase Exchange Shares but instead
shall terminate in accordance with the provisions of subsection
6.1(a). The amount and price of converted options shall be
determined by adjusting the amount and price of the options granted
hereunder in the same proportion as used for determining the number
of Exchange Shares the holders of the Common Shares receive in such
merger, consolidation, acquisition or property or stock, separation
or reorganization. Unless accelerated by the Board, the vesting
schedule set forth in the option agreement shall continue to apply
to the options granted for the Exchange Shares.
6.2 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by
any option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
6.3 DETERMINATION OF BOARD TO BE FINAL
All Section 6 adjustments shall be made by the Board, and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
7. SECURITIES REGULATION
Shares shall not be issued with respect to an option granted under
this Plan unless the exercise of such option and the issuance and delivery of
such shares pursuant thereto shall comply with all relevant provisions of law,
including without limitation the SECURITIES ACT (Ontario) and the SECURITIES ACT
(Alberta), any applicable provincial and state securities laws, the U.S.
SECURITIES ACT OF 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance, including the
availability of an exemption from registration for the issuance and sale of any
shares hereunder. Inability of the Company to obtain from any
<PAGE>
- 8 -
regulatory body having jurisdiction, the authority deemed by the Company's
counsel to be necessary for the lawful issuance and sale of any shares hereunder
or the unavailability of an exemption from registration for the issuance and
sale of any shares hereunder shall relieve the Company any liability in respect
of the nonissuance or sale of such shares as to which such requisite authority
shall not have been obtained.
As a condition to the exercise of an option, the Company may require
the Optionee to represent and warrant at the time of any such exercise that the
shares are being purchased only for investment and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company,
such a representation is required by any relevant provision of the
aforementioned laws. At the option of the Company, a stop-transfer order against
any shares may be placed on the official stock books and records of the Company,
and a legend indicating that the shares may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on share certificates in order to
assure exemption from registration. The Plan Administrator may also require such
other action or agreement by the Optionees as may from time to time be necessary
to comply with the federal and state securities laws. THIS PROVISION SHALL NOT
OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE OPTIONS OR SHARES
HEREUNDER.
Should any of shares of the Company of the same class as the shares
subject to options granted hereunder be listed on a securities exchange or other
securities trading facility, all shares issued hereunder if not previously
listed on such exchange or facility shall be authorized by that exchange or
facility for listing thereon prior to the issuance thereof.
8. AMENDMENT AND TERMINATION
8.1 BOARD ACTION
The Board may at any time suspend, amend or terminate this Plan,
subject to, in the case of amendments, to such amendments being
pre-cleared with The Toronto Stock Exchange provided that except as
set forth in Section 6, the approval of the holders of a majority of
the Company's outstanding voting shares, voting either in person or
by proxy at a duly held shareholders' meeting is necessary within 12
months before or after the adoption by the Board for any amendment
which will:
(a) increase the number of shares that may be issued under this Plan;
(b) change the designation of the participants or class of participants
eligible for participation in this Plan; or
(c) otherwise materially increase the benefits accruing to the
participants under this Plan.
<PAGE>
- 9 -
Any amendment made to this Plan which would constitute a
"modification" to incentive stock options outstanding on the date of such
amendment, shall not be applicable to such outstanding incentive stock options,
but shall have prospective effect only, unless the Optionee agrees otherwise.
8.2 AUTOMATIC TERMINATION
Unless sooner terminated by the Board, this Plan shall terminate ten
years from the earlier of:
(a) the date on which this Plan is adopted by the Board; or
(b) the date on which this Plan is approved by the shareholders of the
Company.
No option may be granted after such termination or during any suspension of this
Plan. The amendment or termination of this Plan shall not, without the consent
of the option holder, alter or impair any rights or obligations under any option
theretofore granted under this Plan.
9. EFFECTIVENESS OF THIS PLAN
This Plan shall become effective upon adoption by the Board so long
as it is approved by the holders of a majority of the Company's outstanding
voting shares at any time within 12 months before or after the adoption of this
Plan.
SEVEN SEAS PETROLEUM INC.
"ALBERT E. WHITEHEAD"
/s/ ALBERT E. WHITEHEAD
Albert E. Whitehead
EXHIBIT 10(n)
EMPLOYEE STOCK OPTION AGREEMENT
THIS AGREEMENT made the ____ day of ____________, 199___.
BETWEEN:
SEVEN SEAS PETROLEUM INC., of 800 - 885 West Georgia Street,
Vancouver, British Columbia, V6C 3H1
(hereinafter called the "Company")
OF THE FIRST PART
AND:
o
(hereinafter called the "Purchaser")
OF THE SECOND PART
WHEREAS:
A. The Purchaser is an Employee as defined herein;
B. The Company wishes the Purchaser to continue as an Employee and to continue
to receive the benefit of his services.
