Model Petroleum Service Contract

Republic of the Philippines
DEPARTMENT OF ENERGY
Taguig City
Metro Manila

 

SERVICE CONTRACT

This SERVICE CONTRACT (the “Contract”) is made and entered into this ___ day of ____________ 2014 at Taguig City, Metro Manila, Philippines, by and between:

 

THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, hereinafter referred to as the "Government", acting through the DEPARTMENT OF ENERGY, with principal office at Energy Center, Rizal Drive, Fort Bonifacio, Taguig City, Metro Manila, in this act represented by the Secretary, HON. CARLOS JERICHO L. PETILLA, hereinafter referred to as the "DEPARTMENT";

-and-

____________________________, a corporation organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal address at _____________________, in this act represented by its _______________________, hereinafter referred to as “___________”;

____________________________, a corporation organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal address at _____________________, in this act represented by its _______________________, hereinafter referred to as “__________”;

__________ and ____________ are hereinafter jointly referred to as “CONTRACTOR”.

In the implementation of this Contract, the Government shall act through and be represented by the DEPARTMENT. The DEPARTMENT and the CONTRACTOR are hereinafter referred to individually as "Party", and collectively as "Parties".

W I T N E S S E T H; That:

WHEREAS, all Petroleum, Crude Oil, Crude, Natural Gas and/or Casinghead Petroleum Spirit of the Philippines belong to the State and their disposition, exploration, development, exploitation and utilization  is under the full control and supervision of the DEPARTMENT under  Presidential Decree No. 87, as amended, otherwise known as the Oil Exploration and Development Act of 1972 (the “Act"), Republic Act 7638 otherwise known as the Department of Energy Act of 1992, and Section 2, Article XII of the 1987 Constitution;

WHEREAS, the Act declares it to be the policy of the State to hasten the discovery and production of indigenous Petroleum through the utilization of Government and/or private resources;

WHEREAS, the CONTRACTOR desires and agrees to provide funds, and apply its appropriate and advanced technology and expertise to cooperate with the DEPARTMENT for the exploration, development and exploitation of Petroleum resources within the Contract Area and agrees to be subject to the laws and decrees of the Government and other rules and regulations of the DEPARTMENT in the implementation of the Contract;

NOW, THEREFORE, in view of the foregoing premises, the DEPARTMENT and CONTRACTOR hereby stipulate and agree, as follows:

SECTION I
SCOPE

1.01    The CONTRACTOR shall be responsible to the DEPARTMENT for the execution of the Petroleum Operations in accordance with the provisions of this Contract, and is hereby appointed and constituted the exclusive party to conduct the Petroleum Operations on behalf of the Government. The DEPARTMENT shall have the right to require performance of any or all obligations of the CONTRACTOR under this Contract from any or all of the companies comprising the CONTRACTOR.

1.02    This Contract is entered into pursuant to Section 7 of the Act with all necessary technology and financing as well as the required services to be furnished by the CONTRACTOR in accordance with the provisions herein contained. The CONTRACTOR shall undertake and execute the Petroleum Operations contemplated herein under full control, management and supervision of the DEPARTMENT.

1.03    The CONTRACTOR shall assume all exploration risks such that if no Petroleum in Commercial Quantity is discovered and produced, it will not be entitled to reimbursement of expenses incurred in connection with this Contract.

1.04    During the term of this Contract, the total production achieved in the conduct of the Petroleum Operations shall be accounted for between the Parties in accordance with Section 10 hereof.

SECTION II
DEFINITIONS

In this Contract, the following words and terms defined in Section 3 of the Act shall, unless otherwise specified therein, have meaning in accordance with the following definitions:

2.01    Act – refers to Presidential Decree No. 87, as amended.

2.02    Accounting Procedure – refers to the set of procedures, guidelines and arrangement between the Parties to govern the recording and proper entry of expenses, costs and income, attached as Annex “B” to this Contract.

2.03    Affiliate – means: (a) a company in which any one of the companies comprising the CONTRACTOR holds directly or indirectly at least fifty percent (50%) of its outstanding shares entitled to vote; or, (b) a company which holds directly or indirectly at least fifty percent (50%) of the outstanding shares entitled to vote of one of the companies comprising the CONTRACTOR; or, (c) a company in which at least fifty percent (50%) of its outstanding shares entitled to vote are held by a company which holds directly or indirectly at least fifty percent (50%) of the outstanding shares entitled to vote of one of the companies comprising the CONTRACTOR.

2.04    Annual Gross Production of Crude Oil – means the total amount of Crude Oil produced from each Oil Field and/or Gas Field within the Contract Area considered separately in each Calendar Year, less the amount of Crude Oil used for Petroleum Operations and the amount of losses, which is saved and measured by a device jointly approved before the Date of Commencement of Commercial Production at the Delivery Point.

2.05    Annual Gross Production of Natural Gas – means the total amount of Natural Gas produced from each Oil Field and/or Gas Field within the Contract Area considered separately in each Calendar Year, less the amount of Natural Gas used for Petroleum Operations and the amount of losses, which is saved and measured by a device jointly approved before the Date of Commencement of Commercial Production at the Delivery Point.

2.06    Appraisal Well – means a well drilled for the purpose of evaluating the commerciality of a geological trap in which Petroleum has been discovered.

2.07   Appraisal Work Program – refers to the Work Program and Budget developed by the CONTRACTOR and approved by the DEPARTMENT to determine the commerciality of a Petroleum discovery.

2.08  Associated Gas – means all gaseous hydrocarbons produced in association with Crude Oil from oil reservoirs, including residue gas remaining after the extraction of liquid hydrocarbons therefrom.

2.09   Barrel – means 42 U.S. gallons (159 liters) or 9702 cubic inches (0.159 cubic meters) at a temperature of 60 degree Fahrenheit (60oF) or 15.56 degree Centigrade (15.56oC).

2.10  Calendar Quarter – means a period of three (3) consecutive Gregorian months under the Gregorian calendar beginning on the first (1st) day of January, the first (1st) day of April, the first (1st) day of July, or the first (1st) day of October.

2.11  Calendar Year – means a period of twelve (12) consecutive months commencing with January 1 and ending on December 31 of the same year.

2.12   Casinghead Petroleum Spirit – means any hydrocarbon, including condensate, existing in liquid form at a temperature of 60 degree Fahrenheit (60oF) and at an atmospheric pressure of 14.65 psi, which is obtained from Natural Gas at the well head or by separation or by any chemical or physical process or ethane, propane, and butane produced by gas processing.

2.13   Contract – means this Service Contract.

2.14   Contract Area – means, at any time, the area within the territory of the Philippines, which is the subject of this Contract. The Contract Area is outlined and more particularly described in Annex "A" attached hereto.

2.15   CONTRACTOR – means the Contractor specified in the Recital of Parties hereto, including assignee(s) in accordance with Section 24 hereof.

2.16   Contract Year – means a period of twelve (12) consecutive months counted from the Effective Date of this Contract and, thereafter, from each anniversary of such Effective Date.

2.17   Crude Oil – means oil in its natural state before the same has been refined or otherwise treated. It does not include oil produced through destructive distillation of coal, bituminous shales, or other stratified deposits, either in its natural state or after the extraction of water and sand or other foreign substances therefrom.

2.18   Crude Oil Exported – means not only Crude Oil exported as such, but also indigenous Crude Oil refined in the Philippines for export.

2.19  Date of Commencement of Commercial Production – means the date of commencement of production of Crude Oil and/or Natural Gas from any Oil Field and/or Gas Field within the Contract Area determined and announced by the DEPARTMENT as Oil Field and/or Gas Field containing Petroleum in Commercial Quantity in accordance with the provisions in Section 9 hereof, after completion of the Development Operations as provided in the Overall Development Program for the said Oil Field and/or Gas Field.

2.20  Deepwater Area – refers to an area where water depths are in excess of two hundred (200) meters.

2.21  Deepwater Contract – refers to a service contract in which at least eighty-five percent (85%) of the total contract area is in water depths beyond two hundred (200) meters.

2.22   Deep Well – refers to a well drilled to a subsea depth of at least 10,000 feet (3,048 meters)

2.23   Delivery Point – means the point at which Petroleum reaches the delivery facility as agreed upon by the CONTRACTOR and the buyer in the sales contract, a copy of which shall be provided to the DEPARTMENT.

2.24   DEPARTMENT – means the Department of Energy of the Government, or its successor.

2.25   Development Area – means a portion of the Contract Area covering an Oil Field and/or Gas Field, which has been designated for development and any potential contiguous extension areas to such field(s) within the Contract Area. The Development Area(s) shall be proposed by the CONTRACTOR, demarcated by the DEPARTMENT and delineated as such in the Overall Development Program approved by the DEPARTMENT. The Development Area shall automatically cease to be in force as of the date of approval of the Production Area.

2.26   Development and Marketing Cost – means cost incurred by the CONTRACTOR for Development and Marketing Operations.

2.27    Development and Marketing Operations – mean operations carried out for the realization of Petroleum production from the date of approval of the Overall Development Program for any Oil Field and/or Gas Field by the DEPARTMENT including design, construction, installation, drilling, and related research work as well as relevant activities, such as marketing of expected production, carried out before the Date of Commencement of Commercial Production for the realization of Petroleum production.

2.28   Development Well – means any well drilled in a Development Area or a Production Area after the date of approval of the Overall Development Program for the purpose of producing Petroleum, increasing production or accelerating extraction of Petroleum, including production wells, injection wells and dry holes unless such well is designated in the Overall Development Program as an Exploration Well.

2.29    Effective Date – means the date of execution of this Contract by the Parties.

2.30   Expatriate Employee – means an alien who is a permanent resident of a foreign country and is legally employed by the CONTRACTOR or Subcontractor for the Petroleum Operations within the scope of this Contract.

2.31   Exploration Area – means a portion of the Contract Area which has not been relinquished before the expiration of the Exploration Period and which is not included in a Development Area or a Production Area.

2.32    Exploration Cost – means cost incurred by the CONTRACTOR for Exploration Operations.

2.33    Exploration Operations – mean operations carried out for the purpose of discovering Petroleum-bearing traps by means of geological, geophysical, geochemical and other methods including exploratory well drilling; all the work undertaken to determine the commerciality of traps in which Petroleum has been discovered including Appraisal Well drilling and feasibility studies, formulation of the Overall Development Program; and activities related to all such operations, including any work done prior to approval of the Overall Development Program in an attempt to identify a market for Petroleum.

2.34   Exploration Period – means the seven (7)-year period, or any extension thereof, referred to in Section 4.01 of this Contract during which the CONTRACTOR is allowed to perform exploration works in the Contract Area.

2.35   Exploration Well – means any Wildcat Well and/or Appraisal Well drilled within the Exploration Period, including dry hole(s) and discovery well(s).

