Association Contract for Cambulos - Empresa Colombiana de Petroleos (Ecopetrol) and Harken de Colombia Ltd.
ASSOCIATION CONTRACT
ASSOCIATE : HARKEN DE COLOMBIA, LTD.----------
SECTOR : CAMBULOS-------------------------
EFFECTIVE DATE : 17 November 1995 ---------------
The contracting parties, namely: on the one hand, Empresa Colombiana de
Petroleos, hereinafter called ECOPETROL, a State owned industrial and
commercial company authorized by Law 165 of 1948, currently governed by its
articles, the reform of which was approved by Decree 1209 of June 15, 1994,
with principal domicile in Santa Fe de Bogota, represented by LUIS BERNARDO
FLOREZ ENCISO, of legal age, identified by citizenship card No. 19.092.255,
issued in Santa Fe de Bogota, domiciled in Santa Fe de Bogota, who states: 1.
That in his capacity as President of ECOPETROL he acts on behalf of this
Company, and 2. That he has been authorized to enter into this Contract by the
Board of Directors of ECOPETROL, as recorded in Minutes No. 2112 of September
12, 1995, and, for the other Party, HARKEN DE COLOMBIA, LTD., a company
organized under the laws of the British Dominion of the Cayman Islands,
hereinafter called THE ASSOCIATE, with a branch established in Colombia, and
with principal domicile in Santa Fe de Bogota, by virtue of Public Document No.
406 of February 19, 1993, authorized in the Eleventh Notarial Circuit of Santa
Fe de Bogota, represented by MIKEL D. FAULKNER, of legal age, a North American
citizen, identified by passport no. HG930148, who states: 1. That he is the
President of the Board of Directors of the company HARKEN DE COLOMBIA, LTD.,
and 2. That he acts in exercise of the power conferred on him by Mr. GONZALO
VELASCO in his capacity as Legal Representative of the Colombian branch, as
evidenced in the attached documents. Upon the foregoing conditions, ECOPETROL
and THE ASSOCIATE hereby declare that they have entered into the Contract
contained in the following clauses:
CHAPTER I - GENERAL PROVISIONS
CLAUSE 1 - PURPOSE OF THIS CONTRACT
1.1. The purpose of this Contract is the exploration of the Contracted
Area and the Exploitation of the Petroleum belonging to the Nation which may be
found in said area, described in Clause 3.
1.2. Pursuant to article 1 of Decree No. 2310 of 1974 the exploration
and exploitation of hydrocarbons belonging to the Nation is incumbent upon
ECOPETROL, which may carry out said activities directly or through contracts
with private parties. Based on the foregoing provision ECOPETROL has agreed
with THE ASSOCIATE to explore the Contracted Area and to exploit the Petroleum
which may be found therein upon the terms and conditions set forth in this
document, Exhibit "A" and Exhibit "B" (Operation Agreement) which form an
integral part hereof.
1.3. Without prejudice to the provisions of this contract, it is
understood that THE ASSOCIATE will have over the Petroleum produced in the
Contracted Area and in the part which corresponds to it, the same rights and
obligations which those who exploit Petroleum belonging to the Nation inside
the Country have before Colombian law.
1.4. ECOPETROL and THE ASSOCIATE agree that they will carry out
exploration and exploitation work in the lands of the Contracted Area, that
they will distribute between themselves the costs and risks thereof in the
proportion and upon the terms contemplated in this Contract and that the
properties acquired and the Petroleum produced and stored will belong to each
Party in the stipulated proportions.
CLAUSE 2 - APPLICATION OF THE CONTRACT
This contract applies to the Contracted Area, delimited in Clause 3, or to the
part thereof, subject to its terms when Clause 8 has been applied.
CLAUSE 3 - CONTRACTED AREA
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The Contracted Area is called "CAMBULOS", and consists of an area of one
hundred and twenty thousand six hundred and sixty two (120.662) hectares and
seven thousand and twelve (7,012) square meters and is located within the
municipal jurisdictions of Chaguani, San Juan de Rio Seco, Viani, Beltran,
Puli, Quipile, Anapoima, Apulo, Tocaima, Jerusalen, Guataqui and Narino, in the
department of Cundinamarca, Piedras y Venadillo in the department of Tolima.
This area is described below and, as shown in the map attached hereto as
Exhibit "A", which forms part of this contract, as well as the corresponding
calculation charts: the reference point used is the AUXILIARY POINT "AIR-215"
of the Instituto Geografico Agustin Codazzi, the plane Gauss coordinates of
which, with origin in Bogota, are; N-1'00.069.96 meters, E-912,937,88 meters
and the geographic coordinates of which are: Latitude 04 Degrees 39' 12". 602
North of the Equator and Longitude 74 Degrees 51' 55".883 West of Greenwich.
From this reference point it continues in a direction S 86 Degrees 13' 53".293
E and for a distance of 1,062.12 meters to point "A", the Gauss coordinates of
which are: N-1'006,000.00 meters, E-914,000.00 meters. From this point "A" the
boundary line continues N47 Degrees 29' 22".391E for a distance of 16.278.82
meters until arriving at point "B", the coordinates of which are N-1'017.000.00
meters, E-926,000,00 meters. From this reference point B, it continues in a
direction N 39 Degrees 48' 20".056 E for a distance of 7,810.25 meters to point
"C", the coordinates of which are: N-1'023.000.00 meters, E-931,000.00 meters.
From this point "C" it continues in a northerly direction for a distance of
15,000.00 meters until point "D", the coordinates of which are: N-1'038,000.00
meters, E-931,000.00 meters. The lines "A-B", "B-C", "C-D" share a common
boundary in their entirety with the lines "E-D", "D-C" and "C-B" of the
Association Contract "Lagunillas" entered into with the American International
Petroleum Corporation. From point "D" it follows in an easterly direction for
1,400.00 meters to point "E", the coordinates of which are: N-1'038,000.00
meters, E-932,400.00 meters. From this point "E" it follows in an easterly
direction for 11.300.00 meters to arrive at point "F", the coordinates of which
are: N-1'038.000.00 meters, E-943,700.00 meters. The line "E-F" shares a common
boundary in its entirety with the line "F-E" of the Association Contract "Rio
Seco" entered into with G.H.K. Company Colombia. From this point "F" it follows
in an easterly direction for 5.800.00 meters to point "G", whose coordinates
are: N-1'038.000.00 meters, E949.500.00 meters. The line "F-G" shares a common
boundary in its entirety with the line "I-H" of the Association Contract
"Dindal", entered into with G.H.K. Company Colombia. From point "G" it
continues in a southerly direction for 31.000.00 meters to arrive at point "H"
whose coordinates are : N-1'007.000.00 meters, E-949.500.00 meters. From point
"H" it continues in direction S 41 Degrees 36' 23".994 W for 35.945.22 meters
to arrive at point "I", the coordinates of which are: N-980.123.01 meters,
E-925.631.90 meters. The line "H-I" shares a common boundary for its entirety
with the line "E-D" of the Association Contract "Apulo" entered into with
Petroleos del Norte S.A.. From Point "I" it follows in direction S 28 Degrees
32' 23".720 W for a distance of 140.02 meters to arrive at point "J" the
coordinates of which are: N-980.000.00 meters, E-925.565.00 meters. The line
"I-J" shares a common boundary for its entirety with the line "D-C" of the
Association Contract "Apulo" entered into with Petroleos del Norte S.A.. From
point "J" it continues in a westerly direction for 9.565 meters to arrive at
point "K", the coordinates of which are: N-980.000.00 meters, E-916.000.00
meters. From point "K" it continues in a northerly direction for 15.177.03
meters to point "L", the coordinates of which are: N-955.177.03 meters,
E-916.000.00 meters. From this point "L" it continues in direction N 78 Degrees
54' 03".893 E for a distance of 4.534.83 meters, to arrive at point "M", the
coordinates of which are: N-996.050.00 E-920.450.00 meters. From this point
"M" it continues in a direction N 32 Degrees 57' 10".690W for a distance of
11.857.70 meters to arrive at point "A", the starting and ending point of the
boundary. The lines "L-M" and "M-A" share a common boundary with lines "C-B"
and "B-A" of the Association Contract "Puli-C" entered into with the American
International Petroleum Company. The above area excludes block "B" of the
Association Contract "Puli" entered into with the American International
Petroleum Company with an area of 5.445 hectares and 407 square meters and with
the following boundaries: Starting Point "A" with coordinates N 1.007.450.00
meters, E-926.200.00 meters. From this point following in a direction of N 20
Degrees 13' 29".290 E for a distance of 2.000.00 meters to point "B" with
coordinates: N-1.009.326.69 meters, E-926.891.41 meters. From this point B,
following in a direction S 64 Degrees 18' 26".123 E for a distance of 4.559.37
meters to arrive at point "C" with coordinates: N-1'007.350.00 meters,
E-931.000.00 meters. From this point "C" following in a southerly direction for
3.150.00 meters to arrive at point "D" with coordinates: N-1'004.200.00 meters,
E-931.000.00 meters. From this point it continues in a direction of S32 Degrees
59' 51".616W for a distance of 8.430.00 meters to point "E" with coordinates:
N-997.129.82 meters, E-926-408-98 meters. From this point "E" continuing in
direction N 73 Degrees 29' 43".639 W for a distance of 3.664.84 meters to
arrive at point "F" with coordinates: N-998.170.97 meters, E-922.895.14
meters. From point "F" continuing in direction N 19 Degrees 36' 14".717 E for a
distance of 9.850.00 meters to arrive at point A, the starting and ending point
of the boundary.
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Paragraph 1.- In the event that any person should claim to be the title-holder
of the subsoil within the Contracted Area, ECOPETROL shall assume the attention
of the case and the pertinent obligations.
Paragraph 2.- Within the Contracted Area are the abandoned wells: Quina-1,
Gautaqui-1 and 2, Bituima-1 and Pitaya-1, which show evidence of hydrocarbons.
To commence work on such wells, THE ASSOCIATE must obtain the prior written
permission of ECOPETROL and the Ministry of Mines and Energy.
CLAUSE 4 - DEFINITIONS
For the purposes of this contract, the expressions listed below shall have the
following meaning:
4.1 Contracted Area: Is the land defined in Clause 3 above, subject
to Clause 8.
4.2 Commercial Field: Is that portion of the Contracted Area which
can produce Petroleum in a quantity and of a quality which are economically
exploitable.