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of other good and
valuable consideration and the sum of One ($1.00) Dollar now paid by the
Purchaser to the Company (the receipt and sufficiency whereof is hereby
acknowledged), it is hereby agreed by and between the parties as follows:
1. In this Agreement, the following terms shall have the following meanings:
(a) "EXPIRY DATE" means o ;
(b) "NOTICE OF EXERCISE" means a notice in writing addressed to the
Company at its address first recited, which notice shall specify
therein the number of Optioned Shares in respect of which the Option
is being exercised;
(c) "OPTION" means the irrevocable right and option to purchase, from
time to time, all, or any part of the Optioned Shares granted to the
Purchaser by the Company pursuant to paragraph hereof;
<PAGE>
- 2 -
(d) "OPTIONED SHARES" means the common shares of the Company, subject to
the Option;
(e) "PLAN" means the stock option plan of the Company which was adopted
at its 1996 annual general meeting held on June 11, 1996; and
(f) "SHARES" means the common shares in the capital stock of the
Company.
2. The Company hereby grants to the Purchaser as an incentive and in
consideration of his services and not in lieu of salary or any other
compensation, subject to the Plan which is incorporated by reference into this
Agreement, and the terms and conditions hereinafter set forth, the Option to
purchase a total of 3,000 Optioned Shares at the price of U.S.$18.75 per
Optioned Share, exercisable by the Purchaser in whole or in part at any time
before 5:00 o'clock p.m., Vancouver time, on the Expiry Date.
3. The Option shall, at 5:00 o'clock p.m., Vancouver time, on the Expiry Date,
forthwith expire and terminate and be of no further force or effect whatsoever.
4. In the event of the death of the Purchaser on or prior to the Expiry Date,
the Option, or such part thereof as remains unexercised, may be exercised by the
personal representative of the Purchaser at any time prior to 5:00 o'clock p.m.,
Vancouver time, on the first anniversary of the date of death of the Purchaser
or prior to 5:00 o'clock p.m., Vancouver time, on the Expiry Date, whichever is
the earlier.
5. The Purchaser represents and warrants that he is an Employee. In the event
the Purchaser ceases to be an Employee prior to the Expiry Date, the Option
shall, at 5:00 o'clock p.m., Vancouver time, on the ninetieth day after the date
upon which the Purchaser ceases to be an Employee, terminate and be of no
further force or effect whatsoever.
6. Subject to the provisions hereof, the Option shall be exercisable in whole or
in part (at any time and from time to time as aforesaid) by the Purchaser or his
personal representative giving a Notice of Exercise together with payment (by
cash or by certified cheque, made payable to the Company) in full of the
purchase price for the number of Optioned Shares specified in the Notice of
Exercise.
7. Upon the exercise of all or any part of the Option, the Company shall
forthwith cause the registrar and transfer agent of the Company to deliver to
the Purchaser or his personal representative within ten (10) days following
receipt by the Company of the Notice of Exercise a certificate in the name of
the Purchaser or his personal representative representing, in aggregate, the
number of Optioned Shares specified in the Notice of Exercise and in respect of
which the Company has received payment.
8. Nothing herein contained shall obligate the Purchaser to purchase any
Optioned Shares except those Optioned Shares in respect of which the Purchaser
shall have exercised his Option in the manner hereinbefore provided.
<PAGE>
- 3 -
9. In the event of any subdivision, redivision or change of the Shares of the
Company at any time prior to the Expiry Date into a greater number of Shares,
the Company shall deliver at the time of any exercise thereafter of the Option
such additional number of Shares as would have resulted from such subdivision,
redivision or change if such exercise of the Option had been made prior to the
date of such subdivision, redivision or change.
10. In the event of any consolidation or change of the Shares of the Company at
any time prior to the Expiry Date into a lesser number of Shares, the number of
Shares deliverable by the Company on any exercise thereafter of the Option shall
be reduced to such number of Shares as would have resulted from such
consolidation or change if such exercise of the Option had been made prior to
the date of such consolidation or change.
11. The Purchaser shall have no rights whatsoever as a shareholder in respect of
any of the Optioned Shares (including any right to receive dividends or other
distribution therefrom or thereon) except in respect of which the Option has
been properly exercised in accordance with paragraph 6 hereof.
12. Time shall be of the essence of this Agreement.
13. This Agreement shall enure to the benefit of and be binding upon the
Company, its successors and assigns, and the Purchaser and his personal
representative to the extent provided in paragraph 4 hereof.
14. Subject to paragraph 4, this Agreement shall not be transferable or
assignable by the Purchaser or his personal representative and the Option may be
exercised only by the Purchaser or his personal representative.
