Petroleum Legislation

A formal Treaty on the joint development of resources in the JDZ has been developed and has been signed and ratified by the two countries. The Treaty was signed by Heads of State and subsequently ratified by respective legislatures in February 2001.

For petroleum operations, the regime operable in the Joint Development Zone is a mixed licensing and PSC regime. There are two key legislative documents governing industry operations in the Joint Development Zone:

• The Petroleum Regulations

• The Tax Regulations

In addition to the aforementioned legislation, the Joint Development Authority has issued the following:

• Investors Memorandum 1 October 2003

• Guidelines for Prospective Investors

• Model PSC

The Petroleum Regulations 2003 cover relevant issues such as fees, terms and conditions of operations, technical and safety standards, the requirements in respect of environmental and health protection and taxation issues.

Some of the general provisions of the Petroleum Regulations 2003 are as follows:

• No Petroleum activity may be undertaken in the JDZ except pursuant to, and in accordance,with the Petroleum Regulations.

• All acreage in the JDZ is held on behalf of the State Parties by the Joint Development Authority.

The following types of licenses, leases and contracts are available in the JDZ:

• Exploration Licenses (EL)

• Oil Prospecting License (OPL)

• Oil Mining Lease (OML)

• Production Sharing Contract (PSC)

Production Sharing Contracts, effectively transferring the rights and obligations of the OPLs and OMLs, will be signed with contractors, and will be negotiated with successful applicants in the 2003 JDZ Licensing Round.

Participation in petroleum exploration, development and production operations in the JDZ is open to any company registered or incorporated in either or both of the States Parties. However, companies commencing activities for the first time in the region may elect to become registered or incorporated upon award of acreage.

The contractor shall have:

i) The exclusive right to search for and develop the oil and gas resources in the contract area.

ii) The right to carry out exploration and development activity either directly or through an agent.

KEY PSC PARAMETERS

Key parameters of the Model Production Sharing Contract for the JDZ are:

Signature Bonus - The Signature Bonus shall be payable in one tranche and shall be non cost recoverable and non tax deductable. The minimum Signature Bonus is $30 million.

Production Bonus - The Production Bonus shall be paid wihtin one month upon reaching the stated production threshold.

Minimum Work Obligation - The Work Programme Commitment should be phased into three exploration sub periods (of 4 years, 2 years and 2 years). The Minimum Work Obligation is two wells (or the equivalent of one well worth of 3D seismic data and one well).

Ring Fencing - Ring Fencing of individual developments for cost recovery and profit share and on a PSC basis for taxation.

Cost Recovery - There shall be a Cost Recovery Ceiling of 80%.

Profit Sharing - Profit Share will be based on an R factor that tracks project profitabllity.

Operatorship - When granting a PSC, the JDA shall appoint or approve an Operator. Any change of Operator must be approved by the Authority. An Operator must be a party to the PSC having an interest in the block and would cease to be the operator if its interest terminates or expires.

FISCAL REGIME

The principal components of the fiscal regime operative in the JDZ are as follows:

Tax Rate - A uniform tax rate of 50% shall be charged throughout the JDZ, and is payable to the Joint Development Authority.

Royalty Rate - A sliding scale that varies with the daily rate of production, with a reduction in royalty over the life of a project.

Profit Sharing - based on an R Factor that reflects project profitability.

Area Rentals - Area during exploration $200 per sq km, during production $500 per sq km (for first 10 years, thereafter $200 per sq km)