4.3 Executive Committee: Is the body formed within thirty (30) days
following the acceptance of a Commercial Field, to supervise, control and
approve all operations and actions performed during the term of the contract.
4.4. Direct Exploration Costs: Are those expenses incurred by THE
ASSOCIATE for the drilling of Wildcat Wells which have turned out to be
productive, as well as for locations, completion, equipment and tests of said
wells, flow lines and separators. The Direct Exploration Costs do not include
administrative or technical support from the head office, or the Company's
central offices.
4.5 Joint Account: The records that will be kept through books of
account, in accordance with Colombian law, in order to credit or charge the
Parties for their participation in the Joint Venture.
4.6 Budget Performance: Are the resources actually spent and/or
committed in each one of the programs and projects approved for any given
calendar year.
4.7 Effective Date: Shall be the calendar day on which the term of
sixty (60) calendar days counted as from the signing date of this contract
expires. All terms stipulated herein shall be counted as from that date,
subject to the validity of the contract itself.
4.8 Cash Flow: Is constituted by the physical movement of cash
(receipts and disbursements) which must be made by the Joint Account in order
to attend to the various obligations contracted by the Association in the
course of its normal operations.
4.9 Natural Gas: Mixture of hydrocarbons in a gaseous state, composed
by the more volatile members of the parafin series of hydrocarbons.
4.10 Direct Expenses: Are all those outlays charged to the Joint
Account for the expenses of personnel directly employed by the Association,
purchase of materials and supplies, contracting of services with third parties
and other general expenses demanded by the Joint Venture in the normal course
of its activities.
4.11 Indirect Expenses: Are those outlays charged to the Joint Account
for technical and/or administrative support eventually furnished, with its own
organization, by the Operator to the Joint Venture.
4.12 Commercial Interest: For operations in pesos, shall be the
current interest rate certified by the Superintendency of Banks for the
corresponding period; for operations in dollars of the United States of
America, shall be the prime rate fixed by CITIBANK in New York.
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4.13 Interest in the Operation: Is the participation in the
obligations and rights which each one of the Parties acquires in the
exploration and exploitation of the Contracted Area.
4.14 Development Investments: Refer to the amount of money invested in
goods and equipment capitalized as assets for the Joint Venture in a Commercial
Field once its existence is accepted by the Parties.
4.15 Production Objectives: Are the formations, layers or sands with a
possible accumulation of hydrocarbons.
4.16 Joint Venture: The activities and work executed or in the process
of execution on behalf of the Parties and for their account.
4.17 Operator: The person appointed by the parties to carry out
directly, for their account, the necessary operations to explore and exploit
the Petroleum found in the Contracted Area.
4.18 Parties: On the Effective Date, ECOPETROL and THE ASSOCIATE.
Subsequently, and at any time, ECOPETROL for one party and THE ASSOCIATE and/or
its assignees, for the other.
4.19 Exploration Period: Is the term which THE ASSOCIATE has to
fulfill the obligations stipulated in Clause 5 of this contract and which shall
not exceed six (6) years counted as from the Effective Date, with the exception
of the cases contemplated in Clauses 9 (subsections 9.3 and 9.8) and 34.
4.20 Exploitation Period: The time which elapses from the end of the
Exploration Period to the end of this contract.
4.21 Petroleum: The natural mixture of hydrocarbons in a liquid or
gaseous state under normal conditions, as well as those substances which
accompany or derive from them, with the exception of helium and rare gases.
4.22 Wildcat Well: Is any well designated as such by THE ASSOCIATE to
be drilled or deepened for its account in the Contracted Area in search of
Petroleum. For the fulfillment of the obligations stipulated in Clause 5 of
this contract, the pertinent Wildcat Well will be previously rated between
ECOPETROL and THE ASSOCIATE.
4.23 Exploitation (or Development) Well: Is any well previously
programmed by the Executive Committee for the production of Petroleum within
the Commercial Area.
4.24 Budget: Is the basic planning instrument whereby resources are
assigned for specific projects to be applied within a calendar year or a
portion thereof in order to achieve the goals and objectives proposed by THE
ASSOCIATE or the Operator.
4.25 Extensive Production Tests: Are the operation carried out at one
or several productive Wildcat wells, in order to evaluate the production
conditions and behavior of the field.
4.26 Reimbursement: Is the payment of 50% of the Direct Exploration
Costs incurred by THE ASSOCIATE.
4.27 Exploration Work: Are those operations executed by THE ASSOCIATE
in relation to the search 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 as from the Effective Date of this
contract, THE ASSOCIATE undertakes to process approximately four hundred (400)
kilometers of seismic and carry out studies of the evaluation and preparation
of maps based on the existing information, photography and/or interpretation
simulated via satellite integrated with surface geology for the interpretation
of the block and design of the seismic program corresponding to
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the second contractual year. During the second year, THE ASSOCIATE will carry
out the acquisition of a seismic program of a minimum length of ninety (90)
kilometers. At the end of the second contractual year, THE ASSOCIATE will have
the option to renounce the contract, always provided that it has complied with
its obligations during the first and second years. If, on the the contrary, it
decides to continue to the third year, it must return areas so that it retains
up to seventy (70.000) thousand hectares.
5.1.2. During the third year THE ASSOCIATE will drill one (1) Wildcat
Well until it penetrates the formations which might be Petroleum bearing in the
area. At the expiration of this third year the Contract will end, if its
extension has not been requested and authorized pursuant to subsection 5.2
below or a Commercial Field has not been discovered
5.2. If THE ASSOCIATE has complied satisfactorily with the obligations
set forth in Clause 5, ECOPETROL, at the request of THE ASSOCIATE, will extend
yearly for up to three (3) additional years, the Exploration Period, and during
each year of extension THE ASSOCIATE will be obligated to carry out Exploration
Work in the Contracted Area, consisting of the drilling of one (1) Wildcat Well
until it penetrates the formations which might be Petroleum bearing in the
area.
5.3. If during any year of the Exploration Period THE ASSOCIATE
decides to carry out work corresponding to its obligations for the following
year, it may request ECOPETROL's approval to carry out said work. If the
request is accepted by ECOPETROL, it shall determine the manner and amount in
which the mentioned obligations will be transferred.
5.4. During the term of this Contract, THE ASSOCIATE may carry out
Exploration Work in the areas which it retains pursuant to clause 8 and THE
ASSOCIATE will be the only one responsible for the risks and costs of these
activities and, therefore, shall have the full and exclusive control thereof
without the maximum duration of the contract being modified for this reason.
CLAUSE 6- FURNISHING OF INFORMATION DURING THE EXPLORATION
6.1. ECOPETROL will furnish to THE ASSOCIATE, when it so requires, all
the information in its possession within the Contracted Area. The costs related
to the reproduction and furnishing of such information shall be for the account
of THE ASSOCIATE.
6.2. During the Exploration Period THE ASSOCIATE will deliver to
ECOPETROL, as it is obtained, all the geological and geophysical information,
edited magnetic tapes, processed seismic sections and all the field information
supporting it, magnetic and gravimetric profiles, all in reproducible
originals, copies of the geophysical reports, reproducible originals of all
records of the wells drilled by THE ASSOCIATE, including the final composited
graph of each well and copies of the final drilling report including core
sample analysis, the results of production tests and any other information
related to the drilling, study or interpretation of nay nature made by THE
ASSOCIATE for the Contracted Area without limitation. ECOPETROL is entitled, at
any time and through the procedures it deems appropriate, to witness all the
operations and verify the information listed above.
6.3 The Parties agree that during the term of this Contract, all the
information obtained in furtherance thereof, is of a confidential nature.
Likewise, the Parties agree that in each case they may make exchanges with
companies associated or not associated to ECOPETROL. It is understood that what
is agreed herein will take place without prejudice to the obligation to supply
to the Ministry of Mines and Energy all the information it may request in
accordance with the prevailing legal and statutory provisions. Nevertheless, it
is understood and agreed that THE ASSOCIATE may provide at its sole discretion
the information required by its affiliates, consultants, contractors, financial
institutions, and which may be required by competent authorities with
jurisdiction over THE ASSOCIATE or its affiliates, or by the regulations of any
stock exchange where the stock of THE ASSOCIATE or related corporations are
listed.
CLAUSE 7 - BUDGET AND EXPLORATION PROGRAMS
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THE ASSOCIATE will be under the obligation to prepare, observing the provisions
of this Contract, the necessary programs and Budgets to effect the exploration
in the Contracted Area. Said Budgets and programs shall be presented promptly
TO ECOPETROL
CLAUSE 8 - RETURN OF AREAS
8.1 At the end of the initial exploration period or of the extensions
which THE ASSOCIATE may have obtained, or at the latest at the expiration of
the sixth (6th) year, 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 an extent
equal to fifty percent (50%) of the initially Contracted Area and two (2) years
later said area will be reduced to the area of the Commercial Field or
Commercial Fields which are in production or development, plus a reserve zone
five (5) kilometers wide around each field. The Commercial Fields plus the zone
surrounding each field shall be called the exploitation area and this shall be
the only part of the Contracted Area that will remain subject to the terms of
this contract.
8.2 THE ASSOCIATE shall determine the areas that it will return to
ECOPETROL in lots with a minimum extent of five thousand (5,000) hectares each,
unless THE ASSOCIATES demonstrates that this is not possible. Despite the
obligation to return the areas referred to in Clause 8 (subsection 8.1), THE
ASSOCIATE is not obligated to return areas which are under development or in
production, including the reserve zones, five (5) kilometers wide, surrounding
said areas, except in the event that, for reasons attributable to THE
ASSOCIATE, the development or production operations are suspended for more than
a year, continuously, without just cause, in which case said areas shall be
returned to ECOPETROL and the Contract shall terminate for said areas or part
of an area. What is contemplated herein applies equally to exploitation under
the sole risk mode.
CHAPTER III - EXPLOITATION
CLAUSE 9 - TERMS AND CONDITIONS
9.1 In order to commence the Joint Venture under the terms of this
contract, it is considered that the exploitation work will begin on the date on
which the Parties acknowledge the existence of a Commercial Field or when the
provisions of Clause 9 (subsection 9.5). The existence of a Commercial Field
will be determined through the drilling, by THE ASSOCIATE, within the proposed
Commercial Field, of a sufficient number of wells to allow a reasonable
determination of the area and Commercial potential of the field. In this case,
THE ASSOCIATE shall inform ECOPETROL in writing of the finding of a Commercial
Field, supplying the studies on which it has based this conclusion. ECOPETROL,
within the term of ninety (90) calendar days as from the date on which THE
ASSOCIATE delivers all the supporting information, shall accept or object the
existence of the Commercial Field. ECOPETROL may request the additional
information it deems necessary within thirty (30) days following the date of
presentation of the first supporting information.