15. If at any time during the continuance of this Agreement, the parties hereto
shall deem it necessary or expedient to make any alteration or addition to this
Agreement, they may do so by means of a written agreement between them which
shall be supplemental hereto and form part hereof.
16. In the event of any conflict between the terms and conditions contained
herein and the Plan, the terms of the Plan still govern.
17. Wherever the plural or masculine are used throughout this Agreement, the
same shall be construed as meaning singular or feminine or neuter or the body
politic or corporate where the context of the parties thereto require.
18. This Agreement may be executed in several parts in the same form and such
parts as so executed shall together constitute one original agreement, and such
parts, if more than one, shall be read together and construed as if all the
signing parties hereto had executed one copy of this Agreement.
<PAGE>
- 4 -
IN WITNESS WHEREOF the Company has hereunto caused its corporate seal to be
affixed in the presence of its duly authorized officers in that behalf and the
Purchaser has hereunto set his hand and seal as of the day and year first above
written.
SEVEN SEAS PETROLEUM INC.
Per: _________________________________
Authorized Signatory
SIGNED, SEALED AND DELIVERED by )
O in the presence of: )
)
)
- ------------------------------------ )
Name )
- ------------------------------------ ) --------------------------------
Address ) o
- ------------------------------------ )
)
- ------------------------------------ )
Occupation )
EXHIBIT 10(O)
DIRECTOR STOCK OPTION AGREEMENT
THIS AGREEMENT made the ______ day of ____________, 199__.
BETWEEN:
SEVEN SEAS PETROLEUM INC, of 800 - 885 West Georgia Street,
Vancouver, British Columbia, V6C 3H1
(hereinafter called the "Company")
OF THE FIRST PART
AND:
o
(hereinafter called the "Purchaser")
OF THE SECOND PART
WHEREAS:
A. The Purchaser is a member of the Board of Directors of the Company;
B. The Company wishes the Purchaser to continue as a director and to continue to
receive the benefit of his services.
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of other good and
valuable consideration and the sum of One ($1.00) Dollar now paid by the
Purchaser to the Company (the receipt and sufficiency whereof is hereby
acknowledged), it is hereby agreed by and between the parties as follows:
1. In this Agreement, the following terms shall have the following meanings:
(a) "EXPIRY DATE" means o ;
(b) "NOTICE OF EXERCISE" means a notice in writing addressed to the
Company at its address first recited, which notice shall specify
therein the number of Optioned Shares in respect of which the Option
is being exercised;
(c) "OPTION" means the irrevocable right and option to purchase, from
time to time, all, or any part of the Optioned Shares granted to the
Purchaser by the Company pursuant to paragraph hereof;
<PAGE>
- 2 -
(d) "OPTIONED SHARES" means the common shares of the Company, subject to
the Option;
(e) "PLAN" means the stock option plan of the Company which was adopted
at its 1996 annual general meeting held on June 11, 1996; and
(f) "SHARES" means the common shares in the capital stock of the
Company.
2. The Company hereby grants to the Purchaser as an incentive and in
consideration of his services and not in lieu of salary or any other
compensation, subject to the Plan which is incorporated by reference into this
Agreement, and the terms and conditions hereinafter set forth, the Option to
purchase a total of 50,000 Optioned Shares at the price of U.S.$18.75 per
Optioned Share, exercisable by the Purchaser in whole or in part at any time
before 5:00 o'clock p.m., Vancouver time, on the Expiry Date.
3. The Option shall, at 5:00 o'clock p.m., Vancouver time, on the Expiry Date,
forthwith expire and terminate and be of no further force or effect whatsoever.
4. In the event of the death of the Purchaser on or prior to the Expiry Date,
the Option, or such part thereof as remains unexercised, may be exercised by the
personal representative of the Purchaser at any time prior to 5:00 o'clock p.m.,
Vancouver time, on the first anniversary of the date of death of the Purchaser
or prior to 5:00 o'clock p.m., Vancouver time, on the Expiry Date, whichever is
the earlier.
5. In the event the Purchaser ceases to be a director of the Company prior to
the Expiry Date, the Option shall, at 5:00 o'clock p.m., Vancouver time, on the
ninetieth day after the date upon which the Purchaser ceases to be a director of
the Company, terminate and be of no further force or effect whatsoever.
6. Subject to the provisions hereof, the Option shall be exercisable in whole or
in part (at any time and from time to time as aforesaid) by the Purchaser or his
personal representative giving a Notice of Exercise together with payment (by
cash or by certified cheque, made payable to the Company) in full of the
purchase price for the number of Optioned Shares specified in the Notice of
Exercise.