2.36    Filipino Participation Incentive Allowance or "FPIA" – means:

    1. the sliding scale allowance from one and one-half percent (1.5%) to seven and one-half percent (7.5%) of the gross proceeds granted to the CONTRACTOR when the aggregate participation in the Contract by one or more Filipino citizens and/or Philippine Corporations is from fifteen percent (15%) to thirty percent (30%), in accordance with OEA Circular No. 87-12-003; or,
    2. the allowance of seven and one-half percent (7.5%) of the gross proceeds granted to CONTRACTOR when the aggregate participation in the Contract by one or more Filipino citizens and/or Philippine Corporations is at least fifteen percent (15%) in respect of a Deepwater Contract, in accordance with OEA Circular No. 92-10-05; or,
    3. the allowance of seven and one-half percent (7.5%) of the gross proceeds granted to the CONTRACTOR when the aggregate participation in the Contract by one or more Filipino citizens and/or Philippine Corporations is at least fifteen percent (15%) in respect of the drilling of a well by the CONTRACTOR in water depths beyond two hundred (200) meters, whether within or outside a Deepwater Area, in accordance with DOE Circular No. 94-01-01.

2.37    Filipino Personnel – means any citizen of the Republic of the Philippines employed by the CONTRACTOR and/or the Subcontractor(s), involved in Petroleum Operations under the Contract.

2.38    Force Majeure – refers to events or circumstances that cannot be foreseen or which, though foreseen, are inevitable, as provided in Section 26.01(b) herein.

2.39    Foreign Exchange – means any currency other than the Philippine currency which is freely convertible into gold or currencies eligible to form part of the country's international reserves and is acceptable to the DEPARTMENT and the CONTRACTOR.

2.40    Gas Field – means an accumulation of gas within the Contract Area composed of one or several overlapping gas-bearing zones, within one (1) trap or within associated traps of the same independent geological structure including gas caps, which may or may not be complicated by faulting, and which has commercial value determined in accordance with the procedures stipulated in Section 13 hereof.

2.41    Government – means the Republic of the Philippines.

2.42    GSEC – means Geophysical Survey and Exploration Contract previously awarded by the DEPARTMENT in the Contract Area being applied for.

2.43    Gross Income – means the gross proceeds from the sale, exchange or disposition of all Petroleum, Crude Oil, Natural Gas and/or Casinghead Petroleum Spirit produced under this Contract and sold or exchanged during the Calendar Year at Posted Price or Market Price, as the case may be, all as determined pursuant to Section 10 and all such other income which are incidental to or arising from any one or more of the Petroleum Operations of the CONTRACTOR.

2.44    Market Price – means the price which is or would be realized for Petroleum produced under this Contract if sold in a transaction between independent persons dealing at arm's length in a free market; Provided, however, that the Market Price for Natural Gas including condensate shall be determined in accordance with Section 10 and Section 13 hereof.

2.45    Moratorium – has meaning set forth in Section 4.03 of this Contract.    

2.46    Natural Gas – means Non-Associated Gas and Associated Gas in their natural state including gas obtained from boreholes and wells and consisting primarily of hydrocarbons.

2.47    Net Proceeds – has the meaning set forth in Section 10.04 hereof.

2.48    Non-Associated Gas – means all gaseous hydrocarbons produced from gas reservoirs, including wet gas, dry gas and residue gas remaining after the extraction of liquid hydrocarbons from wet gas.

2.49    Oil Field – means an accumulation of oil within the Contract Area composed of one (1) or several overlapping oil-bearing zones, within one (1) trap or within associated traps of the same independent geological structure, which may or may not be complicated by faulting, and which has commercial value determined in accordance with the procedures stipulated in Section 9 hereof.

2.50    Oil Field and/or Gas Field Straddling a Boundary – means any Oil Field and/or Gas Field extending beyond the Contract Area.

2.51    Operating Cost – means the cost incurred by the CONTRACTOR for the Production Operations.

2.52    Operating Expenses – mean the total expenditures incurred by CONTRACTOR both within and outside the Philippines in all Petroleum Operations performed pursuant to this Contract as determined in accordance with the Accounting Procedures attached hereto and made part thereof as Annex “B”. These expenses shall include, expenses incurred under GSEC, if any, which shall be limited to the share of the contractor on the particular area as validated by the DEPARTMENT, but are not necessarily limited to, the cost of seismic surveys, reprocessing and special processing of seismic data, geological and geophysical studies, drilling, equipping and completing wells, engineering studies, construction of well platforms and tank batteries, flowline systems and terminals, the cost of operating and maintaining all such facilities including general and administrative costs and expenses, home office overhead, in accordance with the Accounting Procedures (Annex “B”). Operating Expenses shall also include, but are not necessarily limited to, charges relating to lifting, transportation, storage, handling, and sale of Petroleum as specified in Section 10, whether for export or domestic consumption, together with two-thirds (2/3) of interest and financing charges for development and production operations. However, the cost of transportation of petroleum by pipeline shall be subject to separate agreement referred to in Section 2.56 hereof. If the CONTRACTOR has any previous expenditures for Petroleum Operations over the Contract Area under previous Geophysical Survey and Exploration Contracts (GSECs) before the Effective Date of this Contract then the expenditures shall be included as Operating Expenses up to its participation in those GSECs and expenses account transferred by other previous contractors in those in GSECs, subject to validation by the DEPARTMENT.

2.53    Operator – means a member of the joint venture/consortium appointed as the sole representative by the CONTRACTOR in its dealings with the DEPARTMENT.

2.54    Overall Development Program – means a plan prepared by the CONTRACTOR for the development of an Oil Field and/or Gas Field which has been reviewed and approved by the DEPARTMENT and such plans shall include, but shall not be limited to recoverable reserves, the Development Well pattern, master design, production profile, economic/feasibility analysis and time schedule of the Development and Marketing Operations. In addition, abandonment and termination plan shall be included and integrated herein, as specified in Section 7.01(h).   

2.55    Petroleum – means any Crude Oil or mineral oil, Natural Gas or hydrocarbon gas, condensate, Casinghead Petroleum Spirit, bitumen, asphalt, mineral gas, and all other similar or naturally associated substances with the exception of coal, peat, bituminous shale and/or other stratified mineral fuel deposits.

2.56    Petroleum in Commercial Quantity – means Petroleum in such quantities which will permit its being economically developed, either on its own or in combination with other existing and/or future discoveries of Petroleum, as determined by the CONTRACTOR and approved by the DEPARTMENT, in accordance with such policies or guidelines as may be issued, subject to Section 21, after taking into consideration the location of the Petroleum reserves, the depths and number of wells required to be drilled, the availability or potential availability of a market, and the transport and terminal facilities needed to exploit the Petroleum which has been discovered.

2.57    Petroleum Operations – mean searching for and obtaining Petroleum within the Philippines under this Contract, drilling and natural flow or suction or the like, and all other operations incidental thereto. It includes the transportation, storage, handling and sale (whether for export or domestic consumption) of Petroleum so obtained but does not include any: (1) transportation of Petroleum outside the Philippines; (2) processing or refining at a refinery; or (3) any transaction in the products so refined. It includes both transportation of Petroleum up to Delivery Point to the buyer or buyers thereof, and the facilities upstream of said Delivery Point for extraction of such Petroleum. In the event that the DEPARTMENT agrees to the participation of the CONTRACTOR in pipeline installation and operation to transport the Petroleum, then the Parties shall negotiate a separate agreement covering construction and operation of such pipeline. However, Petroleum Operations do not include pipeline gas distribution as a public utility under applicable law or, in the absence thereof, such guidelines or issuances of the DEPARTMENT.

2.58    Philippine Corporation – means a corporation organized under Philippine laws at least sixty percent (60%) of the voting capital of which is owned and held by Filipino citizens and/or other Philippine corporations.

2.59    Philippine Income Tax – refers to taxes imposed under the National Internal Revenue Code of the Philippines, as amended, upon taxable corporate income.

2.60    Philippines – means the Republic of the Philippines.

2.61    Posted Price – means the Free on Board (FOB) price established by the CONTRACTOR and the DEPARTMENT for each grade, specific gravity, and quality of Crude Oil offered for sale to buyers generally for export at the particular point of export, which price shall be based upon geographical location and the fair market export values for Crude Oil of comparable grade, specific gravity, quality and quantity.

2.62    Production Area – means that portion of the Contract Area where all reservoirs containing Petroleum in Commercial Quantity are delineated by the CONTRACTOR with the approval of the DEPARTMENT.

2.63    Production Operations – mean operations and all activities related thereto carried out for Petroleum production of an Oil Field and/or Gas Field from the Date of Commencement of Commercial Production, such as extraction, injection, stimulation, treatment, storage, transportation, and lifting, etc.

2.64    Production Period – means the twenty-five (25)-year period, or any adjustment thereof, referred to in Section 4.01 of this Contract during which the CONTRACTOR is allowed to perform production works or activities in the Production Area.

2.65    Production Year – means, in respect of each Oil Field and/or Gas Field, a period of twelve (12) consecutive Gregorian months under the Gregorian calendar beginning on the Date of Commencement of Commercial Production of such Field and thereafter from the anniversary thereof.

2.66    Subcontractor(s) – means an individual or entity which provides the CONTRACTOR with goods or services under a separate agreement by which the CONTRACTOR performs or causes to perform some of its activities and/or obligations under this Contract.

2.67    Sub-Phase – means the phase within the Exploration Period as determined in accordance with Section 4.01 and Section 6.02 herein.

2.68    Taxable Net Income – shall have the meaning set forth in Section 11 hereof.

2.69    Third Party – means any individual or entity except the DEPARTMENT and the CONTRACTOR.

2.70    United States Dollars (US$) – mean bills or notes of legal tender in the United States of America.

2.71    Wildcat Well – means a well drilled on any geological trap for the purpose of searching for Petroleum accumulations, including wells drilled for the purpose of obtaining geological and geophysical parameters.

2.72    Work Program and Budget – means all types of plans formulated for the performance of the Petroleum Operations, including plans for exploration, development, and production, and the corresponding budget for such activities. For these purposes, the Overall Development Program shall be the Work Program and Budget pertaining to such portions of the Contract Area under the Production Period.

SECTION III
EFFECTIVITY

3.01    This Contract shall come into effect on the Effective Date.

SECTION IV
TERM

4.01    The Exploration Period under this Contract shall be seven (7) years consisting of ________  Sub-Phases, as set forth in Section 6.02, the duration of which depends on the proposed Work Program and Budget, commencing on the Effective Date.  The Exploration Period may be extended for a maximum period of three (3) years provided that the CONTRACTOR:

    1. has not been in default in its exploration work obligations and other obligations; and
    2. has provided a Work Program and Budget  for the extension acceptable to the DEPARTMENT.