9.2.1. If ECOPETROL accepts the existence of the Commercial Field, it
shall notify THE ASSOCIATE accordingly within the term on ninety (90) calendar
days referred to in Clause 9 (subsection 9.1.) and shall begin to participate,
upon the terms of this contract, in the development of the Commercial Field,
discovered by THE ASSOCIATE.
9.2.2. ECOPETROL shall reimburse THE ASSOCIATE for fifty percent (50%)
of the Direct Exploration Cost of:
9.2.2.1 The drilling by THE ASSOCIATE of Wildcat Wells which have turned
out to be commercially productive.
9.2.2.2 The seismic acquisition and drilling of a stratigraphic mine
carried out prior to the date on which ECOPETROL makes an announcement in
respect of the existence of each Commercial Field.
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9.2.2.3 The drilling of Wildcat Wells A-1, according to the Lahee
classification, which are dry, drilled by the ASSOCIATE prior to the date on
which ECOPETROL has made an announcement with regard to the existence of a
Commercial Field.
9.2.2.4 The drilling of Wildcat Wells which are dry and have been drilled
by the ASSOCIATE prior to the discovery well of each Commercial Field.
9.2.3 The amount of these costs shall be determined in dollars of the
United States of America, using as a reference date that on which THE ASSOCIATE
has made such payments: therefore the costs incurred in pesos will be paid at
the representative market exchange rate certified by the Bank of the Republic
on the above date.
9.2.4. The reimbursement of the Direct Exploration Costs in accordance
with that stipulated in Clause 9 (subsection 9.2.2.) will be made by ECOPETROL
to THE ASSOCIATE, from the moment in which the field is put into production by
the Operator, with the amount in dollars equivalent to fifty per cent (50%) in
the direct participation in the total production of the respective field, after
deducting the percentage corresponding to royalties.
9.3. If ECOPETROL does not accept the existence of the Commercial
Field referred to in clause 9 (subsection 9.1.) it may indicate to THE
ASSOCIATE the additional work it considers necessary in order to demonstrate
the existence of a Commercial Field, which work may not have a cost in excess
of TWO MILLION DOLLARS (US$2.000.000.oo), nor may it require for its execution
a term of more than one (1) year, in which case, the Exploration Period for the
Contracted Are shall be automatically extended for a length of time equal to
that agreed upon between the Parties as necessary in order to perform the
additional work requested by ECOPETROL in this clause, but without prejudice to
the provisions regarding the reduction of areas in Clause 8 (subsection 8.1.).
9.4. If ECOPETROL, after the additional work requested by it pursuant
to clause 9 (subsection 9.3) has been executed, accepts the existence of the
Commercial Field referred to in clause 9 (subsection 9.1.), it shall begin to
participate in the development operations of the aforementioned field upon the
terms established in this contract and shall reimburse THE ASSOCIATE in the
manner established in clause 9 (subsection 9.2.3. and 9.2.4), for fifty percent
(50%) of the cost of the additional work requested, as mentioned in Clause 9
(subsection 9.3) and the work executed shall become the property of the Joint
Account.
9.5. If ECOPETROL does not accept the existence of a Commercial Field
after the additional work referred to in clause 9 (subsection 9.3) has been
performed, THE ASSOCIATE shall be entitled to execute the work it deems
necessary for the exploitation of said field and to reimburse itself for two
hundred percent (200%) of the total cost of the work executed for its account
and risk, in the respective field and up to fifty percent of the Direct
Exploration Costs which THE ASSOCIATE has carried out prior to the discovery
pursuant to clause 9 (subsection 9.2.2) For the purposes of this clause the
reimbursement will be made on the value of the Petroleum produced, less the
royalties referred to in Clause 13, deducting the costs of production,
gathering, transportation and sale. If THE ASSOCIATE is using the sole risk
method, it is understood that the term for exploitation commences counted from
the date on which ECOPETROL communicates to THE ASSOCIATE that it does no
accept the commerciality. For the purposes of calculating the dollar value of
the disbursements made in pesos, the exchange rate for the date on which
ECOPETROL made such payments shall be used. For the purposes of this clause,
the value of each barrel of Petroleum produced in said field during a calendar
month shall be the average price per barred received by THE ASSOCIATE from the
sale of its participation in the Petroleum produced in the Contracted Area
during he same month. When THE ASSOCIATE has been reimbursed in the percentage
established in this clause, all the wells drilled, the facilities and goods of
all types acquired by THE ASSOCIATES for the exploitation of the field and paid
as indicated in this clause, shall become the property of the Joint Account at
no cost, upon the acceptance by ECOPETROL of participating in the development
of that field.
9.6. ECOPETROL may begin at any time to participate in the operation
of the field discovered and developed by THE ASSOCIATE without prejudice to the
right of THE ASSOCIATE to reimburse itself for the investments it has made for
its own account in the manner and percentage stipulated in Clause 9 (subsection
9.5). Once THE ASSOCIATE has recovered such amounts, ECOPETROL shall begin to
participate in the economic results of the wells developed exclusively for the
account of THE ASSOCIATE.
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9.7. In order to delimit a Commercial Field, all the geological and
geophysical information and the information pertaining to the wells drilled
within said field or related to it shall be considered.
9.8. If at the end of the Exploration Period of six (6) years referred
to in Clause 5 (subsection 5.2.) THE ASSOCIATE has drilled one or several
Wildcat Wells which indicate the possible existence of a Commercial Field,
ECOPETROL, at the request of THE ASSOCIATE, shall extend the Exploration Period
for the necessary time, which shall not exceed one (1) year, to give THE
ASSOCIATE the opportunity to demonstrate the existence of said Commercial
Field, without prejudice to the provisions of Clause 8.
CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS
10.1. The parties agree that THE ASSOCIATE is the Operator and, as
such, with the limitations contemplated in this contract, will have the control
of all the operations and activities it considers necessary for a technical,
efficient and economical exploitation of the Petroleum found within the area of
the Commercial Field.
10.2. The Operator is under the obligation to carry out all the
development and production operations in accordance with the known industrial
regulations and practices, using the best technical methods and systems
required for the economic and efficient exploitation of the Petroleum and
applying the legal and statutory provisions on the matter.
10.3. For all purposes of this Contract, the Operator shall be
considered a distinct entity from the Parties, and likewise for the application
of the civil, labor and administrative legislation and for its relations with
the personnel in its service, in accordance with Clause 32.
10.4. The Operator shall be entitled to resign from said position, by
written notice to the Parties given six (6) months in advance of the date on
which it wishes its resignation to take effect. The executive Committee shall
designate the new Operator in accordance with Clause 19 (subsection 19.3.2).
CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS
11.1. Within three (3) months following the acceptance of a Commercial
Field in the Contracted Area, the Operator shall submit to the Parties and
activity program and a Budget for the remainder of the pertinent calendar. In
the event that there area less than six and a half (6-1/2) left before the end
of that year the Operator shall prepare and submit a Budget and programs for
the following calendar year, within a term of three (3) months.
The future Budgets and programs shall be submitted to the Parties at the
ordinary meeting of the Executive Committee scheduled for the month of July of
the immediately preceding year. Within twenty (20) days following the receipt
of the Budgets and programs, the Parties shall inform the Operator in writing
of the changes they wish to propose. When this occurs, the Operator shall take
into account the observations and modifications proposed by the Parties in the
preparation of the Budget and of the programs which shall be submitted for the
final approval of the Executive Committee, at the ordinary meeting held in
November of each year, except in the event that there are less than six and a
half (6-1/2) months left before the end of the year in which the existence of
the Commercial Field is recognized. In the event that the total Budget has not
been approved before the month of November, those aspects of the Budget as to
which an agreement has been reached shall be approved by the Executive
Committee, and those aspects which are not approved shall be submitted
immediately to the Parties for further study and a final decision as provided
in Clause 20.
11.2. The Parties may propose additions or revisions to the Budget and
to the approved programs, but, except in case of emergency, these must not be
made with a frequency of less than three (3) months. The executive Committee
shall decide on the additions and revisions proposed at a meeting, which shall
be called within thirty (39) days following the submission thereof.
11.3. The purpose of the programs and Budgets is mainly:
11.3.1. To determine the operations which are to be carried out during
the following calendar year; and
<PAGE> 9
11.3.2. To determine the expenditures and investments which the Operator
is empowered to make.
11.4. The terms program and Budget mean the indicated work plan and the
estimated expenditures and investments to be made by the Operator in the
different aspects of the operation, such as:
11.4.1. Capital investments in production: drilling for the development
of fields, workover or rehabilitation of wells and specific constructions for
production.
11.4.2. General construction and equipment: industrial and campsite
facilities, transportation and construction equipment, drilling and production
equipment. Other constructions and equipment.
11.4.3. Maintenance and operation expenses: production expenses,
geological expenses and administration expenses for the operation.
11.4.4. Working capital requirements.
11.4.5. Contingency funds.
11.5. The Operator shall make all the expenditures and investments and
shall complete the development and production operations in accordance with the
programs and Budgets referred to in Clause 11 (subsection 11.1), without
exceeding ten percent (10%) of the total Budget for each year, except with the
authorization of the Parties in special cases.
11.6. The Operator shall not, on its own decision, commence any
project, nor shall it charge to the Joint Account expenses not approved in the
Budget, which exceed the sum of forty thousand dollars of the United States of
America (US$40.000) or its equivalent in Colombian currency, by project or by
quarter.
11.7. The Operator is authorized to make expenditures imputable to the
Joint Account without the prior authorization of the Executive Committee, in
the case of emergency measures intended to safeguard the personnel or property
of the Parties, emergency expenditures originating from fire, floods, storms
and other disasters; emergency expenditures necessary for the operation and the
maintenance of the production facilities, including the maintenance of the
wells in a condition to produce with the maximum efficiency; emergency
expenditures indispensable for the protection and preservation of materials and
equipment necessary in the operations. In these cases the Operator must call a
special meeting of the Executive Committee as soon as possible, in order to
obtain its approval to continue with the emergency measures.