7. Upon the exercise of all or any part of the Option, the Company shall
forthwith cause the registrar and transfer agent of the Company to deliver to
the Purchaser or his personal representative within ten (10) days following
receipt by the Company of the Notice of Exercise a certificate in the name of
the Purchaser or his personal representative representing, in aggregate, the
number of Optioned Shares specified in the Notice of Exercise and in respect of
which the Company has received payment.
8. Nothing herein contained shall obligate the Purchaser to purchase any
Optioned Shares except those Optioned Shares in respect of which the Purchaser
shall have exercised his Option in the manner hereinbefore provided.
<PAGE>
- 3 -
9. In the event of any subdivision, redivision or change of the Shares of the
Company at any time prior to the Expiry Date into a greater number of Shares,
the Company shall deliver at the time of any exercise thereafter of the option
such additional number of Shares as would have resulted from such subdivision,
redivision or change if such exercise of the Option had been made prior to the
date of such subdivision, redivision or change.
10. In the event of any consolidation or change of the Shares of the Company at
any time prior to the Expiry Date into a lesser number of Shares, the number of
Shares deliverable by the Company on any exercise thereafter of the Option shall
be reduced to such number of Shares as would have resulted from such
consolidation or change if such exercise of the Option had been made prior to
the date of such consolidation or change.
11. The Purchaser shall have no rights whatsoever as a shareholder in respect of
any of the Optioned Shares (including any right to receive dividends or other
distribution therefrom or thereon) except in respect of which the Option has
been properly exercised in accordance with paragraph hereof.
12. Time shall be of the essence of this Agreement.
13. This Agreement shall enure to the benefit of and be binding upon the
Company, its successors and assigns, and the Purchaser and his personal
representative to the extent provided in paragraph hereof.
14. Subject to paragraph , this Agreement shall not be transferable or
assignable by the Purchaser or his personal representative and the Option may be
exercised only by the Purchaser or his personal representative.
15. If at any time during the continuance of this Agreement, the parties hereto
shall deem it necessary or expedient to make any alteration or addition to this
Agreement, they may do so by means of a written agreement between them which
shall be supplemental hereto and form part hereof.
16. In the event of any conflict between the terms and conditions contained
herein and the Plan, the terms of the Plan shall govern.
17. Wherever the plural or masculine are used throughout this Agreement, the
same shall be construed as meaning singular or feminine or neuter or the body
politic or corporate where the context of the parties thereto require.
18. This Agreement may be executed in several parts in the same form and such
parts as so executed shall together constitute one original agreement, and such
parts, if more than one, shall be read together and construed as if all the
signing parties hereto had executed one copy of this Agreement.
<PAGE>
- 4 -
IN WITNESS WHEREOF the Company have executed this agreement as of the day and
year first above written.
SEVEN SEAS PETROLEUM INC.
Per: _________________________________
Authorized Signatory
SIGNED, SEALED AND DELIVERED by )
O in the presence of: )
)
)
- ------------------------------------ )
Name )
- ------------------------------------ ) -------------------------------
Address ) o
- ------------------------------------ )
)
- ------------------------------------ )
Occupation )
Exhibit 10(p)
FORM OF EMPLOYMENT
April 28, 1997
Name and Address
of Executive
Dear Mr. _____________:
RE: EMPLOYMENT CONTRACT
The following are the terms and conditions upon which Seven Seas Petroleum Inc.
(the "Company") is prepared to continue to employ you and upon which you have
agreed to continue your employment with the Company. By signing this letter
agreement you accept the following terms and conditions:
1. WORK DUTIES
1.1. You will carry out the duties and responsibilities of the
position of President of the Company.
2. TERM OF EMPLOYMENT
The Company will employ you for a three year period, starting April 28,
1997, and ending April 28, 2000 provided that this Agreement shall be
automatically renewed for successive terms on a year to year basis unless
notice of non-renewal is effected by either party with written notice of
non-renewal at least 90 days prior to the expiry of the then applicable
term of this Agreement, in which case this Agreement will expire on the
last day of such term.
3. SALARY AND BENEFITS
3.1 Subject to the other terms and conditions of this agreement, the Company
agrees to pay to you a base salary of U.S.$ _______ per annum, subject to
such annual increases effective January 1st during each year of this
agreement as the board of directors shall determine.
3.2 In addition to your base salary, the Company may, entirely at the
discretion of the Company's compensation committee, award you a bonus. At
the end of each calendar year during the term of this agreement, the
compensation committee will assess your performance during the previous
year and determine the amount of the discretionary bonus, if any, which
will be awarded to you. Such determination and award to be made on or
before January 31st for the preceding calendar year.
<PAGE>
3.3 You shall also be eligible for annual incentive compensation in the form
of stock options in the Company, in accordance with the policy formulated
by the Company from time to time. Your eligibility for stock options shall
be determined by the Company's compensation committee.