Unless Petroleum is discovered at the end of such extension period, the extended Exploration Period shall automatically terminate on the last day of the extension.  If Petroleum is discovered by the end of the original or the extended Exploration Period, the CONTRACTOR shall be entitled to an additional extension, as necessary, of the Exploration for a period not exceeding one (1) year to determine if the Petroleum discovered is of commercial quantity subject to the DEPARTMENT’s approval of a Work Program and Budget for the proper execution of the Appraisal Program submitted by the CONTRACTOR. This additional extension shall be deemed part of the initial twenty-five (25)-year period for Production Operations if the Contract Area is subsequently developed by the CONTRACTOR.

4.02    Where Petroleum in Commercial Quantity is discovered during the Exploration Period or any extension thereof, this Contract shall remain in force in respect of any Production Areas delineated pursuant to Section 5 hereof,  during:

    1. the balance of the Exploration Period, or any extension thereof, as the case may be; and,
    2. the Production Period which may be renewed for a series of five (5)-year periods but in no case shall such renewal exceed a total of fifteen (15) years under such terms and conditions as may be agreed upon by the Parties at the time of renewal. Provided that:
      1. the CONTRACTOR has not been in default in its approved Work Program and Budget and other obligations;
      2. the term of this Contract shall in no case exceed fifty (50) years from the Effective Date inclusive of the Moratorium or any extension thereof, if any; and,
      3. if, during the Production Period, the CONTRACTOR fails to continue production of Petroleum for more than one (1) year without the prior approval of the DEPARTMENT, then the DEPARTMENT may unilaterally terminate this Contract.

4.03    If the CONTRACTOR discovers Petroleum under this Contract in sufficient quantity that could be normally produced except that, due to inadequate technology, the capability to produce the Petroleum in Commercial Quantity does not yet exist, the CONTRACTOR shall notify the DEPARTMENT and the Parties will jointly review the findings of the CONTRACTOR.  Upon mutual satisfaction that technological means to extract Petroleum in Commercial Quantity does not yet exist, then the corresponding work and expenditure obligations under this Contract shall be suspended for a period not exceeding three (3) years (the "Moratorium"), provided that the CONTRACTOR, subject to the approval of the DEPARTMENT, shall delineate the Oil Field and/or Gas Field that will be put under Moratorium and elect to either relinquish or continue the Work Program and Budget over the rest of the Contract Area, subject to Section 5 hereof.  The decision as to whether a Moratorium is justified shall be based, among others, on projects and operations found elsewhere in the world at comparable depths and conditions to those encountered by the CONTRACTOR under this Contract.  Any other conditions not expressly provided herein, as basis for Moratorium shall be subject to the approval of the DEPARTMENT.   

4.04    During the Moratorium, the CONTRACTOR shall actively pursue the necessary research or activities by itself or in joint industry studies, to address reason for the Moratorium. The CONTRACTOR shall semi-annually report to the DEPARTMENT its progress in such research or activities.  If the DEPARTMENT determines that the reason for the Moratorium has been sufficiently resolved, the CONTRACTOR shall  elect either to:

    1. continue with its obligations under this Contract effective on the first day following the formal notice lifting the Moratorium; or,
    2. relinquish the said Contract Area without further commitment or obligation.

SECTION V
EXCLUSION OF AREAS

5.01    On or before the end of the ________ Sub-Phase, the CONTRACTOR shall surrender at least twenty-five percent (25%) of the initial Contract Area.

5.02    On or before the end of the _________ Sub-Phase, the CONTRACTOR shall surrender an additional area equal to at least twenty-five percent (25%) of the initial Contract Area.

5.03    In the event that on or before the end of any Sub-Phase during the Exploration Period, the CONTRACTOR has delineated any Production Area, the extent of such Production Area shall be deducted from the initial Contract Area for the purpose of determining the size of such area that must be surrendered pursuant to Sections 5.01 and 5.02 above.

5.04    If Petroleum in Commercial Quantity is discovered during any Sub-Phase of the Exploration Period or any extension thereof, the CONTRACTOR may retain after the Exploration Period twelve and one-half percent (12.5%) of the initial Contract Area for further exploration and development, in addition to the delineated Production Areas; Provided, that the CONTRACTOR shall prepare and submit the Work Program and Budget in accordance with Section 8.01 for the area to be retained subject to the approval of the DEPARTMENT; Provided further, that the CONTRACTOR shall pay after the Exploration Period as annual rentals to the DEPARTMENT on such twelve and one-half percent (12.5%) retained area of One Hundred Pesos (PhP 100.00)  per hectare or fraction thereof; and, Provided finally, that such annual rentals shall be offset by the amount spent by the CONTRACTOR for exploration on such retained area during the Contract Year.  Failure of the CONTRACTOR to implement the Work Program as approved by the DEPARTMENT in any Contract Year will cause the automatic surrender of the retained area to the DEPARTMENT.

5.05    Within thirty (30) days prior to the date of each relinquishment, the CONTRACTOR shall submit to the DEPARTMENT a written report on its completed Exploration Operations on the areas to be relinquished, including a map showing the areas to be relinquished with the coordinates of the connecting points of the boundary lines.

5.06    The CONTRACTOR shall have the right to submit written notice to the DEPARTMENT to surrender or abandon the entire Contract Area prior to the end of any Contract Year or exploration Sub-Phase and be relieved of any work commitment or expenditure amount related to future Contract Years or exploration Sub-Phases; Provided, that if the CONTRACTOR surrenders or abandons the entire Contract Area prior to satisfying its minimum work and expenditure commitments for any of the Contract Year or exploration Sub-Phase, it shall pay the DEPARTMENT the amount it should have spent, but did not, for exploration work during the pertinent unfinished Contract Year or Sub-Phase as specified under Section 6.  The performance guarantee posted by the CONTRACTOR, in accordance with Section 7.01(g) of this Contract, shall be liable for any such deficiency.

5.07    The CONTRACTOR shall have the right, within thirty (30) days prior to the end of each Sub-Phase, to surrender or abandon any portion of the Contract Area.  Any portion surrendered shall be credited against that portion of the Contract Area which the CONTRACTOR is next required to surrender under the provisions of Sections 5.01 and 5.02 hereof.

5.08    With respect to any surrender of area pursuant to this Section 5, the CONTRACTOR shall advise the DEPARTMENT of the portion to be surrendered at least thirty (30) days in advance of the date of surrender.  The areas being surrendered shall each be of sufficient size and convenient shape by themselves or in conjunction with areas outside the Contract Area to enable Petroleum Operations to be conducted thereon.

SECTION VI
MINIMUM WORK COMMITMENT AND MINIMUM EXPECTED
EXPLORATION EXPENDITURES

6.01    The CONTRACTOR shall begin to perform the Exploration Operations within six (6) months from the Effective Date of the Contract.

6.02    The CONTRACTOR shall fulfill the minimum exploration work commitment for each Sub-Phase of the Exploration Period in accordance with the following provisions:

    1. During the 1st Sub-Phase of the Exploration Period covering Contract Years _____________ (being ______ months), the CONTRACTOR shall _______________________________________________________________, with an expected equivalent total minimum expenditure of ______________ United States Dollars (US$ ____________).
    2. During the 2nd Sub-Phase of the Exploration Period covering Contract Years _____________ (being ______ months), the CONTRACTOR shall _______________________________________________________________, with an expected equivalent total minimum expenditure of ______________ United States Dollars (US$ ____________).
    3. During the 3rd Sub-Phase of the Exploration Period covering Contract Years _____________ (being ______ months), the CONTRACTOR shall _______________________________________________________________, with an expected equivalent total minimum expenditure of ______________ United States Dollars (US$ ____________).
    4. During the 4th Sub-Phase of the Exploration Period covering Contract Years _____________ (being ______ months), the CONTRACTOR shall _______________________________________________________________, with an expected equivalent total minimum expenditure of ______________ United States Dollars (US$ ____________).
    5. If the CONTRACTOR is able to drill one (1) Deep Well, then such Deep Well drilling shall be considered as equivalent to drilling two (2) Exploration Wells committed under this Contract.

6.03    At least thirty (30) calendar days before the end of each Sub-Phase of the Exploration Period, the CONTRACTOR, based on the following options in accordance with the provisions of this Contract shall notify in writing the DEPARTMENT either to:

    1. enter the next Sub-Phase and continue exploration upon prior approval by the DEPARTMENT; or
    2. conduct only an Appraisal Work Program in the Petroleum discoveries awaiting appraisal based on procedures under Section 9 of the Contract, and/or Development and Marketing Operations as approved by the DEPARTMENT, provided that the minimum obligations during the current exploration Sub-Phase have been fulfilled; and the areas under Section 5 hereof have been relinquished; or
    3. terminate the Contract.

The CONTRACTOR shall notify the DEPARTMENT in writing of its option at least thirty (30) days before the end of each of the relevant Sub-Phase.

6.04    If the CONTRACTOR fails to comply with the work obligations during any Sub-Phase provided for in this Contract, it shall pay to the DEPARTMENT the amount it should have spent but did not in direct execution of its work obligations. If the CONTRACTOR elects to terminate the Contract before the end of any Sub-Phase during the Exploration Period and there are unfulfilled work obligations in the Sub-Phase in question, the CONTRACTOR shall pay the value of the unfulfilled balance of the minimum exploration work commitment for such Sub-Phase in US$.  However, if the minimum exploration work commitment for any Sub-Phase during the Exploration Period is fulfilled while its expected corresponding minimum exploration expenditures are not fulfilled, the unspent part shall be deemed as a saving and shall not be paid to the DEPARTMENT.

6.05    Subject to the approval of the DEPARTMENT and provided that the work commitments in the Work Program and Budget for the preceding Sub-Phase have been fulfilled, the CONTRACTOR may commence to the next Sub-Phase during the Exploration Period earlier than the scheduled date.  If the exploration work actually fulfilled by the CONTRACTOR exceeds the minimum exploration work commitment for the said Sub-Phase, the excess part may be credited, subject to the approval of the DEPARTMENT, against the minimum exploration work commitment for the next Sub-Phase(s).