CLAUSE 12 - PRODUCTION
12.1. With the frequency which may be necessary, the Operator shall
determine, with the approval of the Executive Committee, the Maximum Degree of
Productive Efficiency (MER) for each Commercial Field. This Maximum Degree of
Productive Efficiency (MER) shall be the maximum rate of production of
Petroleum which may be extracted from a field in order to obtain the maximum
final recovery of the reserves. The estimated production shall be reduced in
the manner necessary to compensate the actual or anticipated conditions of the
operation, such as wells under repair which are not producing, capacity
limitations in the collector lines, in the pumps, in the separators, in the
tanks, in the pipelines and in other facilities.
12.2. Periodically, at least once a year, the Operator shall determine,
with the approval of the Executive Committee, the area considered capable of
producing Petroleum in a commercial quantity in each field and shall propose a
spacing and schedule for the drilling of Development Wells under conditions of
economy and efficiency.
12.3 The Operator shall prepare and deliver to each of the Parties, at
regular three-month intervals, a program indicating the participation in the
production and another showing the distribution of the production of each Party
for the next six (6) months. The production forecast shall be made based on
the Maximum Degree of Productive Efficiency (MER) as stipulated in Clause 12
(subsection 12.1) and adjusted to the rights of each Party, in accordance with
this
<PAGE> 10
contract. The production distribution program shall be determined bases on the
periodic petitions of each Party, and in accordance with Clause 14 (subsection
14.2) with the corrections which might be necessary to ensure that neither one
of the Parties, being capable of withdrawing, will receive less than the amount
to which it is entitled as provided in Clause 14 without prejudice to the
provisions in Clauses 21 (subsection 21.2) and 22 (subsection 22.5).
12.4. If either one of the Parties anticipates a reduction in its
capacity to receive Petroleum with respect to the forecast furnished to the
Operator, it must inform the latter thereof as soon as possible, and if such a
reduction is due to an emergency situation, it shall notify the Operator within
twelve (12) hours following the occurrence of the event which causes the
reduction. Therefore, said party shall furnish a new receipt program to the
Operator, taking into account the pertinent reduction.
12.5 The Operator may use the crude oil and the gas consumed in
carrying out the production operations in the Contracted Area and these
consumptions are exempt from the royalties referred to in Clause 13
(subsections 13.1 and 13.2).
CLAUSE 13 - ROYALTIES
13.1. During the exploitation of the Contract Are, prior to the
distribution of the production corresponding to the Parties, the Operator shall
deliver to ECOPETROL by way of a royalty twenty percent (20%) of the verified
production of liquid hydrocarbons of said area. ECOPETROL, for its account and
risk, shall take in kind from the tanks belonging to the Joint Account the
production percentage corresponding to the royalty.
13.2. By way of a royalty, the Operator shall deliver to ECOPETROL
twenty percent (20%) of the gas production.
13.3. Of the production percentage corresponding to the royalty,
ECOPETROL, in the manner and upon the terms established by the law, shall pay
the Nation, Departments and Municipalities, the royalties corresponding to the
total production of the Commercial Field, and THE ASSOCIATE shall in no case be
responsible for any payment to these entities and persons for said account.
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF THE PETROLEUM
14.1. The Petroleum produced, with the exception of that which has been
used for the benefit of the operations under this contract and that which is
inevitably lost in these operations, shall be transported to the common tanks
of the Parties or to other measurement facilities agreed by the Parties. The
Petroleum shall be measured in accordance with the standards and methods
accepted by the oil industry and, bases on this measurement, the percentages
referred to in Clause 13 shall be determined. From that moment on, the
remaining Petroleum shall become the property of each party in the proportions
specified in this Contract.
14.2 Distribution of Production
14.2.1 After deducting the percentages corresponding to the royalty, the
remaining petroleum and gas produced from the Contracted Area shall belong to
the Parties in the proportion of fifty (50%) percent for ECOPETROL and fifty
(50%) percent for THE ASSOCIATE until the accumulated production in the
Contracted Area reaches the quantity of 60 million barrels of oil . 14.2.2
When the accumulated production is in excess of 60 million barrels of oil, the
remaining petroleum and gas produced from the Contracted Area (with the prior
deduction of the percentage corresponding to the royalty) belongs to the
Parties in the proportion resulting from the application of the factor R as
appears in the following chart:
FACTOR R Distribution of Production after deduction of Royalties
<PAGE> 11
ASSOCIATE ECOPETROL
0.0 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 the above mentioned chart factor R is defined in
the following terms:
R = IA
------------------------------
ID + A-B + GO
Where:
IA (Accumulated Income of THE ASSOCIATE): The valorization of the
accumulated income corresponding to the volume of hydrocarbons produced by THE
ASSOCIATE at the price of reference agreed by the parties, excluding the
hydrocarbons re-injected into the Fields of the Contracted Area, and those
consumed in the operation and the burnt off gas.
The average price of reference of the hydrocarbons will be determined by the
mutual agreement of the Parties. The Accumulated Income will be determined by
taking as a base the Monthly Income, which will itself be determined by
multiplying the average monthly price of reference by the monthly production
pursuant to Form 9 of the MME.
ID (Accumulated Development Investments): Fifty per cent (50%) of
the accumulated development investments approved by the Executive Committee of
the Association.
A: The Direct Exploration Costs incurred by THE ASSOCIATE
pursuant to Clause 9 (subsections 9.2.2, 9.2.3, and 9.2.4) of this Contract.
B: The accumulated repayment of the Direct Exploration Costs,
referred to above, pursuant to Clause 9 (subsections 9.2.2, 9.2.3 and 9.2.4) of
this Contract.
GO: The accumulated expenses of the operation, approved by the
Executive Committee of the Association, in the proportion corresponding to THE
ASSOCIATE, together with the accumulated transport costs of THE ASSOCIATE.
Transport costs are the investment and operation expenses of the transportation
of hydrocarbons, produced in the commercial fields situated in the Contracted
Area, from these commercial fields to the port of export or the place where the
price to be used in the calculation of income is to be agreed.
IA: These transport costs will be determined by the Parties by
mutual agreement once the exploitation stage of the fields which have been
accepted as commercially viable by ECOPETROL begins. Extraordinary or similar
Contributions which are directly applicable to the exploitation of
hydrocarbons in the Contracted Area are included in the Operation Expenses.
All the amounts included in the determination of factor R are to be in dollars.
To achieve this, expenses in pesos must be converted into dollars at the
representative market exchange rate, as certified by the Bank of the Republic,
on the date on which the corresponding payments have been made.
14.2.4 Calculation of Factor R: The distribution of the production
based on Factor R will be applied from the first day of the third calendar
month following the one in which the accumulated production in the Contracted
Area reaches sixty million barrels of Pertroleum. The calculation of Factor R
will be based on the accounting close corresponding to the calendar month of
the financial year in which the accumulated production in the Contracted Area
reaches sixty million barrels of Petroleum. The resulting production
distribution will apply until 30 June of the following year. From this moment,
the distribution of production to which Factor R will apply, will be made for
periods of one
<PAGE> 12
year (from 1 July to 30 June)), the payment of this, to be based on the
accumulated values at 31 December of the year immediately preceding, in
accordance with the corresponding accounting close.
14.2.5. In the event that a field produces both crude oil and gas, in
order to apply the foregoing distribution chart the total accumulated
production which shall be taken into account shall be that of the principal
hydrocarbon in accordance with the authorization granted by the Ministry of
Mines and Energy for the exploitation of said field. In order to determine the
total accumulated production, the measurement for the equivalent gas is the
amount of 7,000 standard cubic feet of gas per barrel of Petroleum.
14.3. In addition to the tanks and other jointly-owned facilities, each
Party shall have the right to build its own production facilities in the
Contracted Area for its own and exclusive use, complying with the legal
regulations. The transportation and delivery of Petroleum by each Party to the
pipeline and to other reservoirs which are not jointly owned shall be made for
the exclusive account and risk of the Party which receives the Petroleum.
14.4. In the event that production is obtained at places not connected
by pipelines, charging the Joint Account the Parties may agree to install
pipelines to the point where the Petroleum can be sold, or to a place which
connects with the pipeline. If the parties agree to build such pipelines, they
shall enter into the contracts they consider appropriate for such purpose and
shall designate the Operator in accordance with the prevailing legal
provisions.
14.5. Each Party shall be the owner of the Petroleum produced and
stored as a result of the Operation and placed at its disposal, as stipulated
in this contract, and at its cost must receive it in kind or sell or dispose of
it separately, as provided in Clause 14 (subsection 14.3).
14.6. If either one of the Parties, for any reason whatsoever, cannot
separately dispose of, or withdraw from the tanks of the Joint Account all or
part of the Petroleum corresponding to it pursuant to this contract, the
following procedure shall apply:
14.6.1. If ECOPETROL is the party which cannot withdraw, in whole or in
part, its share of Petroleum (participation plus royalty), in accordance with
Clause 12 (subsection 12.3), the Operator may continue to produce the field and
to deliver to THE ASSOCIATE, in addition to the portion representing THE
ASSOCIATE's share in the operation bases on one hundred percent (100%) of the
MER, all that Petroleum which THE ASSOCIATE chooses and is able to withdraw up
to a limit of one hundred percent (100%) of the MER, crediting to ECOPETROL,
for subsequent delivery, the volume of Petroleum which ECOPETROL was entitled
to but did not withdraw. But as regards the volume of Petroleum not withdrawn
which corresponds to ECOPETROL that month as royalties, THE ASSOCIATE, at the
request of ECOPETROL, shall pay the latter in dollars of the United States of
America, the difference between the quantity of Petroleum withdrawn and the
quantity of Petroleum corresponding to it by way of the royalty referred to in
Clause 13 (subsections 13.1 and 13.2), it being understood that any withdrawal
of Petroleum made by ECOPETROL shall be applied, in the first place, to the
payment in kind of the royalty, and that once this has been paid, the
additional withdrawals of Petroleum made shall be applied to the participation
corresponding to it according to Clause 14 (subsection 14.2).
14.6.2. In the event THE ASSOCIATE is the Party which cannot withdraw, in
whole or in part, its portion assigned under Clause 12 (subsection 12.3), the
Operator shall deliver to ECOPETROL, based on one hundred percent (100%) of the
MER, not only the participation and share corresponding to it, but also the
Petroleum which ECOPETROL is able to withdraw up to a limit to THE ASSOCIATE
for its subsequent delivery, the portion corresponding to its share which it
has not been able to withdraw.