4. VACATION.
4.1 You will be entitled to paid vacation of 4 weeks per
calendar year provided that no more than 2 weeks may be
taken consecutively.
4.2 Your vacation will not be cumulative from year to year, nor will you be
paid in lieu of vacation not taken in a year.
5. HEALTH, RETIREMENT AND WELFARE BENEFITS
(a) The Company will pay the premiums for existing medical, and other
benefit plans as altered, amended, introduced or discontinued from
time to time by the Company or its carrier(s). Policy documents
govern benefit entitlement. The Company is currently self-insured
for dental expenses. The Company shall continue to provide this
benefit or obtain insurance and pay the premiums for a benefit equal
to that currently provided.
(b) The Company currently has a 401(k) Plan in force, funded at the
election of each employee and the Company will continue to make this
401(k) Plan available to you on the same terms as are currently in
effect.
6. EXPENSES
In accordance with policies formulated by the Company from time to time,
you will be reimbursed for all reasonable travelling and other expenses
actually and properly incurred by you in connection with the performance
of your duties and functions. For all such expenses, you will be required
to keep proper accounts and to furnish statements and vouchers to the
Company within 30 days after the date the expenses are incurred.
7. SERVICE TO THE COMPANY
7.1 During the term of your employment by the Company, unless otherwise
authorized in writing by the Company, you will well and faithfully serve
the Company, promote its interests and devote the whole of your working
time, attention and energy to the business and the affairs of the Company.
7.2 During the term of your employment by the Company, you will
devote substantially all of your time and effort to
2
<PAGE>
fulfilling your duties as an officer and employee of the Company.
8. CONFIDENTIALITY
All business and trade secrets and confidential information and knowledge
which you may acquire during the continuance of your employment with the
Company related to the business and the affairs of the Company
(collectively the "Confidential Information"), will for all purposes and
at all times, both during the continuance of your employment and at all
times thereafter, be held by you in trust for the exclusive benefit of the
Company. Neither during the term of your employment nor at any time
thereafter shall you disclose to any corporation, firm or person other
than the Company, any of the Confidential Information of the Company, nor
will you use for any purposes other than those expressly authorized by the
Company any such Confidential Information. This paragraph does not apply
to any information which would be found in the public domain.
9. TERMINATION
(a) In the event of cause, the Company may terminate your employment at
any time without notice. For the purposes of this Agreement, cause
includes but is not limited to, your death or serious incapacity,
your breach of any term of this Agreement, or any reason deemed just
cause pursuant to the common law of the Province of British
Columbia.
(b) In the absence of cause, the following termination and resignation
provisions apply to your employment with the Company:
(i) you may resign on giving the Company 3 months'
prior written notice of the effective date of your
resignation; and
(ii) on receipt of your 3 months' notice of resignation, the
Company may elect to pay you 3 months' base salary in lieu of
notice, in which case your employment will terminate
immediately upon receipt of such payment.
10. RIGHTS OF TERMINATION
In the event of the termination of your employment with the Company
whether for cause, expiration of this Agreement or otherwise, you shall
have the right to purchase from the Company, at the Company's
undepreciated cost as shown on the financial books of the Company, all or
any of the furniture
3
<PAGE>
or artwork in your office, such right to be exercisable within 30 days of
the termination of your employment with the Company by delivery to the
Company of a notice indicating the items to be purchased and accompanied
by a certified cheque, payable to the Company, representing the purchase
price as provided for herein for such items.
11. LAW OF CONTRACT
Any dispute relating to the terms of this employment agreement will be
resolved pursuant to the laws of the Province of British Columbia.
If you are prepared to accept employment with the Company on the foregoing
terms, kindly confirm your acceptance and agreement by signing the enclosed
duplicate copy of this letter where indicated and return one copy to us.
We ask you to fully consider all of the above terms and to obtain any advice you
feel is necessary, including legal advice, before you execute this agreement. We
will not accept delivery of this agreement from you today to ensure that you
have the opportunity to consider these terms and seek advice. If you are not
agreeable to the terms as set out herein, kindly advise us within one week.
Yours very truly,
SEVEN SEAS PETROLEUM INC.
By:_______________________
Authorized Signatory
ACCEPTED AND AGREED TO THIS 28th DAY OF APRIL, 1997. I HAVE READ AND UNDERSTAND
THE TERMS AND CONDITIONS OF EMPLOYMENT SET OUT IN THIS LETTER AGREEMENT. I HAVE
BEEN GIVEN FULL OPPORTUNITY TO CONSULT LEGAL ADVISORS OF MY CHOOSING.
______________________________
Name of Executive
4
Exhibit 10(q)
FORM OF EXECUTIVE AGREEMENT
THIS AGREEMENT made the 28TH day of April, 1997.