SECTION VII
RIGHTS AND OBLIGATIONS OF THE CONTRACTOR

7.01    The CONTRACTOR shall have the following obligations:

    1. Perform all Petroleum Operations and provide all necessary services, technology, and financing in connection therewith; Provided, that no Foreign Exchange requirements of the Petroleum Operations shall be funded from the Philippine banking system unless otherwise allowed under applicable laws and regulations;
    2. Be subject to the provisions of applicable laws relating to labor, health, safety, indigenous people’s rights, environment and specially protected areas and ecology;
    3. Provide insurance to adequately cover/answer for any oil spill which may cause pollution and/or damage to the environment, lives and/or property, in accordance with existing laws, rules and regulations;
    4. Operate the Production Area in accordance with good international petroleum practices and pursuant to an efficient and economic program of operation, by using modern and scientific methods to enable maximum economic production of Petroleum once a Production Area has been established.  The CONTRACTOR shall exert its best efforts to avoid hazards to life, health, and property, pollution of air, land, and waters;
    5. Allow examiners of the Bureau of Internal Revenue and other representatives authorized by the DEPARTMENT, at all reasonable times upon prior fifteen (15) days written notice, full access to accounts, books, and records relating to Petroleum Operations hereunder for tax and other fiscal purposes;
    6. Give priority in employment to qualified personnel (as determined by the CONTRACTOR) in the municipalities or provinces where the Petroleum Operations are located;
    7. Within sixty (60) days after the Effective Date of this Contract or upon implementation of the succeeding Sub-phases to post a performance bond of sufficient amount, but not less than the minimum expenditure commitment for that particular Contract Year, in favor of the DEPARTMENT conditioned upon the faithful performance by the CONTRACTOR of any or all of its exploration and development activities under this Contract.  Upon the request of the CONTRACTOR, the amount of guarantee for each Contract Year may be subsequently reduced based on the CONTRACTOR's performance of its work and expenditure commitments;
    8. Include in the Overall Development Program, submitted to the DEPARTMENT for approval, a provision for abandonment and payment of abandonment costs.  It shall provide that beginning on the Date of Commencement of Commercial Production the estimated abandonment and decommissioning cost of the Oil Fields and/or Gas Fields in the Contract Area shall be determined (with annual reviews and adjustments thereafter to be included in the annual Work Program and Budget) accrued and recovered annually as Operating Expenses over the productive life of the Oil Fields and/or Gas Fields.  In this regard, the CONTRACTOR shall be responsible in the proper abandonment and rehabilitation of all sites affected by its Petroleum Operations.  For this purpose, the CONTRACTOR shall establish and maintain a sinking fund in the form of a trust account with a reputable commercial bank in the Philippines in favor of the DEPARTMENT the amount of which shall be equivalent to the estimated abandonment and decommissioning cost within one (1) year after the Date of Commencement of Commercial Production.  The CONTRACTOR shall then submit to the DEPARTMENT a certification from the concerned bank that the account has been established for the benefit and purpose provided in this Section;
    9. Apply the appropriate and advanced technology and business experience in performing the Petroleum Operations reasonably, economically and efficiently in accordance with sound international petroleum industry practice;
    10. Prepare/submit the annual Work Program and Budget to the DEPARTMENT for review and approval;
    11. Be responsible for procurement of installations, equipment and supplies and enter into subcontracts related to the Petroleum Operations, in accordance with the approved Work Program and Budget;
    12. Maintain complete and accurate accounting records of all the costs and expenditures for the Petroleum Operations in accordance with the provisions of the Accounting Procedure (attached hereto as Annex “B”) and to keep the accounting books secure and in good order;
    13. Make necessary preparation for regular meetings of Parties, and to submit in advance to the Parties necessary information related to the matters to be reviewed and approved by the Parties;
    14. Give preference to local companies/agencies in entering into subcontracts on projects or services which are required in the Petroleum Operations but are not carried out by the CONTRACTOR, provided that these companies/agencies are competitive/qualified and the services required are locally available;
    15. Inform all the Subcontractors which render services for the Petroleum Operations and all the Expatriate Employees of the Operator and of Subcontractors who are engaged in the Petroleum Operations in the Philippines that they shall be subject to the laws, decrees of the Government, and other rules and regulations of the DEPARTMENT;
    16. Submit to the DEPARTMENT a quarterly report on its work accomplishment and actual expenditure relative to Section 6 hereof covered by a transmittal letter duly signed by the responsible official of the CONTRACTOR.  In addition, all technical reports should be signed by a duly licensed technical personnel of, or engaged by, the CONTRACTOR;
    17. Handle the information, samples or reports in accordance with the following provisions:
        1. provide the DEPARTMENT with various data and information in accordance with Section 8 and Section 14 hereof;
        2. furnish the DEPARTMENT quarterly reports on safety, environmental protection and accidents related to the Petroleum Operations and with financial reports prepared in accordance with the provisions of the Accounting Procedure; and,
        3. furnish the DEPARTMENT with the following:
            1. annual procurement plans for purchasing equipment and materials, inquiries, offers, orders and services, etc., in accordance with the approved Work Program and Budget;
            2. manuals, technical specifications, design criteria, design documents (including design drawings), construction records and information, consumption statistics, equipment inventory, spare parts inventory, etc.;
            3. technical investigation and cost analysis reports; and,
            4. other information relating to the Petroleum Operations acquired by the CONTRACTOR;
    18. Abide by the laws, decrees of the Government and other rules and regulations of the DEPARTMENT with respect to environmental protection and safety of the Petroleum Operations and shall endeavor in accordance with the international petroleum industry practice to:
        1. prevent damage and destruction to marine organisms and their living oceanic environments;
        2. control blowouts promptly and prevent or avoid waste or loss of Petroleum discovered in or produced from the Contract Area;
        3. prevent Petroleum from flowing into low pressure formations or damaging adjacent Petroleum-bearing formations;
        4. prevent water from flowing into Petroleum-bearing formations through dry holes or other wells, except for the purpose of secondary recovery; and,
        5. prevent damage to crops, buildings and other installations;
    19. Maintain detailed technical records and accounts of Petroleum Operations;
    20. Meet with the DEPARTMENT on a quarterly basis or as needed during the formulation of the CONTRACTOR’s Overall Development Plan and all issues relative to the Petroleum Operations;
    21. Conform to the Government regulations regarding, among others, safety, demarcation of the Contract Area, non-interference with the rights of other Petroleum, mineral, and natural resources operators;
    22. Install and maintain all meters and measuring equipment in good order and, upon proper notification from an inspection group, allow access to these as well as to the exploration and production sites to inspectors authorized by the DEPARTMENT;
    23. Be subject to Philippine Income Tax under the provisions of the National Internal Revenue Code and the Act, including their amendments;
    24. After the Date of Commencement of Commercial Production in the Contract Area, supply, a portion of the domestic requirements of the Philippines on a pro rata basis from the CONTRACTOR's and the Government's shares in such production, which portion shall be offered for sale at Market Price and shall be determined as follows: in respect of each year, by multiplying the total quantity of Petroleum required for domestic consumption by the ratio of the total quantity of Petroleum produced from the Contract Area to the entire Philippine production of Petroleum. The CONTRACTOR, subject to the approval of the DEPARTMENT, which approval shall not be unreasonably withheld, shall be entitled to sell its portion of such Petroleum in the open market in case domestic purchasers of the Petroleum are not willing or otherwise unable to timely purchase the Petroleum or timely pay the Market Price therefore;
    25. CONTRACTOR, acting as reasonably prudent operator following sound oil and/or gas field practices prevalent in the international petroleum industry, shall exert best effort to ensure rig availability in connection with the performance of its obligations hereunder;
    26. Secure the petroleum facilities including wells, platform, pipelines and all other equipment installed which are necessary for the Petroleum Operations, subject to the approval by the DEPARTMENT.  Costs and expenses for securing the petroleum facilities shall be included as Operating Expenses under Section 10; and
    27. Refrain from issuing press releases, media statements and interviews on any oil/gas discovery, estimated oil/gas reserves and any well drilling operations, tests, and/or results, unless otherwise approved or allowed by the DEPARTMENT. The DEPARTMENT shall have the exclusive right to make any such press releases or interviews on the mentioned activities/information.

7.02    The CONTRACTOR shall have the following rights:

  1. Provided, however, that if the CONTRACTOR or its Subcontractor(s) sell, transfer, or dispose of such machinery, equipment, spare parts, and materials within the Philippines without the prior approval of the DEPARTMENT, the CONTRACTOR shall pay twice the amount of the tax exemption granted on the equipment sold, transferred or disposed;

    Provided further, that the DEPARTMENT shall allow, and approve the sale, transfer, or disposition of the said items within the Philippines, without tax, if made:

    1. Exemption from all national taxes, except Philippine Income Tax, pursuant to Section 21.04 hereof, under the provisions of the National Internal Revenue Code and the Act, as amended;
    2. Exemption from all levies, tariffs, duties, compensating tax and value added tax pursuant to Section 21.04 hereof, on the importation into the Philippines of all machinery, equipment, spare parts, and all materials required for, and to be used exclusively by the CONTRACTOR or its Subcontractor(s) in the Petroleum Operations, on the following conditions:
        1. said machinery, equipment, spare parts, and materials of comparable price, quality and quantity are not manufactured domestically nor readily available to the CONTRACTOR or its Subcontractor(s) within the same or better time frame;
        2. said machinery, equipment and spare parts are directly and actually needed, and will be used exclusively by the CONTRACTOR in its Petroleum Operations or in the operations for it by a Subcontractor(s) and are covered by shipping documents in the name of the CONTRACTOR to whom the shipment will be delivered directly by the customs authorities; and,
        3. the prior approval of the DEPARTMENT was obtained by the CONTRACTOR prior to the importation of such machinery, equipment, spare parts, and materials, which approval shall not be unreasonably withheld;
        1. to another contractor who is granted similar Philippine duty-exempt status;
        2. for reasons of technical obsolescence; or,
        3. for purposes of replacement to improve and/or expand the Petroleum Operations of the CONTRACTOR;
    3. Exemption from posting of performance/surety bond during the Production Period of the Contract;
    4. Exemption, upon approval by the DEPARTMENT, which approval shall not be unreasonably withheld, from laws, regulations and/or ordinances restricting the exportation of machinery, equipment, spare parts and materials which were imported solely for the CONTRACTOR's Petroleum Operations when no longer needed;
    5. Exemption from publication requirements under Republic Act Number five thousand four hundred fifty-five (R.A. 5455), and the provisions of Republic Act Number six thousand one hundred seventy-three (R.A. 6173), as amended, with respect to the exploration, production, exportation, sale, or disposition of Petroleum discovered and produced in the Contract Area;
    6. Exportation of Petroleum subject to the obligation to supply a portion of domestic requirements as provided in Section 7.01(x) above;
    7. Entry, upon the sole approval of the DEPARTMENT, which approval shall not be unreasonably withheld, of alien technical and specialized personnel (including the immediate members of their families), who may exercise their professions solely for the Petroleum Operations of the CONTRACTOR; Provided, that if the employment or connection of such alien with the CONTRACTOR ceases, the applicable laws and regulations on immigration shall apply to him and his immediate family; Provided further, that Filipinos shall be given preference to positions for which they have adequate training and experience (as determined by the CONTRACTOR); Provided finally, that the CONTRACTOR shall adopt and implement a training program for Filipinos along technical or specialized lines;
    8. Have at all times the right of ingress to and egress from the Contract Area and to and from facilities wherever located;
    9. Subject to the regulations of the Bangko Sentral ng Pilipinas, be entitled to:
        1. repatriate over a reasonable period the capital investment and all costs and expenses actually spent on or brought into the country in Foreign Exchange or other assets and registered with the Bangko Sentral ng Pilipinas;
        2. retain abroad all Foreign Exchange representing proceeds arising from exports accruing to the CONTRACTOR and/or its designated Operator over and above:
            1. the Foreign Exchange to be converted into pesos in an amount sufficient to cover, or equivalent to, the local costs for administration and operations of the exported Petroleum; and,
            2. revenues payable to the Government on such Petroleum exported;
        3. convert into Foreign Exchange and remit abroad at prevailing rates no less favorable to the CONTRACTOR than those available to any other purchaser of foreign currencies, any excess balances of the CONTRACTOR's peso earnings from Petroleum production and sale over and above the current working capital they require; and,
        4. convert Foreign Exchange into Philippine currency for all purposes in connection with its Petroleum Operations at prevailing rates no less favorable to the CONTRACTOR than those available to any other purchaser of such currency;
    10. Be allowed the Filipino Participation Incentive Allowance (FPIA);
    11. Exemption from the investment requirements of foreign corporations under Section 126 in relation to Section 148 of the Corporation Code of the Philippines;
    12. May block off, upon notice to and approval by the DEPARTMENT, which approval shall not be unreasonably withheld, any delineated structure that straddles or adjoins a portion of the Contract Area and a free area. Such blocked-off area(s) shall thereupon be deemed a part of the Contract Area subject to the terms and conditions of this Contract and, subject further to Section 5 hereof.