14.7. When both parties are able to receive the Petroleum assigned
under clause 12 (subsection 12.3), the Operator shall deliver to the Party
which before was unable to receive its share of the production and, at its
request, in addition to its participation in the operation, a minimum of ten
percent (10%) per month of the monthly production corresponding to the other
Party and, by mutual agreement, up to one hundred percent (100%) of the
unreceived share, up to the time when the total quantities credited to the
Party which was unable to receive its Petroleum, have been cancelled.
<PAGE> 13
14.8. Without prejudice to the legal provisions which govern the
matter, each Party shall be free, at any time, to sell or export its share of
Petroleum obtained, under this contract, or to dispose of it in any way.
CLAUSE 15 - UTILIZATION OF GAS
In the event that one or several fields of Petroleum in liquid state with
associated gas, the Operator within two (2) years following the commencement of
commercial production in the field, shall present a project for the utilization
of the Natural Gas for the benefit of the Joint Account. The Executive
Committee shall approve the project and determine the schedule for its
execution. If the Operator does not present a project within a term of two (2)
years of fails to execute the project which has been approved within the period
established by the Executive Committee, ECOPETROL may take, free of charge, for
itself all the available gas from the fields under exploitation, insofar as it
is not required for the efficient exploitation of the field.
CLAUSE 16 - UNIFICATION
When an economically exploitable field extends in a continuous manner to a
structure located in the Contracted Area or another or other areas, the
Operator in agreement with ECOPETROL and with the other interested parties,
shall implement, with the prior approval of the Ministry of Mines and Energy, a
unit exploitation plan, which must agree with the Petroleum exploitation
engineering techniques.
CLAUSE 17 - SUPPLY OF INFORMATION AND INSPECTION DURING EXPLOITATION
17.1 The Operator shall deliver to the Parties, as they are obtained,
reproducible originals (sepias), and copies of the electrical, radioactive and
sonic records of the wells drilled, histories, core analyses, production tests
and all routine reports made or received in relation to the operations and
activities carried on in the Contracted Area.
17.2 Each one of the Parties, at its expense and for its account and
risk, shall be entitled, through authorized representatives, to inspect the
wells and facilities of the Contracted Area and the activities related
therewith. Said representatives shall be entitled to examine cores, samples,
maps, records of the wells drilled, surveys, books and any other source of
information related to the development of this contract.
17.3 In order for ECOPETROL to comply with the provisions of Clause
29, the Operator shall prepare and deliver to ECOPETROL all the reports
required by the National Government.
17.4 The information and data related to exploitation work must be
kept confidential in the same terms of Clause 6 (subsection 6.3) hereof.
CHAPTER IV - EXECUTIVE COMMITTEE
CLAUSE 18 - CONSTITUTION
18.1 Within thirty (30) calendar days following the acceptance of a
Commercial Field, each Party shall appoint a representative and its
corresponding first and second alternates, to make up the Executive Committee
and inform the other Party in writing of the names and addresses of its
representative and alternates. The Parties may change representative or
alternates at any time, but must inform the other party in writing. The vote
or decision of the representative of each one of the Parties shall bind said
Party. If the principal representative of one of the Parties cannot attend a
meeting of the Committee, he shall designate in writing the alternate who is
to attend, who shall have the same authority as the principal.
18.2 The Executive Committee shall hold ordinary meetings during the
months of March, July and November, in which the exploitation program carried
out by the Operator and the immediate plans shall be reviewed. Annually, at
the ordinary meeting held in July, the Operator shall present to the Executive
Committee the annual operating
<PAGE> 14
program and the expenditure and investment Budget for the following calendar
year, which shall be examined and approved at the ordinary meeting of the month
of November.
18.3 The Parties and the Operator may request the calling of special
meetings of Executive Committee to analyze specific conditions of the
operation. The Chairman of the Committee shall notify, ten (10) calendar days
in advance, the date of the meeting and the matters that are going to be
considered. Any matter which has not been included in the agenda of the
meeting may be taken up during it, with the prior acceptance of the
representatives of the Parties in the Committee.
18.4 The representative of each of the Parties shall have in all
matters discussed by the Executive Committee, a vote equivalent to the
percentage of its total Interests in the Joint Venture. In order to be valid,
any resolution or determination made by the Executive Committee must have the
affirmative vote of more than fifty percent (50%) of the total Interest. In
accordance with the enunciated procedure, the decisions adopted by the
Executive Committee shall be mandatory and definitive for the Parties and for
the Operator.
CLAUSE 19 - FUNCTIONS
19.1 The representatives of the Parties shall constitute the
Executive Committee, invested with full authority and responsibility to
establish and adopt exploitation, development, operating programs and Budgets
related to this contract. A representative of the Operator shall attend the
meetings of the Executive Committee.
19.2 The Executive Committee shall appoint its Secretary. The
Secretary shall keep complete and detailed records and minutes of each
meeting, as well as notes on all the discussions and determinations made by
the Committee. The copies of these minutes, in order to be valid, must be
approved and signed by the representatives of the Parties within five (5)
business days following the adjournment of the meeting and delivered to them
as soon as possible.
19.3 The functions of the Executive Committee are, among others, 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 of the Joint Account. -
19.3.4 To approve or disapprove the annual operating program and the
expense Budget and any amendment or revision and to authorize extraordinary
expenses.
19.3.5 To determine the expense rules and policies.
19.3.6 To approve or disapprove any recommendation regarding expenses
made by the Operator (which have not been included in the approved Budget)
when said expenses 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 decide on matters submitted for its
consideration.
19.3.8 To create the subcommittees deemed necessary and establish the
functions which they are to carry out, under its direction and charging the
Joint Account.
19.3.9 To define the type and periodicity of the drilling, operation
and production reports and any other information which the Operator must
furnish to the Parties charging the Joint Account.
19.3.10 To supervise the operation of the Joint Account.
<PAGE> 15
19.3.11 To authorize the Operator to enter into contracts on behalf of
the Joint Venture in amounts exceeding forty thousand dollars of the United
States of America (US$40,000) or its equivalent in Colombian legal tender, and
19.3.12 In general, to perform all functions authorized in this contract
and which do not correspond to another entity or person pursuant to an express
clause or a legal or statutory provision.
CLAUSE 20 - DECISION IN CASE OF DISAGREEMENT IN THE OPERATION
20.1 Any project related to the Joint Venture which requires for its
execution the approval of the Executive Committee, as established in this
contract and regarding which the representatives of the Parties in said
committee are in disagreement, shall be submitted directly to the highest
executive of each of the Parties residing in Colombia, in order to make a
joint decision. If within sixty (60) calendar days following the submittal of
the consultation the Parties have reached an agreement or decision regarding
the matter in question, they shall communicate this to the Secretary of the
Executive Committee, who shall call a meeting of that body within fifteen (15)
calendar days following the receipt of the communication and the members of
said Committee shall be obligated to ratify the agreement or decision at said
meeting.
20.2 If within sixty (60) calendar days following the date of
submittal of the consultation the Parties do not reach an agreement regarding
the difference, the operations may be carried out in accordance with Clause
21.
CLAUSE 21 - OPERATIONS UNDER THE RISK OF ONE OF THE PARTIES
21.1 If at any time one of the Parties wishes to drill a Wildcat Well
not approved in the operation program, it shall notify the other Party in
writing, no less than thirty (30) calendar days in advance of the next meeting
of the Executive Committee, of its desire to drill said well, including
information such as location, recommendation to drill, depth and estimated
costs. The Operator shall include said proposal among the items to be taken
up at the next meeting of the Executive Committee. If this proposal is
approved by the Executive Committee, said well shall be drilled charging the
Joint Account. If said proposal is not accepted by the Executive Committee,
the party who wishes to drill the mentioned well, hereinafter called the
participating Party, shall have the right to drill, complete, produce or
abandon said well at its exclusive expense and risk. The Party who does not
wish to participate in the foregoing operation shall be called the
non-participating Party. The participating Party shall commence the drilling
of said well within one hundred eighty (180) days following its rejection by
the Executive Committee. If the drilling is not commenced within this period,
it must again be submitted to the consideration of the Executive Committee.
At the request of the participating Party, the Operator shall drill the
aforementioned well for the account and risk of the Participating party,
provided that in the judgment of the Operator this operation does not
interfere with the normal development of the field operations, upon the
advance to the Operator, by the participating Party, of the sums which the
Operator deems necessary in order to carry out the drilling. In the event
said well cannot be drilled by the Operator without interfering with the
normal development of the operations, the participating Party shall be
entitled to drill said well directly or through a competent service company
and, in this case, the participating Party shall be responsible for said
operation, ithout interfering with the development of the normal field
operations.
21.2 If the well referred to in Clause 21 (subsection 21.1) is
completed as productive, it shall be administrated by the Operator and the
production of said well, after deducting the royalty referred to in Clause 13,
shall be the property of the participating Party, which shall cover all the
expenses of the operation of said well until the net value of the production,
after deducting the costs of production, gathering, storage, transportation
and the like and sales, is equal to two hundred percent (200%) of the cost of
drilling and completion of said well, which from that moment on and for the
purposes of this contract shall be the property of the Joint Account, as if it
had been drilled with the approval of the Executive Committee for the account
of the Parties. For the purposes of this clause, the value of each barrel of
Petroleum produced at said well during a calendar month, before deducting the
aforementioned costs, shall be the average price per barrel received by the
participating Party from the sales of its participation in the Petroleum
produced in the Contracted Area during that same month.
21.3 If at any time one of the Parties wishes to work over, deepen or
plug a well which is not in commercial production or which is a dry well that
has been drilled by the Joint Account, and if these operations have not been
<PAGE> 16
included in a program approved by the Executive Committee, said Party shall
advise the other Party of its intention to work over, deepen or plug the
mentioned well. If there is no equipment at the location, the procedure
indicated in Clause 21 (subsections 21.1 and 21.2) shall be applied. If there
is adequate equipment at the well site to conduct the proposed operations, the
Party receiving notice of the operations which the other Party wishes to carry
out, shall have a term of forty-eight (48) hours counted as from the receipt
of the notice to approve or disapprove the operation, and if during this term
no answer is received it shall be understood that the operation will be
carried out for the account and risk of the Joint Account. If the proposed
work is carried out for the exclusive account and risk of one participating
Party, the well shall be administrated subject to Clause 21 (subsection
21.2).