BETWEEN:
SEVEN SEAS PETROLEUM INC., a corporation continued under the laws of
the Yukon and having an address at 1990 Post Oak Boulevard, Suite
960, Houston, Texas
77056
(herein called the "Company")
AND: OF THE FIRST PART
Name and Address of Executive
(herein called the "Employee")
OF THE SECOND PART
WITNESSES THAT WHEREAS:
A. The Employee is presently employed by the Company under
an Employment Contract;
B. The Company and the Employee are desirous of having certain rights
and benefits in the event that the Employee's employment with the Company is
terminated in a manner set forth hereinafter;
C. The Company wishes to retain the benefit of the Employee's services
and to ensure that the Employee is able to carry out his responsibilities with
the Company free from any distractions associated with any potential change in
the ownership or control of the Company or its assets;
NOW THEREFORE in consideration of the premises and the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged by each of the
Employee and the Company, it is agreed by and between the Employee and the
Company as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
<PAGE>
In this Agreement, the following words and terms with the initial
letter or letters thereof capitalized shall have the meanings set forth below:
(a) "Agreement" means this agreement as amended from time
to time;
(b) "Change in Control" means a transaction or series of
transactions whereby directly or indirectly:
(i) any person or combination of persons acquires a sufficient
number of securities of the Company to affect materially the
control of the Company, whether by way of acquisition of
previously issued securities or as a result of issuances from
treasury, or a combination thereof, and for the purposes of
this Agreement, a person or combination of persons holding
shares or other securities in excess of the number which,
directly or following the conversion or exercise thereof,
would entitle the holders thereof to cast 20% or more of the
votes attached to all shares of the Company which may be cast
to elect directors of the Company, shall be deemed to be in a
position to affect materially the control of the Company;
(ii) the Company shall consolidate or merge with or into,
amalgamate with, or enter into a statutory arrangement with
any other person, or any other person shall consolidate or
merge with or into, or amalgamate with or enter into a
statutory arrangement with the Company, and, in connection
therewith, all or part of the outstanding shares of the
Company which have voting rights attached thereto shall be
changed in any way, reclassified or converted into, exchanged
or otherwise acquired for shares or other securities of the
Company or any other person or for cash or any other property
(other than a transaction which has been approved by the
directors of the Company, a majority of whom are directors of
the Company holding office at the date of this Agreement);
(iii) there shall be a change in a majority of the board of
directors of the Company whether as a result of a shareholders
meeting or as a result of appointments made by the remaining
members of the board of directors of the Company in filling
vacancies caused by the resignation of the majority in number
of the board of directors of the Company;
2
<PAGE>
(iv) a majority of the board of directors shall have resigned or
otherwise been removed from office, whether or not the
vacancies created by such resignations or removals are filled;
or
(v) the Company shall sell or otherwise transfer, including by way
of the grant of a leasehold interest (or one or more
subsidiaries of the Company shall sell or otherwise transfer,
including by way of the grant of a leasehold interest)
property or assets (a) aggregating more than 50% of the
consolidated assets (measured by either book value or fair
market value) of the Company and its subsidiaries as at the
end of the most recently completed financial year of the
Company or (B) which during the most recently completed
financial year of the Company generated, or during the then
current financial year of the Company are expected to
generate, more than 50% of the consolidated operating income
or cash flow of the Company and its subsidiaries, to any other
person or persons (other than the Company or one or more
subsidiaries of the Company),
other than a transaction or series of transactions which involves a sale
of securities or assets of the Company with which the Employee is involved
as a purchaser in any manner, whether directly or indirectly, and whether
by way of participation in a corporation or partnership that is a
purchaser or by provision of debt, equity or purchase- leaseback
financing;
(c) "Expiry Date" means the date which is 12 months after a Change in
Control occurs;
(d) "Triggering Event" means any one of the following events which
occurs following a Change of Control without the express agreement
in writing of the Employee:
(i) an adverse change in any of the duties, powers, rights,
discretion or compensation of the Employee as they exist
immediately prior to the Change of Control; or
(ii) a change in the person or body to whom the Employee reported
immediately prior to the Change of Control provided that this
shall not include a change resulting from a promotion in the
normal course of business.
1.2 PLURAL AND GENDER
3
<PAGE>
Whenever used in this Agreement, words importing the singular number
only shall include the plural and vice versa and words importing the masculine
gender shall include the feminine gender.
1.3 BINDING EFFECT
This Agreement shall be binding on the successors and assigns of the
Company and shall enure to the benefit of the successors and assigns of the
Employee.
1.4 MONETARY AMOUNTS
All references to monetary amounts in this Agreement are to lawful
money in the United States of America.