7.03    The DEPARTMENT, shall on behalf of each company comprising the CONTRACTOR, pay from the Government’s share of the Net Proceeds and separately remit to the Bureau of Internal Revenue, all Philippine Income Taxes as defined under Section 2 of this Contract, the National Internal Revenue Code, and the Act based on income or profit derived from Petroleum Operations under this Contract.  The DEPARTMENT shall separately remit such Philippine Income Tax to, and obtain separate official receipts acknowledging payment of said taxes from, the proper Government authority and shall furnish to each of the companies comprising the CONTRACTOR their respective official receipts issued in their names.

SECTION VIII
WORK PROGRAM AND BUDGET

8.01    Before the end of October of each Calendar Year after the Effective Date of the Contract, the CONTRACTOR shall submit and present to the DEPARTMENT for review and approval its annual Work Program and Budget for the next Calendar Year. Within forty-five (45) working days following the receipt of the annual Work Program and Budget, the DEPARTMENT shall notify the CONTRACTOR in writing of its approval or suggest modifications thereto with its detailed reasons.  If the DEPARTMENT requests any modifications on the aforesaid annual Work Program and Budget, the Parties shall promptly hold meetings to discuss modifications and all suggested modifications will be respectively considered by the CONTRACTOR.  Any modifications agreed upon by the Parties shall be effected immediately.  In case the DEPARTMENT fails to act on the proposed annual Work Program and Budget within forty-five (45) working days from receipt, the proposed annual Work Program and Budget shall be deemed to have been approved by the DEPARTMENT.  The CONTRACTOR shall conduct the Petroleum Operations in accordance with the approved or modified annual Work Program and Budget.

8.02    The CONTRACTOR may, in accordance with the following provisions, incur excess expenditures or expenditures outside the budget in carrying out the Work Program and Budget, provided that the objectives in the approved Work Program and Budget are not changed.  The CONTRACTOR shall advise the DEPARTMENT of any significant changes on the Work Program and Budget, as follows:

  1. In carrying out an approved budget for a single item, such as the drilling of well, the CONTRACTOR may, if necessary, incur excess expenditures of no more than fifty percent (50%) of the budgeted amount.  The CONTRACTOR shall inform the DEPARTMENT in writing of such possible excess of aggregate amount ten (10) working days prior to incurring such expenditures and explain the need for such expenditures.
  2. For the efficient performance of the Petroleum Operations, the CONTRACTOR may, without approval of the DEPARTMENT, undertake certain case of emergency works, including but not limited to blowout and oil spill corrective measures which are not included in the Work Program and Budget, but the CONTRACTOR shall, within fifteen (15) working days after such emergency expenditures are incurred, make a written report to the DEPARTMENT.
  3. In the event that the aggregate of excess expenditures under Section 8.02(a) herein and expenditures under Section 8.02(b) herein in a Calendar Year cause the total expenditures of that Calendar Year to exceed the approved annual budget, such excess shall not exceed fifteen percent (15%) of the approved annual budget for that Calendar Year. If the aforesaid excess is expected to be in excess of fifteen percent (15%) of the annual budget, the CONTRACTOR shall present its reasons thereof to the DEPARTMENT in writing and also meet with the DEPARTMENT to discuss the expenditures for approval prior to incurring such expenditures.

SECTION IX
DETERMINATION OF COMMERCIALITY

9.01    If any Crude Oil or Natural Gas is discovered within the Contract Area, the CONTRACTOR shall promptly report in writing such discovery to the DEPARTMENT indicating therein the preliminary assessment or report on such discovery and, if there is a need for more time to decide on its next action, the expected date at which the CONTRACTOR shall inform the DEPARTMENT of its decision whether or not it shall pursue appraisal drilling of the discovery.

On such date indicated, the CONTRACTOR shall inform the DEPARTMENT of its decision; if it decides that a Crude Oil/Natural Gas discovery is worthy of appraisal, the CONTRACTOR shall submit to the DEPARTMENT an Appraisal Work Program providing in detail the appraisal work and timetable for such discovery.  For Crude Oil discovery, such Appraisal Work Program shall be prepared and submitted by the CONTRACTOR to the DEPARTMENT not later than ninety (90) calendar days from the date of the notice of such decision made by the CONTRACTOR.  For a Natural Gas discovery, such Appraisal Work Program shall be prepared and submitted on the date the CONTRACTOR shall indicate in the notice of its decision sent to the DEPARTMENT. The Appraisal Work Program shall, insofar as is practicable, be prepared on the basis of continuous appraisal work, with a view to commence such Appraisal Work Program within one hundred eighty (180) calendar days from the date of the aforesaid decision was made by the CONTRACTOR.

9.02    After the submission to and approval by the DEPARTMENT of the Appraisal Work Program referred to in Section 9.01 herein, the CONTRACTOR shall carry out the operations as soon as possible without unreasonable delay in accordance with the timetable set forth in the approved Appraisal Work Program.

9.03    Within one hundred eighty (180) calendar days after the completion of the last Appraisal Well, the CONTRACTOR shall submit to the DEPARTMENT a detailed report on the appraisal of the commerciality of the discovery.  Under special circumstances, the above-mentioned periods may be reasonably extended upon agreement of the Parties. The appraisal report shall include the evaluation on geology, development, engineering and economics.

9.04    Within thirty (30) calendar days following the submission of the appraisal report on any Crude Oil bearing trap, the CONTRACTOR shall convene a meeting with the DEPARTMENT to review such report. When Parties decide unanimously after its review that the said Crude Oil bearing trap may be an Oil Field containing Petroleum in Commercial Quantity, then the CONTRACTOR shall, within a reasonable period of time, submit an Overall Development Program to the DEPARTMENT for its review and approval.  The Overall Development Program shall include the maximum efficient rate (MER) and the expected duration of the production determined in accordance with the international petroleum industry practice.  The discovery and appraisal of discovery of Natural Gas is provided for in Section 13.02 of this Contract.

Prior to the submission of the Overall Development Program, the CONTRACTOR shall submit to the DEPARTMENT a report of Crude Oil and Natural Gas reserves in place for review.

9.05    In the event of an Oil Field and/or Gas Field straddling a boundary, the CONTRACTOR shall endeavor to arrange with the neighboring parties involved to work out a unitized Overall Development Program for such Field and to negotiate the relevant provisions thereof.

If such field extends to an adjacent area not covered by a service contract, then the Contract Area may be extended, subject to the approval of the DEPARTMENT within a reasonable time, to include such part of the adjacent area as is necessary to cover such field.  If the size of the additional area exceeds ten percent (10%) of the size of the original Contract Area, the DEPARTMENT and the CONTRACTOR shall negotiate a new service contract for the additional area.  

9.06    If a Petroleum bearing trap without commercial value within the Contract Area can be most economically developed as a commercial Oil Field and/or Gas Field, such as but not limited to, by linking it up with facilities located outside the Contract Area, then the development of such Field shall be dealt with in the same manner as provided in Section 9.05 herein or other manner agreed by the neighboring parties.

9.07    The procedures specified in this Section 9 shall be applied, by analogy, to the determination of additional development projects in any Oil Field within the Contract Area during the Production Period, such projects being designed to increase the level of production and/or total quantity of Petroleum recoverable from the said Field.

9.08    If an extended well test (EWT) is deemed by the CONTRACTOR to be necessary with respect to any trap in which Petroleum is discovered or any Oil Field and/or Gas Field within the Contract Area, the Parties shall mutually agree on the terms and conditions of an EWT which shall then be governed by a written agreement signed by the Parties and forming part of this Contract.

9.09    Nothing in this Section shall limit the right of the DEPARTMENT, on behalf of the State, as owner of the Petroleum resources in respect of such portions of the Contract Area relinquished by the CONTRACTOR or in respect of such Petroleum resources in the Production Area that are not covered by or included in the declaration of Petroleum in Commercial Quantity.

SECTION X
RECOVERY OF OPERATING EXPENSES AND
ACCOUNTING FOR PROCEEDS OF PRODUCTION

10.01    For the purpose of determining gross proceeds, Petroleum shall be valued as follows:

  1. all Petroleum sold, exchanged, or otherwise disposed for consumption in the Philippines, or for export, shall be valued at Market Price;
  2. if there are no transactions, which can be used to determine the Market Price of Crude Oil, then such Petroleum shall be valued at the Posted Price;
  3. if there are no transactions which can be used to determine the Market Price of Natural Gas, then the value of Natural Gas produced from the Contract Area shall be agreed upon based on general pricing principles prevailing internationally and other mechanisms for determining the same, including the conduct of a transparent and competitive marketing and solicitation process, taking into account such factors as the market, quality and quantity of the Natural Gas, including equivalent hydrocarbon substitute energy imported into the Philippines.
  4. The value determined under Section 10.01(a), (b) or (c) above shall be reduced by reasonable commissions or brokerage fees incurred in connection with sales to Third Parties but shall not exceed the customary and prevailing rate.

10.02    In each Calendar Year, the CONTRACTOR shall recover from the Gross Income resulting from the sale, exchange, or other disposition of all Petroleum produced under this Contract an amount equal to all unrecovered Operating Expenses in accordance with Accounting Procedure; Provided, that the amount so recovered shall not exceed seventy percent (70%) of the Gross Income from Petroleum production in any Calendar Year; Provided further, that if, in any Calendar Year, the unrecovered Operating Expenses exceed seventy percent (70%) of the Gross Income from Petroleum production, or if there is no Gross Income, then the unrecovered Operating Expenses shall be recovered from the Gross Income in the succeeding Calendar Year(s).