21.4 If at any time one of the Parties wishes to construct new
facilities for the extraction of liquids from the gas and for the transport
and exportation of Petroleum, which shall be known as additional facilities,
said Party shall notify the other in writing 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 starting date of the construction and duration
thereof. Within ninety (90) days counted as from the date of the notice, the
other Party, through a written notice, shall be entitled to decide whether it
participates in the projected additional facilities. In the event said Party
chooses not to participate in the additional facilities, or does not reply to
the proposal of the participating Party, hereinafter called the constructor
Party, the latter may proceed with the additional facilities and order the
Operator to construct, operate and maintain said facilities at the exclusive
expense and risk of the constructor Party, without prejudice to the normal
development of the Joint Operations. The constructor Party may negotiate with
the other Party the use of said facilities for the Joint Venture. During the
time that the facilities are operated for the account and risk of the
constructor Party, the Operator shall charge it for all the operating and
maintenance costs of the additional facilities in accordance with the
generally accepted accounting standards.
CHAPTER V - JOINT ACCOUNT
CLAUSE 22 - HANDLING
22.1 Without prejudice to the provisions of other Clauses of this
contract, the expenses incurred for Exploration Work shall be for the account
and risk of THE ASSOCIATE.
22.2 From the time the parties accept the existence of a Commercial
Field and subject to the provisions of Clause 5 (subsection 5.2) and Clause 13
(subsections 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 that moment on,
all expenses, payments, investments, costs and obligations made and incurred
for the development of the operations, pursuant to this contract, and the
investments made by THE ASSOCIATE before and after the recognition of a
Commercial Field, in the drilling and termination of the wells which have
proven to be productive within the field, shall be charged to the Joint
Account. Except as provided in Clauses 14 (subsection 14.3) and 21, all
properties acquired or used thereafter for the performance of the activities
of the operation of the Commercial Field shall be paid for and shall belong to
the Parties, in the same proportion described in this clause.
22.3 In the first five (5) days of each month the Parties shall
supply to the Operator, at the bank designated by it, the share corresponding
to them in the Budget in accordance with the needs and in the currency in
which the expenses are to be made, that is, in Colombian pesos or in dollars
of the United States of America, as requested by the Operator in accordance
with the programs and Budgets approved by the Executive Committee. When THE
ASSOCIATE does not have the Colombian pesos necessary to cover the share of
its contribution in this currency, ECOPETROL shall be entitled to supply said
pesos and to receive the credit for the contributions which it must make in
dollars, converted at the market representative exchange rate certified by the
Superintendency of Banks, on the day when ECOPETROL is to make the pertinent
contribution, when said transaction is permitted by the legal provisions.
<PAGE> 17
22.4 The Operator shall present to the parties on a monthly basis,
and within thirty (30) calendar days following the end of each month, a
monthly statement in which it will show the amounts advanced, the expenditures
made, the outstanding obligations and a report on all the charges and credits
made to the Joint Account, which report shall be prepared in accordance with
Exhibit "B". If the payments referred to in Clause 22 (subsection 22.3) are
not made within the stipulated term and the Operator chooses to cover them,
the delinquent Party shall pay the Commercial Interest, in the same currency
in which the payment has been incurred, during the period of delay.
22.5 If one of the Parties should fail to contribute promptly to the
Joint Account the sums which correspond to it, as from that date said party
shall be considered a delinquent Party and the other Party, as a
non-delinquent Party. If the non-delinquent Party had made the contribution
corresponding to the delinquent Party, in addition to its own, said Party
shall have the right, after sixty (60) days of delay, to receive from the
Operator the total participation of the delinquent Party, in the Contracted
Area (excluding the percentage corresponding to the royalty), up to a quantity
of production which permits the non-delinquent Party a net earning for the
sales made equal to the amount not paid by the delinquent Party, plus an
annual interest equal to the Commercial Interest as from the sixtieth (60th)
day following the date on which the delay begins. "Net earning" is understood
to be the difference between the selling price of the crude taken by the
non-delinquent Party, less the cost of transportation, storage, loading and
other reasonable expenditures made by the non-breaching Party in the sale of
the products taken. The right of the non-breaching Party may be exercised at
any time after thirty (30) days of having notified the breaching Party in
writing of its intention to take part or all of the production corresponding
to the delinquent Party.
22.6.1 All Direct Expenses of the Joint Operation shall be charged to
the Parties in the same proportion in which the production, after payment of
royalties, is distributed.
22.6.2 The Indirect Expenses shall be charged to the Parties in the
same proportion established for the Direct Expenses in subsection 22.6.1 of
this clause. The amount of these expenses shall be the result of taking the
total annual value of the investments and expenditures (excluding technical
and administrative support) and applying to
it the equation a + m (X-b). In this equation "X" is the total value of
the annual investments and expenditures, and "a", "m" and "b" are constants
the values of which are indicated in the following table in relation to the
amount of the annual investments and expenditures:
AMOUNT OF INVESTMENTS AND VALUES OF THE CONSTANTS EXPENDITURES
----------------------------------------------------------------------------------------------------
"X" (US$) "a" (US$) m (frac.) "b" (US$)
----------------------------------------------------------------------------------------------------
0 25,000,000 0 0.10 0
----------------------------------------------------------------------------------------------------
25,000,001 50,000,000 2,500,000 0.08 25,000,000
----------------------------------------------------------------------------------------------------
50,000,001 100,000,000 4,500,000 0.07 50,000,000
----------------------------------------------------------------------------------------------------
100,000,001 200,000,000 8,000,000 0.06 100,000,000
----------------------------------------------------------------------------------------------------
200,000,001 300,000,000 14,000,000 0.04 200,000,000
----------------------------------------------------------------------------------------------------
300,000,001 400,000,000 18,000,000 0.02 300,000,000
----------------------------------------------------------------------------------------------------
400,000,001 and above 20,000,000 0.01 400,000,000
----------------------------------------------------------------------------------------------------
The equation shall be applied only once for each year in each case with the
value of the constants corresponding to the total value of the annual
investments and expenditures.
22.7 The monthly statements of account referred to in Clause 22
(subsection 22.4) may be revised or objected to by either one of the Parties
as from the time when they are received by them and up to two (2) years after
the end of the calendar year to which they correspond, clearly specifying the
items corrected or objected to and the pertinent
<PAGE> 18
reason. Any account which has not been corrected or objected to within this
period, shall be considered final and correct.
22.8 The Operator shall keep accounting records, vouchers and reports
for the Joint Account in Colombian pesos in accordance with Colombian laws and
any charge or credit to the Joint Account shall be made in accordance with the
accounting procedure established in Exhibit "B", which forms part of this
contract. In case of discrepancy between said accounting procedure and the
provisions of this contract, the terms of the latter shall prevail.
22.9 The Operator may effect sales of materials or equipment during
the first twenty (20) years of the Exploitation Period for the benefit of the
Joint Account, when the amount of the sale does not exceed five thousand
dollars of the United States of America (US$5,000) or its equivalent in
Colombian pesos. This type of operations, per calendar year, may not exceed
the amount of fifty thousand dollars of the United States of America
(US$50,000) or its equivalent in Colombian currency. The sales which exceed
these amounts or those of real-estate properties must be approved by the
Executive Committee. The sale of said materials or equipment shall be made at
a reasonable commercial price in accordance with the conditions for the use of
the asset.
22.10 All machinery, equipment or other assets or personal property
acquired by the Operator for the performance of this contract charged to the
Joint Account, shall belong equally to the Parties. However, in the event
that one of the Parties has decided to terminate its interest in the contract
before the expiration of the first seventeen (17) years of the Exploitation
Period, except as provided under Clause 25, said Party agrees to sell to the
other, part or all of its Interest in said items at a reasonable commercial
price or at their book value, whichever is lower. In the event that the other
Party does not wish to purchase them within ninety (90) days following the
formal offer of sale, the Party wishing to withdraw shall be entitled to assign
to a third party the Interest corresponding to it in said machinery, equipment
and items. If THE ASSOCIATE decides to withdraw after seventeen (17) years of
the Exploitation Period have elapsed, its rights in the Joint Venture shall
pass at no cost to ECOPETROL.
CHAPTER VI - DURATION OF THE CONTRACT
CLAUSE 23 - MAXIMUM DURATION
This contract shall have a maximum duration, as from its Effective Date, of
twenty-eight (28) years, distributed as follows: up to six (6) years as an
Exploration Period pursuant to Clause 5 without prejudice to the provisions of
Clause 9 (subsection 9.3 and 9.8), and twenty-two (22) years as an
Exploitation Period, counted as from the date of termination of the
Exploration Period. It is understood that in the events contemplated in this
contract, in which the Exploration Period is extended, the total term shall
not be considered as extended in any case for more than twenty-eight (28)
years.
If, once the commerciality of one or more fields has been declared, THE
ASSOCIATE continues to comply with all exploratory obligations referred to
under Clause 5, it may simultaneously carry out the exploitation of such fields
before the expiration of the Exploration Period defined in Clause 4 (subsection
4.19). Should this be the case, the Exploitation period of 22 years will only
be counted as from the expiration of the Exploration Period.
CLAUSE 24 - TERMINATION
This contract shall terminate in any of the following cases:
24.1 Upon the expiration of the Exploration Period without THE
ASSOCIATE having discovered a Commercial Field, except as provided in Clauses
9 (subsections 9.5 and 9.8) and 34.
24.2 When the duration of the contract, as stipulated in Clause 23,
has elapsed.
24.3 At any time by decision of THE ASSOCIATE, upon compliance with
its obligations referred to in Clause 5 and the others contracted pursuant to
this contract.
<PAGE> 19
24.4 For the special causes referred to in Clause 25.
CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION
25.1 Unilaterally, ECOPETROL may declare this contract terminated, at
any time before the expiration of the period stipulated in Clause 23, in the
following cases:
25.1.1 Dissolution of THE ASSOCIATE and its assignees.
25.1.2 If THE ASSOCIATE or its assignees assign this contract, in whole
or in part, without complying with the provisions of Clause 27.
25.1.3 Due to financial incapacity of THE ASSOCIATE and its assignees,
which is presumed when there is a judicial declaration of bankruptcy or a
meeting of its creditors is called.
25.1.4 Due to the failure to observe the obligations acquired by THE
ASSOCIATE under this contract.
At the expiration of each of the periods contemplated for the performance of
the exploratory obligations, THE ASSOCIATE shall submit a written report
evidencing the fulfillment of the obligations for the respective period. In
the event that it has been unable to fulfill these, the Operator shall have a
period of sixty (60) days to complete them diligently according to good
oilfield practices. If this term were insufficient, the Parties may by mutual
agreement establish an additional term for said performance. If at the end of
this period all the agreed work has still not been carried out, a default shall
be declared and ECOPETROL may proceed in accordance with the provisions of
clause 25.3.