2. RIGHTS OF EMPLOYEE
2.1 RIGHT UPON OCCURRENCE OF TRIGGERING EVENT
(a) RIGHT: If a Change in Control occurs and if, in respect of the
Employee, a Triggering Event occurs on or before the Expiry Date,
the Employee shall be entitled to elect to terminate his employment
with the Company and to receive a payment from the Company in the
amount equal to:
(i) the remaining annual base salary payable to the Employee for
the term of the Employment Contract; and
(ii) the amount equal to the most recent annual bonus paid to the
Employee by the Company, for each year, or part of a year
remaining on the Employment Contract, provided that such
payment shall only be made in respect of any year that the
Company otherwise declares and pays bonuses to some or all of
its employees.
(b) CONDITION: The right of the Employee provided for in Section
2.1(a) hereof is conditional upon the Employee electing to
exercise such right by notice given to the Company within six
months after the Triggering Event.
2.2 TERMINATION RIGHT
If a Change in Control occurs and the Employee has not received
notice of the termination of his employment with the Company or a Triggering
Event has not otherwise occurred, then, during the six month period after the
Change of Control, the Employee may, notwithstanding the absence of a Triggering
Event,
4
<PAGE>
give notice to the Company of the intention of the Employee to terminate his
employment with the Company. If such notice is given by the Employee, the
termination of his employment will become effective on a date indicated in the
notice, but in any event not later than 120 days following the Employee giving
notice to its intention to terminate his employment with the Company and in such
case the Employee shall be entitled to a payment from the Company in the amount
calculated in accordance with Section 2.1(a) hereof.
2.3 RIGHT UPON TERMINATION
The Employee shall be entitled to a payment from the Company in the
amount calculated in accordance with Section 2.1(a) hereof if his employment
with the Company is terminated by the Company within 12 months after a Change of
Control other than for cause as defined in the Employment Contract. The Company
shall not terminate the employment of the Employee for any reason unless such
dismissal is specifically approved by the directors of the Company.
2.4 STOCK OPTIONS
In the event that the Employee is entitled to a payment pursuant to
Section 2.1, 2.2 or 2.3 hereof, the term during which any option to purchase
common shares of the Company granted to the Employee by the Company or any
subsidiary of the Company may be exercised shall be extended to the earlier of
the expiry date of the option and 18 months after the date of the giving of
notice by the Employee pursuant to Section 2.1 or 2.2 hereof or the termination
of his employment by the Company as referred to in Section 2.3 hereof, as the
case may be. In addition, in such event, any provisions of such an option which
restricts the number of common shares of the Company which may be purchased
before a particular date shall be waived. Subject to required regulatory
approvals, in the event that the exercise price of any option granted at the
same time as the option was granted to the Employee is repriced downwards, the
exercise price of the option held by the Employee shall be similarly repriced.
The terms of any option agreement evidencing such option shall be deemed to be
amended to reflect the provisions of this Section 2.4.
2.5 HEALTH BENEFITS
If the Employee is entitled to a payment pursuant to Section 2.1,
2.2 or 2.3 hereof, the Company shall also continue to pay the Employee's health
insurance premiums for a period which is the lesser of one year from termination
or until the Employee has otherwise secured comparable health insurance.
3. PAYMENTS AND REVIEW
5
<PAGE>
3.1 PAYMENTS UNDER THIS AGREEMENT
Subject to any arrangements made pursuant to Section 4.2 hereof, any
payment to be made by the Company pursuant to the terms of this Agreement shall
be paid by the Company in cash in a lump sum within five business days of the
giving of notice by the Employee pursuant to Section 2.1 or 2.2 hereof or within
five business days of the termination of employment by the Company as referred
to in Section 2.3 hereof, as the case may be. Any such payment shall be
calculated, in the case of Section 2.1 or 2.2 hereof, at the date of giving
notice pursuant to Section 2.1 or 2.2 hereof, as the case may be, and, in the
case of Section 2.3 hereof, at the date of termination of the Employee's
employment.
3.2 AGREEMENT SUPPLEMENTAL
This Agreement shall be supplemental to the Employment Contract that
exists between the Company and the Employee, except insofar as the Employment
Contract relates to the termination of the Employee's employment after a Change
of Control, in which case this Agreement shall supersede the termination
provisions of the Employment Contract.
4. MISCELLANEOUS
4.1 ASSIGNMENT AND ASSUMPTION
This Agreement shall be assigned by the Company to any successor
corporation of the Company and shall be binding upon such successor corporation.
For the purposes of this Section 4.1, "successor corporation" shall include any
person referred to in paragraphs 1.1(b)(ii) or (iii) hereof. The Company shall
use its best efforts to ensure that the successor corporation shall continue the
provisions of this Agreement as if it were the original party in place of the
Company; provided however that the Company shall not thereby be relieved of any
obligation to the Employee pursuant to this Agreement. In the event of a
transactions or series of transactions as described in paragraphs 1.1(b)(ii) or
(iii) hereof, appropriate arrangements shall be made by the Company for the
successor corporation to honour this Agreement as if the Employee had exercised
his maximum rights hereunder as of the effective date of such transaction.