10.03    Unless elected otherwise by the DEPARTMENT, the CONTRACTOR shall market the Government share of Petroleum. The CONTRACTOR shall have the right and privilege of receiving in kind and disposing of the CONTRACTOR's portion of the Petroleum produced and saved from the Contract Area.

10.04    For purposes of this Section 10, Net Proceeds means the difference between Gross Income, and the sum of: (1) the Operating Expenses recoverable pursuant to Section 10.2 and (2) the Filipino Participation Incentive Allowance pursuant to Section 7.2(j).   If the DEPARTMENT elects to receive its entire share of Petroleum in kind, which is equivalent to sixty percent (60%) of the estimated Net Proceeds from each Petroleum lifting or delivery operation, then the DEPARTMENT shall notify the CONTRACTOR of such election at least six (6) months in advance of any Calendar Year in which Petroleum is to be received.  However, if the CONTRACTOR markets the Government share of Petroleum produced, the CONTRACTOR shall account for the proceeds from such sales as provided in this Section 10.

  1. If the CONTRACTOR markets the Government’s entire share of Petroleum production, the CONTRACTOR shall within three (3) working days from the collection date, but in no case beyond sixty (60) days from lifting or delivery date, pay to the DEPARTMENT, with respect to such Petroleum production, an amount equal to sixty percent (60%) of estimated Net Proceeds from each Petroleum lifting or delivery operation.  The payment corresponding to the first lifting or delivery of the Calendar Year shall include any adjustments on the Government’s share for the preceding Calendar Quarter. Provided, that if the CONTRACTOR failed to remit the share of the Government on the Net Proceeds within due date, any unremitted amount shall carry an interest of LIBOR plus one percent (1%) per annum reckoned from the day immediately following the three (3) working days from collection date or sixty (60) days from lifting or delivery date whichever comes later.
  2. If the payment for the Petroleum marketed or committed for sale under a sales contract or agreement is not received by the CONTRACTOR within sixty (60) days from a lifting or delivery date, the CONTRACTOR shall accordingly notify the DEPARTMENT in writing of the delay and the reason thereof.  The CONTRACTOR and the DEPARTMENT shall then meet to agree on the terms by which the CONTRACTOR’s obligation shall be performed.  Failure by the CONTRACTOR to furnish the DEPARTMENT with such written notice of the delay creates the presumption that the delay in remittance of payment is due to the fault of the CONTRACTOR in which case Section 10.04(a) shall apply.

10.05    If the CONTRACTOR has not been authorized to market the Government's entire share of Petroleum production, then with respect to such Petroleum, the Government shall be entitled to receive in kind and shall take Petroleum equal in value to sixty percent (60%) of the Net Proceeds.

10.06    The CONTRACTOR shall retain its share of Petroleum as service fee equivalent to forty percent (40%) of the Net Proceeds from Petroleum Operations.

10.07    If the DEPARTMENT and the CONTRACTOR elect to take their respective shares of Petroleum in kind, the Parties will enter into separate agreements providing, among others, for the manner and form of deliveries, offtake procedures, over/under reconciliation, terminal operations procedures, terminal Force Majeure details and appropriate quarterly adjustments.

SECTION XI
INCOME TAXES

11.01    The CONTRACTOR shall be liable each taxable year for Philippine Income Tax under the provisions of the National Internal Revenue Code and the Act, both as amended. The Philippine Income Tax shall be part of the Government Share.

11.02    The Taxable Net Income shall be equivalent to CONTRACTOR’s service fee grossed-up for the amount of the Philippine Income Tax.

11.03    Each company comprising the CONTRACTOR shall render to the DEPARTMENT a return for each taxable year in duplicate in such form and manner as provided by law setting forth its Taxable Net Income. The DEPARTMENT shall file the CONTRACTOR's return with the Commissioner of Internal Revenue or his deputies or other persons authorized to receive such return within the period specified in the National Internal Revenue Code and the Rules and Regulations promulgated thereunder.

11.04    The DEPARTMENT shall pay from the Government’s share of Net Proceeds and separately remit the Philippine Income Taxes of each company comprising the CONTRACTOR and, upon payment, shall obtain separate official receipts in the name of each company comprising the CONTRACTOR and shall furnish such receipts to each company. Each of the companies comprising the CONTRACTOR shall be subject to tax separately on its share of income.

SECTION XII
PAYMENTS

12.01    All payments which this Contract obligates the CONTRACTOR to make to the DEPARTMENT shall be in Foreign Exchange at a bank to be designated by the DEPARTMENT and agreed upon by the Bangko Sentral ng Pilipinas; Provided, that the CONTRACTOR may make such payments in Philippine Pesos to the extent that such currency is realized as a result of the domestic sale of Petroleum. All such payments shall be translated at the applicable exchange rate as defined in the Accounting Procedure attached hereto as Annex "B".

SECTION XIII
NATURAL GAS

13.01    Associated Gas

  1. Associated Gas produced from any Oil Field within the Contract Area shall be used primarily for purposes related to the Production Operations and production enhancement of Oil Fields including, without limitations, oil treating, gas injection, gas lifting and power generation.
  2. Based on the principle of full utilization of the Associated Gas and with no impediment to normal production of the Crude Oil, the Overall Development Program of each Oil Field shall include a plan of utilization of Associated Natural Gas. If there is any excess Associated Gas remaining in any Oil Field after utilization pursuant to Section 13.01(a) herein, the CONTRACTOR shall carry out a feasibility study regarding the commercial utilization of such excess Associated Gas. Such feasibility study, if carried out before the Development Operations of an Oil Field, shall be included as part of the feasibility study on the development of the Oil Field.
    1. If the Parties agree that excess Associated Gas has no commercial value, then such gas shall be disposed of by the CONTRACTOR, provided that there is no impediment to normal production of the Crude Oil.
    2. If the Parties agree that excess Associated Gas has commercial value, the CONTRACTOR shall complete the gas sales contract(s) and other commercial and technical arrangements required to develop such Associated Gas with prior approval of the DEPARTMENT. The CONTRACTOR shall negotiate and execute contracts for the sale of Associated Gas, including the Government share, if the DEPARTMENT has not elected to get its share in the gas production in kind. The CONTRACTOR shall inform the DEPARTMENT about material developments in the negotiations that significantly affect the interest of the DEPARTMENT, and coordinate with the DEPARTMENT on such matters.  The DEPARTMENT may elect to join the negotiations. Such participation of the DEPARTMENT in the negotiations shall however not in any way restrict or limit the right of CONTRACTOR to dispose of its share of Associated Gas.
    3. If any Party considers that excess Associated Gas has commercial value while the other Party considers that excess Associated Gas has no commercial value, the Party which considers excess Associated Gas to have commercial value may utilize such excess Associated Gas, at its own cost and expense and without impeding the production of Crude Oil and without affecting the shares of Crude Oil and Gas otherwise allocable to the Parties under the other provisions of this Contract, but if such excess Associated Gas is not so utilized at any time or from time to time, then such excess Associated Gas shall be disposed of by the CONTRACTOR, provided that there is no impediment to normal production of the Crude Oil.

13.02    Non-Associated Gas

  1. For Non-Associated Gas discovery pursuant to Sections 9.01 and 9.02 herein, an Appraisal Work Program shall be prepared and submitted by the CONTRACTOR to the DEPARTMENT not later than twenty-four (24) months from the submission of the discovery report.  During this period the CONTRACTOR will conduct preliminary market studies in order to analyze the markets for the Non-Associated Gas as well as investigate such technical issues as reserve size ranges, deliverability and other issues pertaining to the exploitation of the Non-Associated Gas.
  2. Following the completion of the Appraisal Work Program and review of the potential of the discovery, the CONTRACTOR shall submit an appraisal report to the DEPARTMENT within one (1) Year from the completion of the last Appraisal Well.  If the CONTRACTOR with the approval of the DEPARTMENT decides that the discovery is commercial, the Parties shall agree on a development plan for the Gas Field.  The CONTRACTOR shall complete the gas sales contract(s) and other commercial and technical arrangements required to develop such Natural Gas. The CONTRACTOR shall negotiate and execute contracts for the sale of Non-Associated Gas, including the Government share, if the DEPARTMENT has not elected to get its share in the gas production in kind. The CONTRACTOR shall inform the DEPARTMENT about material developments in the negotiations that significantly affect the interest of the DEPARTMENT, and coordinate with the DEPARTMENT on such matters.  The DEPARTMENT may elect to join the negotiations. Such participation of the DEPARTMENT in the negotiations shall however not in any way restrict or limit the right of CONTRACTOR to dispose of its share of Non-Associated Gas.
  3. If the Parties decide unanimously that a Non-Associated Gas reservoir is non-commercial, the corresponding area covered by the Non-Associated Gas reservoir may be retained in the Contract Area as long as the CONTRACTOR is actively seeking in good faith to solve technical issues and find a market for the Non-Associated Gas, but in no event can the CONTRACTOR retain the area longer than ten (10) years from the submission of the discovery report nor beyond the termination of this Contract.
  4. Prior to the expiration of the Exploration Period, if the CONTRACTOR together with the DEPARTMENT considers that a Non-Associated Gas reservoir which has been determined to be non commercial needs to be reappraised because of some favorable factors, CONTRACTOR shall work out a new evaluation report on that Non-Associated Gas reservoir and submit the same to the DEPARTMENT for review and approval.

13.03    Natural Gas Transportation

  1. To the extent allowed by law, the DEPARTMENT may agree to the participation of the CONTRACTOR in the pipeline installation and operation to transport Natural Gas, subject to a separate pipeline agreement between the DEPARTMENT and the CONTRACTOR and/or Third Parties.  If the CONTRACTOR participates in the installation and operation of such pipeline(s), the installation and operation of such pipeline(s) may be included in the Overall Development Program and Petroleum Operations under this Contract.
  2. If a Third Party provides Natural Gas pipeline transportation services to the CONTRACTOR, the tariffs charged to the CONTRACTOR for such services shall be fair and reasonable based on the investment and shall be appropriate for pipeline infrastructure projects in the Philippines.

SECTION XIV
TECHNICAL DATA AND REPORTS SUBMISSION

14.01    All technical data and reports, except for proprietary techniques used in developing such technical data and reports, must be submitted by the CONTRACTOR to the DEPARTMENT within sixty (60) days after such technical data and reports become available. The technical data and reports to be submitted by the CONTRACTOR include but are not limited to the following:

  1. Unprocessed and migrated seismic data in tapes and other media (e.g. CD format compatible with available DEPARTMENT software/hardware);
  2. Geological and geochemical reports, including geological maps, petrographic data and geochemical data/analysis;
  3. Geophysical Reports:
    1. Seismic acquisition, processing and interpretation reports;
    2. Gravity & magnetic surveys;
    3. Navigation data of surveys; and,
    4. Other geophysical surveys;
  4. Rock cores, rock cuttings, geological logs and hydrocarbon or fluid samples obtained from drilling;
  5. Drillstem and well test data, analysis and interpretation;
  6. Well drilling, completion and abandonment reports;
  7. All petrophysical and geophysical logs from wells in digital and hard copies;
  8. Data, analysis, and interpretation on oil and gas reservoir characteristics;
  9. Oil, gas and condensate production reports; and,
  10. Other relevant data and reports generated from Petroleum Operations.