25.2 In the event of a unilateral declaration of termination, the
rights of THE ASSOCIATE enunciated in this contract, both in its capacity as
interested Party and in its capacity as Operator, if at the time of the
unilateral declaration of termination THE ASSOCIATE is both, shall terminate.
25.3 ECOPETROL may not unilaterally declare this contract terminated,
unless sixty (60) days have elapsed after its written notice to THE ASSOCIATE
or its assignees, clearly specifying the causes invoked for said declaration
and only if the other Party has not presented satisfactory explanations to
ECOPETROL or if THE ASSOCIATE has not remedied the fault in the performance of
the contract, without prejudice to the right of THE ASSOCIATE to file the
legal remedies it deems appropriate.
CLAUSE 26 - OBLIGATIONS IN CASE OF TERMINATION
26.1 Upon termination of the contract in accordance with Clause 24,
either in the Exploration or Exploitation Period, THE ASSOCIATE shall leave in
production those wells which at the time are productive and shall deliver the
constructions, pipelines, transfer lines and other real properties of the
Joint Account (located in the Contracted Area), all of which shall become free
of charge the property of ECOPETROL, together with the easements and properties
acquired for the benefit of the contract, even if the former or the latter are
found outside the Contracted Area.
26.2 If this contract is terminated for any reason after the first
seventeen years of the Exploitation Period, all the Interest of THE ASSOCIATE
in the machinery, equipment and other assets or personal property used or
acquired by THE ASSOCIATE or by the Operator for the performance of this
contract, shall pass, free of charge, to ECOPETROL.
26.3 If this contract is terminated before the seventeen (17) years
of the Exploitation Period elapse, the provisions of Clause 22 (subsection
22.10) shall apply.
26.4 In the event that this contract terminates upon a unilateral
declaration of termination, issued at any time, all real and personal
properties acquired for the exclusive benefit of the Joint Account shall pass
free of charge to ECOPETROL.
<PAGE> 20
26.5 At the termination of this contract for any reason and at any
time, the Parties shall be obligated to perform satisfactorily their legal
obligations to each other and to third parties as well as those acquired under
this contract.
CHAPTER VII - MISCELLANEOUS PROVISIONS
CLAUSE 27 - ASSIGNMENT RIGHTS.
27.1 THE ASSOCIATE shall be entitled to assign or transfer, in whole
or in part, its interest, rights and obligations under the association
contract to another person, company or group, with the prior approval of the
Ministry of Mines and Energy, and of the President of Empresa Colombiana de
Petroleos, ECOPETROL.
Therefore, any project which involves a total or partial assignment or
transfer of the interests, rights and obligations under the contract, must be
informed to the Ministry of Mines and Energy and the President of Empresa
Colombiana de Petroleos, ECOPETROL, by means of a certified writing of THE
ASSOCIATE, indicating the essential items of the negotiation, such as possible
assignee, amount, interests, rights and obligations to be assigned, scope of
the operation, etc. Within 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
potential assignees, after which they shall adopt their determination, without
being obligated to give reasons for it. In any event, the determination of the
Minister of Mines and Energy shall prevail.
27.2 If more than thirty (30) business days counted from the date of
receipt of the application by the Ministry of Mines and Energy elapse without
THE ASSOCIATE having received a reply, it shall be understood for all purposes
that the application has been approved.
27.3 The assignments made during the Exploration Period between
companies legally established in Colombia, will not be subject to the
procedure described above and will be formalized through the written
authorization of Empresa Colombiana de Petroleos, ECOPETROL, and the execution
of the pertinent document.
27.4 Any changes or modifications in the contractual relations of THE
ASSOCIATE with Empresa Colombiana de Petroleos, ECOPETROL, as a result of
total or partial direct negotiations in respect of interests, quotas or shares
in THE ASSOCIATE, shall also be subject to the approval procedure by the
Minister of Mines and Energy and the President of Empresa Colombiana de
Petroleos, ECOPETROL.
27.5 Nevertheless, said changes or modifications will not require the
authorization of the Minister of Mines and Energy and Empresa Colombiana de
Petroleos in the following cases:
27.5.1 When the transactions are carried out at a stock exchange or
open securities market.
27.5.2 In the case of assignments or transfers resulting from events
beyond the control of THE ASSOCIATE or the companies which control or direct
it, such as government decisions, legal judgments, partition and adjudication
of assets and auctions.
27.5.3 When the negotiations are carried out among the companies which
control or direct THE ASSOCIATE, or their affiliates or subsidiaries, or among
companies which form a single economic group, in which cases it shall suffice
to inform the Minister of Mines and Energy and Empresa Colombiana de
Petroleos, ECOPETROL, promptly of the assignment or transfer.
27.6 Except in the cases listed above, the carrying out of any of the
assignments, transfers, negotiations, transactions or operations referred to
in this clause, without the prior OK or approval of the Minister of Mines and
Energy and the President of Empresa Colombiana de Petroleos, ECOPETROL, when
necessary, shall result in the application of the provisions of Clause 25 of
the association contract.
<PAGE> 21
27.7 The operations carried out pursuant to this clause and which
under Colombian tax legislation are subject to tax, shall pay the pertinent
taxes.
CLAUSE 28 - DISAGREEMENTS
Whenever there is a discrepancy or contradiction in the interpretation of the
clauses of this contract in relation to those contained in Exhibit "B" entitled
"Operating Agreement", the stipulations of the former shall prevail.
28.2 Any disagreements which arise between the Parties regarding
matters of law related to the interpretation and performance of the contract
and which cannot be settled amicably, are subject to the cognizance and
decision of the jurisdictional branch of the Colombian government.
28.3 Any difference in fact or of a technical nature which may arise
between the Parties in relation to the interpretation or application of this
contract and which cannot be settled amicably, shall be submitted to the final
decision of experts appointed as follows: one by each Party and, the third
one, by mutual agreement between the principal experts appointed. If these
cannot agree on the designation of the third expert, the latter shall be
appointed at the request of either one of the Parties, by the Board of
Directors of the Colombian Society of Engineers "SCI", which has its
headquarters in Santa Fe de Bogota.
28.4 Any difference of an accounting nature which may arise between
the Parties in relation to the interpretation and performance of the contract
and which cannot be settled amicably, shall be submitted to the decision of
experts, who must be licensed public accountants appointed as follows: one
for each Party and, a third one, by the two principal experts and, in the
absence of an agreement between them and at the request of either one of the
Parties, said third party shall be appointed by the Central Board of
Accountants of Bogota.
28.5 Both Parties declare that the decision of the experts shall have
the full effect of a settlement between them and, therefore, said decision
shall be final.
28.6 In the event of a disagreement between the Parties regarding the
technical, accounting or legal nature of the controversy, this shall be
considered legal and Clause 28 (subsection 28.2), shall be applied.
CLAUSE 29 - LEGAL REPRESENTATION
Without prejudice to the rights which THE ASSOCIATE may have as a result of
legal provisions or of the clauses of this contract, ECOPETROL shall represent
the Parties before the Colombian authorities as regards the exploitation of
the Contracted Area whenever it must do so, and shall supply the officials and
government entities with all the data and reports which may be legally
required. The Operator shall be obliged to prepare and supply to ECOPETROL
the pertinent reports. The expenses incurred by ECOPETROL in attending to any
matter referred to in this clause, shall be charged to the Joint Account and
when such expenses exceed two thousand five hundred dollars of the United
States of America (US$2,500) or its equivalent in Colombian currency, the
prior approval of the Operator shall be necessary. The Parties declare, as
regards any relationship with third parties, that neither the provisions of
this clause nor those of any other clause of the contract, imply the granting
of a general power-of-attorney or that the Parties have constituted a civil or
commercial partnership or any other relationship under which either one of the
Parties can be considered jointly and severally responsible for the acts and
failures to act of the other Party or as having the authority or mandate to
bind the other Party as regards any obligation. This contract relates to the
operations within the territory of the Republic of Colombia and although
ECOPETROL is an industrial and commercial enterprise belonging to the Colombian
government, the Parties are in agreement that THE ASSOCIATE, if such were the
case, may elect to be excluded from the application of all the provisions of
subchapter K entitled PARTNERS AND PARTNERSHIPS of the Internal Revenue Code
of the United States of America. THE ASSOCIATE shall make such election in
its name in the appropriate manner.
CLAUSE 30 - RESPONSIBILITIES
<PAGE> 22
30.1 The Operator shall conduct the operations which are the subject
matter of this contract in an efficient and adequate manner and in accordance
with the practices of the oil industry internationally recognized for this
type of operations, it being understood that it shall at no time be
responsible for errors of judgment, or for losses or damages which are not the
result of the Operator's gross negligence.
30.2 The responsibilities contracted by ECOPETROL and THE ASSOCIATE
in relation to this contract with respect to third parties shall not be joint
and several and, therefore, each Party shall be separately responsible for its
participation in the expenses, investments and obligations resulting
therefrom.
30.3 From the value of the expenses incurred and the contracts
entered into by the Operator in amounts exceeding forty thousand dollars of
the United States of America (US$40,000) or its equivalent in Colombian pesos
without having been promptly authorized by the Executive Committee, except in
the cases contemplated by Clause 11 (subsection 11.7), the only one
responsible before third parties shall be the Operator, which shall therefore
assume the corresponding value in full. When the pertinent expense is
accepted by the Executive Committee, the cost of the work, study or purchase
will be recognized to the Operator, in accordance with guidelines that will be
defined by the Executive Committee. In the event that the expense or asset is
not accepted by the Executive Committee, the Operator, if possible, may
withdraw the asset in question, reimbursing the partners for any cost incurred
by the operation in relation to its withdrawal. When it is not possible for
the Operator to withdraw said assets, or he declines to do so, the benefit or
equity increase resulting from these expenses or contracts shall pertain to the
Parties in proportion to their Interest in the Operation.
30.4 Ecologic Control. THE ASSOCIATE, in conducting all the
activities of the contract, must comply with the provisions of the National
Code of Renewable Natural Resources and Environmental Protection and the
other legal provisions on the matter. To such end, THE ASSOCIATE agrees to
execute a permanent plan of a preventive nature to guarantee the preservation
and restoration of the natural resources within the zones in which the
exploration, exploitation and transportation work which is the object of this
contract is carried out.