4.2 FURTHER ASSURANCES
Each of the Company and the Employee agrees to make, do and execute
or cause to be made, done and executed all such further and other things, acts,
deeds, documents, assignments and assurances as may be necessary or reasonably
required to carry out the intent and purpose of this Agreement fully and
effectually. Without limiting the generality of the foregoing,
6
<PAGE>
the Company shall take all reasonable steps in order to structure the payment or
payments provided for in this Agreement in the manner most advantageous to the
Employee with respect to the provisions of the INTERNAL REVENUE CODE (U.S.).
4.3 NOTICE
Any notice required or permitted to be given under this Agreement
will be in writing and may be given by delivering, sending by telegram, sending
by telecopier, or sending by prepaid registered mail posted in Canada, the
notice to the following address or telecopier number:
If to the Company:
1990 Post Oak Boulevard, Suite 960
Houston, Texas 77056
Telecopier No.: 1-713-621-9770
If to the Employee:
As set out in the Employment Agreement or as thereafter advised by
Employee.
(or to such other address or telecopier number as any party may specify by
notice in writing to another party).
Any notice delivered or sent by telegram or sent by telecopier on a
business day will be deemed conclusively to have been effectively given on the
day the notice was delivered, or the telegram was filed with the telegraph
company, or the telecopy transmission was sent successfully to the telecopier
number set out above, as the case may be.
Any notice sent by prepaid registered mail will be deemed
conclusively to have been effectively given on the third business day after
posting but if at the time of posting or between the time of posting and the
third business day thereafter there is a strike, lockout, or other labour
disturbance affecting postal service, then the notice will not be effectively
given until actually delivered.
4.4 COSTS
The Company shall pay all costs and expenses, including legal fees,
incurred by the Employee in connection with the entering into and the
interpretation of the provisions of this Agreement.
4.5 GOVERNING LAW
7
<PAGE>
This Agreement shall be governed by and be construed in accordance
with the laws of the State of Texas.
4.6 SEVERABILITY
Any provision of this Agreement which contravenes any applicable law
or which is found to be unenforceable shall, to the extent of such contravention
or unenforceablity, be deemed severable and shall not cause this Agreement to be
held invalid or unenforceable or affect any other provision or provisions of
this Agreement.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
as of the date first above written.
SEVEN SEAS PETROLEUM INC.
By:___________________________________c/s
___________________________________
Name of Executive
8
EXHIBIT 22
Subsidiaries of Seven Seas Petroleum Inc.
JURISIDICTION
NAME OF INCORPORATION
Cimarrona Limited Liability Company Oklahoma
Esmeralda Limited Liability Company Oklahoma
GHK Company Colombia Oklahoma
Petrolinson, S.A. Panama
Seven Seas Petroleum Argentina Inc. Cayman Islands
Seven Seas Petroleum Australia Inc. Cayman Islands
Seven Seas Resources Australia Inc. British Columbia
Seven Seas Petroleum Colombia Inc. Cayman Islands
Seven Seas Petroleum Holdings, Inc. Cayman Islands
Seven Seas Petroleum Mediterranean Inc. Cayman Islands
Seven Seas Petroleum PNG Inc. Cayman Islands
Seven Seas Petroleum Turkey Inc. Cayman Islands
Seven Seas Petroleum Turkey Inc. British Columbia
Seven Seas Petroleum USA Inc. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 10,620,477 3,365,603
<SECURITIES> 43,795 43,795
<RECEIVABLES> 1,241,430 43,642
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,905,702 3,453,522
<PP&E> 159,713,568 675,515
<DEPRECIATION> 111,334 37,671
<TOTAL-ASSETS> 171,533,207 4,170,437
<CURRENT-LIABILITIES> 2,805,665 120,305
<BONDS> 0 0
0 0
45,652,120 0
<COMMON> 6,781,384 6,170,117
<OTHER-SE> 119,548,227 0
<TOTAL-LIABILITY-AND-EQUITY> 171,533,207 4,170,437
<SALES> 233,682 0
<TOTAL-REVENUES> 575,281 152,383
<CGS> 0 0
<TOTAL-COSTS> 2,831,815 2,272,368
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,256,534) (2,119,985)
<INCOME-TAX> 2,338 0
<INCOME-CONTINUING> (2,194,637) (2,119,985)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,194,637) (2,119,985)
<EPS-PRIMARY> (.17) (.23)
<EPS-DILUTED> 0 0
</TABLE>