SECTION XV
ASSETS AND EQUIPMENT

15.01    The CONTRACTOR shall acquire for the Petroleum Operations only such assets and equipment as are reasonably estimated to be required in carrying out the Petroleum Operations and approved in the Work Program and Budget.

15.02    The CONTRACTOR may also utilize in the Petroleum Operations, equipment owned and made available by the CONTRACTOR.  Charges to the Petroleum Operations account for the use of such equipment shall be made as provided in the Annex “B” - Accounting Procedure.

15.03    The CONTRACTOR shall own all assets purchased, installed and/or constructed under the Work Program and Budget, subject to the pertinent rules under Annex “B” (Accounting Procedure).  The CONTRACTOR shall transfer possession and ownership of fully cost recovered assets, as is, upon termination of this Contract, Provided however, that:

  1. all liability for maintenance, damage and in respect of third parties shall remain with the CONTRACTOR for the duration of its period of ownership and/or possession or use of such assets; and
  2. in case the DEPARTMENT does not elect to possess certain assets which have been fully cost recovered at the time of full recovery or time of transfer, the CONTRACTOR shall, at its expense, remove or dispose of said assets within one (1) year after the termination of this Contract or within the period agreed by the Parties.

Notwithstanding the foregoing,

  1. the CONTRACTOR shall have the right to continue to use the aforementioned assets until it has concluded its use of them in accordance with obligations under this Contract, as extended from time to time;
  2. an income derived from the use or possession of these assets shall be included in the computation of Gross Income and subject to the terms of Annex “B” (Accounting Procedure).

This clause 15.03 shall not apply to assets owned by a Third Party and leased or used by the CONTRACTOR for the performance of its obligations in this Contract.

15.04    The ownership of all data, records, samples, and other technical data obtained in the course of performing the Petroleum Operations shall be vested in the DEPARTMENT.

15.05    The CONTRACTOR will not remove any fully cost recovered material, equipment or facilities covered by this Contract from the Contract Area without the prior written consent of the DEPARTMENT.  The ownership of all materials, equipment and facilities erected or placed within the Contract Area shall be transferred to the DEPARTMENT immediately after the recoupment by the CONTRACTOR of all costs pertaining to such materials, equipment and facilities; Provided, that all materials, equipment and facilities which are of a movable nature and the costs for which have not been fully recouped by the CONTRACTOR shall remain the property of the CONTRACTOR unless CONTRACTOR fails to remove such property from the Contract Area within one (1) year after termination of this Contract.  The DEPARTMENT shall assume ownership of the materials, equipment and facilities subject to all financing agreements, liens and other burdens thereon and shall promptly inform third party right holders of such financing agreements, liens and other burdens, but may delay assuming ownership thereof pending the satisfaction and release of any such burdens.

Notwithstanding the transfer of ownership to the DEPARTMENT, the CONTRACTOR shall:

  1. have the right to transfer the materials, equipment and facilities within the Contract Area;
  2. have the right to use the materials, equipment and facilities free of charge other than the obligation to maintain or repair the same as deemed necessary in accordance with generally accepted offshore oil field and marine practices; and,
  3. be permitted to fully recoup all expenditures for such purposes.  The provisions of this Section shall not apply to leased or chartered materials, equipment and facilities.

SECTION XVI
CONSULTATION AND ARBITRATION

16.01    The Parties shall make their best efforts to settle amicably through consultation any dispute arising in connection with the performance or interpretation of any provision hereof.

16.02    Disputes arising between the DEPARTMENT and the CONTRACTOR relating to this Contract or the interpretation and performance of any of its clauses, which cannot be settled amicably, shall be settled by arbitration, subject to the provisions of Section 16.04 below.  The DEPARTMENT and the CONTRACTOR shall each appoint one (1) arbitrator and so advice the other Party within thirty (30) days after receipt of a written request to do so.  Such two (2) arbitrators shall appoint a third arbitrator.  If either Party fails to appoint an arbitrator within thirty (30) days after receipt of a written request from the other Party to do so, such arbitrator shall be appointed, at the request of the other Party, by the President of the International Chamber of Commerce.  If the first two (2) arbitrators appointed as aforesaid fail to agree on a third arbitrator within thirty (30) days after receipt of a written request from the other Party to do so, such third arbitrator shall be appointed, at the request of either Party, by the President of the International Chamber of Commerce.  If an arbitrator fails or is unable to act, his successor will be appointed in the same manner as the arbitrator whom he succeeds.  Unless the Parties agree otherwise, Singapore shall be the venue of the arbitration proceedings.

16.03    The English language shall be the official language to be used in the arbitral proceedings.  All hearing materials, statement of claim or defense, award and the reasons supporting them shall be written in English.

16.04    The decision of a majority of the arbitrators shall be final and binding upon the Parties. Judgment upon the award rendered may be entered in any court having jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. Each Party shall bear its respective cost of arbitration unless the arbitrators decide otherwise.
    
16.05    Except as provided in this Section 16, arbitration shall be conducted in accordance with the Rules of Arbitration of the International Chamber of Commerce, then in effect.

16.06    The right to continue or complete arbitration proceedings commenced during the term of this Contract shall survive the termination or cancellation of this Contract.

SECTION XVII
EMPLOYMENT, DEVELOPMENT ASSISTANCE, SCHOLARSHIP, AND
TRAINING OF PHILIPPINE PERSONNEL

17.01  The CONTRACTOR agrees to employ qualified Filipino Personnel (as determined by CONTRACTOR) in the Petroleum Operations and, after the Date of Commencement of Commercial Production, will undertake the education and training of such Filipino Personnel for labor and staff positions, including administrative, technical and management positions.

17.02    The CONTRACTOR shall provide assistance for training programs, scholarships, conferences, seminars and other similar activities for the DEPARTMENT's personnel with a total minimum training commitment of _____________ United States Dollars (US$ ___________) per year, cumulative during exploration/development period and ____________ United States Dollars (US$ ____________) per year, cumulative during Production Period.  Any unfulfilled training obligation shall survive the cancellation/termination of this Contract.

17.03    Costs and expenses of training Filipino/Foreign personnel for the CONTRACTOR’s own employment and the training assistance of the DEPARTMENT's personnel and scholarship for deserving students for universities and colleges shall be included as Operating Expenses in the Work Program and Budget under Section 8 hereof.

17.04    The CONTRACTOR, as directed by the DEPARTMENT, shall provide a one (1) time developmental assistance for the DEPARTMENT in the minimum amount of  ____________ United States Dollars (US$ _____________) payable within sixty (60) days upon written request by the DEPARTMENT.

17.05    The CONTRACTOR shall provide scholarship for deserving students residing in the vicinity of the Contract Area, or as determined by the DEPARTMENT, and institutional assistance to state universities/colleges likewise located, in the amount of _____________ United States Dollars (US$ __________) per year, cumulative during exploration/ development phase, and to be negotiated a minimum amount of ____________ United States Dollars (US$ ___________) per year, cumulative during the production phase.

17.06    The CONTRACTOR shall undertake corporate social responsibility in the host community or vicinity of the Contract Area, as may be determined by the CONTRACTOR and the DEPARTMENT.

SECTION XVIII
BOOKS OF ACCOUNTS AND AUDIT

18.01    The Operator shall be responsible for keeping complete books of accounts, both in United States Dollars and Philippine Peso denominations, reflecting all transactions in connection with the Petroleum Operations in accordance with Annex “B” – Accounting Procedure.  The basic currency of the determination of cost recovery shall be United States Dollars.

18.02    The DEPARTMENT shall have the right to inspect and audit the Operator's books of accounts relating to this Contract for any Calendar Year within twenty four (24) months following the end of such Calendar Year. Any such audit shall be completed within twelve (12) months after its commencement of such audit.  Any exception must be made to the Operator in writing within ninety (90) days following the completion of such audit.  If the DEPARTMENT fails to give such written exception within such time, or fails or declines to conduct an audit of the Operator's books of accounts within the time period stated above, then the Operator’s books of accounts and statements of Operating Expenses for such Calendar Year shall be established as correct and final for all purposes including the recovery of Operating Expenses.

18.03    The DEPARTMENT is entitled upon prior notice access to all relevant joint account, records, files and other information and may inspect such sites and facilities as necessary.

18.04    If the DEPARTMENT notifies the Operator of an exception to the Operator’s books of accounts within the time period specified in Section 18.02 above, the Operator shall within ninety (90) days after receipt of such notice confer with the DEPARTMENT regarding the exception and the Parties shall attempt to reach a mutually acceptable resolution of such exception within a period not to exceed three (3) months.  If any cost or expense included in the Operator’s statement of Operating Expenses is the subject of an exception which cannot be resolved during such three (3) months period, then such cost or expense shall be excluded as Operating Expenses and shall not be recoverable from gross proceeds pending the resolution of such exception through mutual agreement or arbitration.  If such cost or expense is subsequently determined to be properly included in the Operator’s statement of Operating Expenses, either by mutual agreement or arbitration, then the Operator’s current statement of Operating Expenses shall be increased by the amount of such cost or expense.

SECTION XIX
MISCELLANEOUS PROVISIONS

19.01    Any notice required or given by either Party to the other Party shall be in writing and shall be effective when a copy thereof is handed to or served upon the Party's designated representative or the person in charge of the Party's office or place of business; or, when sent by facsimile, notice shall be effective upon the issuance of a confirmation report that the notice was successfully transmitted to addressee's number; or, when sent by registered mail, notice shall be effective upon actual receipt by the addressee; Provided, that if addressee fails to claim its mail from the post office within five (5) days from the date of the first notice of the postmaster, service shall take effect at the expiration of such time. All such notices shall be addressed, as follows:

To the GOVERNMENT -

Hon. CARLOS JERICHO L. PETILLA
Secretary
DEPARTMENT OF ENERGY
Energy Center, Rizal Drive
Fort Bonifacio
Taguig City, Metro Manila, Philippines

To the CONTRACTOR -

_______________________
_______________________
_______________________

Any Party may substitute or change its address on written notice thereof to the other Parties.

19.02    Governing Law

The laws of the Philippines shall apply to this Contract.

19.03    Department Circulars, Rules and Regulations on Petroleum

All Department circulars, rules and regulations issued or to be issued by the DEPARTMENT whether in the exercise of its regulatory powers or contractual rights shall form part of this Contract.