Said plans and programs shall be communicated by THE ASSOCIATE to the
communities and entities of a national and regional order related to this
matter.
Likewise, specific contingency plans must be established to attend to the
emergencies which might arise and the pertinent remedial actions must be
carried out. To such end, THE ASSOCIATE must coordinate said plans and
actions with the competent entities.
The respective programs and Budgets must be prepared by THE ASSOCIATE in
accordance with the pertinent clauses of this contract.
All the costs incurred shall be assumed by THE ASSOCIATE during the
Exploration Period and by both Parties, charging the Joint Account, during the
Exploitation Period.
CLAUSE 31 - TAXES, LEVIES AND OTHERS
The levies and contributions which accrue after the establishment of the Joint
Venture and before the Parties receive their participation in the proceeds,
which are attributable to the exploitation of the Petroleum, shall be charged
to the Joint Account. Income, capital and supplementary taxes shall be for the
exclusive account of each one of the Parties to the extent corresponding to
each one.
CLAUSE 32 - PERSONNEL
32.1 After consulting with ECOPETROL, THE ASSOCIATE shall appoint the
Manager of the Operator.
32.2 In accordance with the terms of this contract and subject to the
regulations established, the Operator shall have autonomy to designate the
personnel required for the operations referred to in this contract, being
entitled to fix its remuneration, functions, categories, number and conditions.
The Operator shall adequately and diligently train the
<PAGE> 23
Colombian personnel required to replace the foreign personnel which the
Operator considers necessary to carry out the operations of this Contract.
In any event, the Operator shall comply with the legal provisions which
establish the proportion of national and foreign employees and workers.
32.3 Technology Transfer - THE ASSOCIATE agrees to conduct for its
account a guided training program for ECOPETROL professionals in areas related
to the development of the contract.
To comply with this obligation during the Exploration Period, the guided
training may be, among other, in the fields of geology, geophysics and related
areas, appraisal of reserves and description of fields, drilling and
production. The guided training shall be conducted throughout the initial
exploration period and its extensions, through the integration of
professionals designated by ECOPETROL into the work group which THE ASSOCIATE
shall organize for the Contracted Area or for other related activities of THE
ASSOCIATE.
In order to be able to renounce as mentioned in Clause 5 of this contract, THE
ASSOCIATE must have previously complied with the training programs
contemplated herein.
In the Exploitation Period, the scope, duration, place, participants, training
conditions and other aspects, shall be established by the Executive Committee
of the Association.
All costs of the guided training, with the exception of the labor costs
accruing in favor of the professionals who receive said training, shall be
assumed by THE ASSOCIATE in the Exploration Period and by both parties,
charging the Joint Account, during the Exploitation Period.
PARAGRAPH: In order to comply with the obligations regarding the Transfer of
Technology as provided herein, during the first three years of the Exploration
Period and for each year, THE ASSOCIATE agrees to carry out guided training
programs for ECOPETROL'S professionals, which cost is not to exceed US$30.000
per year. The subject matter of said programs as well as the type of program is
to be agreed by ECOPETROL and THE ASSOCIATE. Should the Exploration Period be
extended, the guided training program will consist of similar programs to the
ones performed during the first three years.
32.4 Pursuant to this Contract, during the Exploitation Period the
Operator shall be entitled to execute any work through contractors, subject to
the power of the Executive Committee to approve those contracts in amounts
exceeding forty thousand dollars of the United States of America (US$40,000)
or its equivalent in Colombian currency.
CLAUSE 33 - INSURANCE
The Operator shall take all the insurance required under Colombian law.
Likewise, it shall require each contractor which performs work related to this
contract, to obtain and maintain in force the insurance which the Operator
considers necessary. Likewise, the Operator shall take the other insurance
which the Executive Committee deems appropriate.
CLAUSE 34 - FORCE MAJEURE OR ACTS OF GOD
The obligations contemplated in this contract shall be suspended during the
time that either one of the Parties is unable to perform them in whole or in
part, due to unforeseen events which constitute force majeure or acts of God,
such as strikes, lockouts, wars, earthquakes, floods or other catastrophes,
laws or government regulations or decrees which prevent the obtaining of the
indispensable materials and, in general, any non-financial reason which
actually prevents the work, even if not listed above, but which affects the
Parties and is beyond their control. If one of the Parties is unable, due to
force majeure or acts of God, to perform the obligations under this contract,
it shall notify the other Party immediately, for its consideration,
specifying the reasons for the impediment. Under no circumstances may force
majeure events or acts of God extend or prolong the total exploration and
exploitation period beyond the twenty-eight calendar years counted as from the
Effective Date as stipulated in Clause 23, but any force majeure impediment
during
<PAGE> 24
the six (6) year exploration period indicated in Clause 5, the duration of
which is more than thirty (30) consecutive days, shall extend this six (6) year
period for the same duration of the impediment.
CLAUSE 35 - APPLICATION OF COLOMBIAN LAWS
For all purposes of this contract, the Parties fix as domicile the city of
Santa Fe de Bogota, Republic of Colombia. This contract is governed in all
its parts by Colombian law and THE ASSOCIATE submits to the jurisdiction of
the Colombian courts and waives any attempt at a diplomatic claim as regards
its rights and obligations arising from this contract, except in the case of
denial of justice. It is understood that there will be no denial of justice
when THE ASSOCIATE, in its capacity as Party or Operator, has had access to all
the recourses and means of action which, under Colombian law, may be used
before the jurisdictional branch of the government.
CLAUSE 36 - NOTICES
The notices or communications between the Parties in relation to this contract
will require for their effectiveness the 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:
Carrera 6 No. 115-65, Oficina 307, Santa Fe de Bogota, Colombia. Any change of
address shall be notified in advance to the other Party.
CLAUSE 37 - VALUE INCREASE OF THE PETROLEUM
The payments or reimbursements referred to in Clauses 9 (subsections 9.2 and
9.4) and 22 (subsection 22.5), shall be made in dollars of the United States
of America, or in Petroleum on the basis of the prevailing price and the
limitations established in Colombian legislation for the sale of the portion
payable in dollars, of Petroleum or Natural Gas coming from the Contracted
Area and intended for refining in the national territory.
CLAUSE 38 - PRICES FOR THE PETROLEUM
38.1 The Petroleum which corresponds to THE ASSOCIATE pursuant to
this contract, intended for refining or internal supply, shall be paid for
delivered to the refinery where it is to be processed or to the receiving
station agreed upon by the Parties, as follows:
38.1.1 The gas shall be paid for in accordance with Resolution number
61 of 1983, issued by the Commission of Petroleum and Natural Gas Prices and
Decree number 196 of January 17, 1986, issued by the President of the
Republic, or the government regulations which substitute it.
38.1.2 The crude oil shall be paid for in accordance with Resolution
number 013 of December 14, 1992, issued by the National Energy Commission or
the government regulations which may substitute them.
38.2 The differences which arise from the application of this clause
shall be settled by the systems established in this contract.
CLAUSE 39 - DELEGATION AND ADMINISTRATION
The PRESIDENT OF THE EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL- delegates to
the Vicepresident of Associated Operations the administration of this Contract,
pursuant to the laws and regulatory provisions of ECOPETROL, with capacity to
exercise all the measures required for the performance of this contract.
CLAUSE 40 - EFFECTIVENESS
This contract requires for its effectiveness the approval of the Ministry of
Mines and Energy.
<PAGE> 25
In witness whereof, this contract is signed in Santa Fe de Bogota, before
witnesses, on the eighteenth (18) day of September, nineteen hundred and
ninety-five (1995).
EMPRESA COLOMBIANA DE PETROLEOS HARKEN DE COLOMBIA, LTD.
ECOPETROL
(Signed) /s/ LUIS BERNARDO FLOREZ ENCISO (Signed) /s/ MIKEL D. FAULKNER
LUIS BERNARDO FLOREZ ENCISO MIKEL D. FAULKNER
President President of the Board of Directors
Witnesses
<PAGE> 26
EXHIBIT 10.2
DEVELOPMENT FINANCE AGREEMENT
____________________________________________________
Harken Energy Corporation
and
Arbco Associates L.P.,
Offense Group Associates L.P.,
Kayne, Anderson Nontraditional Investments L.P.,
Opportunity Associates L.P.
____________________________________________________
October 12, 1995
<PAGE> 27
TABLE OF CONTENTS
PAGE
ARTICLE I Definitions and References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. References and Titles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II Advancement of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.1. Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.2. Requests for Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.3. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III Rio Negro NPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.1. Rio Negro NPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.2. Establishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.3. Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.4. Debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.5. Additional Account Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.6. Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.7. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.8. Overpayments and Underpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.9. Prudent Operator Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.10. Sales of Subject Hydrocarbons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.11. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.12. Contracts with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.13. Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.14. Abandonments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.15. Pooling and Unitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.16. Non-consent Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.17. No Personal Liability; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.18. Assignment by Harken Colombia or Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 3.19. Assignment by Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 3.20. Access to Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IV Investors Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.1. Exercise of Investors' Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.2. Number of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.3. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE> 28
Section 4.4. Reduction of Designated Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE V Owner Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.1. Exercise of Owner's Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.2. Exercise of Investors' Second Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.3. Number of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 5.4. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.5. Reduction of Designated Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.6. Investors' Cash Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.7. Payment of Cash Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VI Automatic Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.1. Conversion Upon Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.2. Notice of Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.3. Number of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.4. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 6.5. Elimination of Designated Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VII Owner Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.1. Organization and Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.2. Qualification to do Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.3. Charter, Bylaws, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.4. Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.5. Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.6. Authority of Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.7. Non-Contravention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.8. Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.9. Reports and Financial Statements of Owner . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.10. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.11. Certificate of Designations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.12. Owner's Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.13. Association Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 7.14. Ownership of Harken Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.15. Absence of Bankruptcy Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.16. Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.17. No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.18. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 7.19. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 7.20. Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 7.21. Continuing Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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ARTICLE VIII Investors Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.1. Organization and Corporate Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.2. Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.3. Authority of Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.4. Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.5. Governmental Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.6. Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.7. Disclosure of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.8. Accredited Investors and Experience. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.9. Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.10. Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.11. Continuing Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE IX Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 9.1. Investors' Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 9.2. Conditions of Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 9.3. Taking of Necessary Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 9.4. Issuance of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE X Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.1. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.2. Public Announcements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.3. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.4. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.5. Waivers and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.6. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.7. Binding Effect; No Assignment; No Third Party Benefit . . . . . . . . . . . . . . . . . . . 33
Section 10.8. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.9. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 10.10. United States Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 10.11. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 10.12. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34