19.04    Termination of Contract

The DEPARTMENT shall have the power to terminate this Contract after due written notice for failure of the CONTRACTOR to remedy a breach of a material obligation under the Contract within ninety (90) days from the receipt of the written notice:

  1. fulfill its work obligation in any Contract Year or exploration Sub-Phase;
  2. failure to remit the government share without justifiable cause within sixty (60) days from lifting or delivery date;  
  3. post the required performance bond in the exploration phase; (d) implement safety measures required by the DEPARTMENT pursuant to Section 7.01(r); or,
  4. gross negligence in complying with  the reportorial requirements of this Contract.

19.05    Downstream Facilities

At such time as the CONTRACTOR has established commercial production, the CONTRACTOR may undertake technical and economic studies to determine the feasibility of establishing downstream facilities such as petrochemical, liquefied natural gas (“LNG”), liquefied petroleum gas (“LPG”), compressed natural gas (CNG) or middle distillate synthesis plants in the Philippines to utilize a portion of the Petroleum produced from the Contract Area.  All expenditures for such studies shall be considered Operating Expenses, provided that the same is included in the Work Program and Budget approved by the DEPARTMENT.  If the studies indicate that a particular downstream facility could be constructed and operated in an economical and technically feasible manner, then the CONTRACTOR shall have the option, subject to the DEPARTMENT's approval, to design, construct, and operate such facility. The DEPARTMENT shall assist the CONTRACTOR in obtaining such approvals.

SECTION XX
PAYMENTS BY THE CONTRACTOR

20.01    The CONTRACTOR shall pay the DEPARTMENT a signature bonus equivalent to Fifty Thousand United States Dollars (US$ 50,000.00) within sixty (60) days from the Effective Date.

20.02    The CONTRACTOR shall, within sixty (60) days following the Date of Commencement of Commercial Production, pay to the DEPARTMENT the total sum of Three Hundred Thousand United States Dollars (US$ 300,000.00) as discovery bonus.

20.03    On the first occasion that there shall be produced and sold from the Contract Area an average rate, over a period of sixty (60) days, of either twenty-five thousand (25,000) barrels of Crude Oil and/or Casinghead Petroleum Spirit per day (BPD); or two hundred fifty million (250,000,000) cubic feet of Natural Gas per day (CFGD), the CONTRACTOR shall, within sixty (60) days following the expiration of said sixty (60)-day period, pay to the DEPARTMENT as production bonus, the total sum of Five Hundred Thousand United States Dollars (US$ 500,000.00); Provided, it is understood that the CONTRACTOR, in order to sustain said rate of twenty-five thousand (25,000) BPD of Crude Oil and/or Casinghead Petroleum Spirit or two hundred fifty million (250,000,000) CFGD for said sixty (60)-day period, shall not be required to operate the Contract Area other than as a reasonably prudent operator following sound oil and/or gas field practice prevalent in the international petroleum industry.

20.04    On the first occasion that there shall be produced and sold from the Contract Area an average rate, over a period of sixty (60) days, of either fifty thousand (50,000) BPD of Crude Oil and/or Casinghead Petroleum Spirit or five hundred million (500,000,000) CFGD, the CONTRACTOR shall, within sixty (60) days following the expiration of said sixty (60)-day period, pay to the DEPARTMENT as production bonus, the total sum of One Million United States Dollars (US$ 1,000,000.00); Provided, it is understood that the CONTRACTOR, in order to sustain said rate of fifty thousand (50,000) BPD of Crude Oil and/or Casinghead Petroleum Spirit or five hundred million (500,000,000) CFGD for said sixty (60) day period, shall not be required to operate the Contract Area other than as a reasonably prudent operator following sound oil and/or gas field practice prevalent in the international petroleum industry.

20.05    On the first occasion that there shall be produced and sold from the Contract Area an average rate, over a period of sixty (60) days, of either seventy-five thousand (75,000) BPD of Crude Oil and/or Casinghead Petroleum Spirit or seven hundred fifty million (750,000,000) CFGD, the CONTRACTOR shall, within sixty (60) days following the expiration of said sixty (60)-day period, pay to the DEPARTMENT as production bonus, the total sum of Two Million United States Dollars (US$ 2,000,000.00); Provided, it is understood that the CONTRACTOR, in order to sustain said rate of seventy-five thousand (75,000) BPD of Crude Oil and/or Casinghead Petroleum Spirit or seven hundred fifty million (750,000,000) CFGD for said sixty (60)-day period, shall not be required to operate the Contract Area other than as a reasonably prudent operator following sound oil and/or gas field practice prevalent in the international petroleum industry.

20.06 The CONTRACTOR shall pay the DEPARTMENT a signature bonus equivalent to Fifty Thousand United States Dollars (US$ 50,000.00) within sixty (60) days from the Effective Date.

SECTION XXI
STABILIZATION

21.01    Rights and obligations under this Contract shall be deemed as essential considerations for the conclusion hereof and shall not be unilaterally changed or impaired.

21.02    This Contract shall not be annulled, amended or modified in any respect except by the mutual consent in writing of the Parties hereto.

21.03    The CONTRACTOR’s rights under this Contract shall not be impaired and its obligations shall not be increased by:

  1. any change in Philippine laws or regulations; or,
  2. any change in the manner of implementing any existing laws or regulations; or,
  3. any introduction of new laws or regulations; or, (4) any cancellation of existing laws or regulations.

21.04    In the event of any change in existing laws or regulations that increases or results in increase of, among others, the percentage (%) for cost recovery allowed to the CONTRACTOR, the amount of or extension of the FPIA or the benefits relating to cross recovery of deepwater incentives, the Parties shall immediately meet and negotiate on an equitable allocation of the benefits with the end in view of retaining the commercial terms or gains by which this Contract was agreed to by the Parties.

SECTION XXII
INSURANCE

22.01    The CONTRACTOR shall work out an insurance program for the Exploration Operations and submit the same to the DEPARTMENT for review and approval within one hundred twenty (120) days after the Effective Date of this Contract. The CONTRACTOR shall obtain the insurance contracts in accordance with such program as approved by the DEPARTMENT before commencement of Petroleum Operations within the Contract Area. Similar provisions shall apply in respect of Development and Marketing Operations and Production Operations.

22.02    The insurance programs worked out by the CONTRACTOR shall include where applicable, but not be limited to, the following insurance covering:

  1. damages to and expenses for all drilling installations and equipment, including damages to and expenses for the properties used in work sites and supply bases for the Petroleum Operations, while any damage to and expense for the equipment and properties owned by any Third Party rendering services to the CONTRACTOR shall be handled in accordance with Section 22.04 herein;
  2. damages to and expenses for any of the equipment or installations for production, storage and transportation, and buildings in the course of   construction and installation both onshore and offshore;
  3. damages to and expenses for the Crude Oil and/or Natural Gas production installations, facilities, equipment and pipelines, both onshore and offshore;
  4. liability to Third Party;
  5. liability for pollution and expenses for cleaning up in the course of drilling and Production Operations;
  6. expenses for killing blowouts;
  7. liability incurred by the CONTRACTOR who takes the responsibility in chartering drilling vessels, supply boats or other boats, ships and aircraft serving the Petroleum Operations;
  8. liability for removal of wrecks; and,
  9. losses and expenses incurred during the transportation and storage in transit of goods shipped from different parts of the world to work sites.

22.03    Losses within the deductible limits of the insurance program reviewed and approved by the DEPARTMENT in accordance with Section 22.01 herein shall be chargeable as Operating Expenses.

22.04    The CONTRACTOR shall endeavor to ensure that its Subcontractors and lessors to insure themselves against relevant losses.

SECTION XXIII
CONFIDENTIALITY

23.01    All documents, information, data and reports related to the Petroleum Operations within the Contract Area (“Confidential Information”) shall be kept confidential, pursuant to this Section 23, except in cases as specified in Sections 23.02, 23.03, 23.04.

23.02    Without the written consent of the DEPARTMENT, no company comprising the CONTRACTOR or any assignee shall disclose the Confidential Information to any Third Party and to any Affiliate not directly connected with the implementation of the Contract except the Third Parties and Affiliates in Section 23.03 herein, and no Party shall otherwise transfer, present, sell or publish it in any way within the confidentiality periods.

Within the confidentiality periods, the DEPARTMENT shall bear the obligations for confidentiality for the Confidential Information. However, the DEPARTMENT has the right to furnish the following original information and data or interpretation thereon with respect to the Contract Area to any Third Parties:

  1. raw and/or processed data generated and held by the CONTRACTOR for over five (5) years from the date the data were generated; and,
  2. interpretations of information and data generated and held by the CONTRACTOR for over seven (7) years (provided this Contract is still existing and active) from date the data or report was generated.

23.03    The CONTRACTOR may, furnish necessary Confidential Information to the following Third Parties and Affiliates:

  1. Banks or other credit institutions from which finance is sought by any party to the Contract for the implementation of the Contract;
  2. Third Parties and Affiliates which provide services for the Petroleum Operations, including Subcontractors and other service contractors;
  3. A prospective assignee or assignees to whom rights and obligations under the Contract are intended to be assigned; and,
  4. Consultants, auditors, officers or employees and persons engaged by the CONTRACTOR, where necessary for the performance of its obligations and in pursuance of its rights under this Contract.
  5. A Party may disclose confidential information which would otherwise be confidential if and to the extent required by the law of any relevant jurisdiction or by any relevant authority to which the Party making the disclosure is subject, whether or not such requirement has the force of law; or required by existing contractual obligations; or required to vest the full benefit of this Contract in any of the parties; or when disclosure is made to the professional advisers, auditors and bankers of any of the Parties; or when the confidential information has come into the public domain through no fault of that Party; or the other Parties have given prior written approval to the disclosure.

23.04    Necessary Confidential Information may be furnished by the CONTRACTOR to governments and stock exchanges in accordance with the laws of the relevant countries.

23.05    The Parties when furnishing Confidential Information to Third Parties and Affiliates as mentioned in Section 23.03 herein shall require them to assume the confidentiality obligations as set forth herein.

SECTION XXIV
ASSIGNMENTS AND AUTHORIZATION

24.01    The CONTRACTOR may assign part or all of its rights and/or obligations under the Contract to its Affiliate with prior written notice to the DEPARTMENT, subject to the following provisions:

  1. the CONTRACTOR shall submit to the DEPARTMENT copies of a written agreement on the corresponding part of its rights and/or obligations to be assigned;
  2. the CONTRACTOR shall guarantee in writing to the DEPARTMENT the performance of the assigned obligations; and,
  3. no such assignment shall interfere with the performance of the Petroleum Operations.

24.02    The CONTRACTOR may assign part or all of its rights and/or obligations under this Contract to any Third Party, provided that such assignment, to be effective, shall be approved in writing by the DEPARTMENT, such approval not to be unreasonably withheld.

24.03    The CONTRACTOR may authorize its subsidiaries, branches or regional corporations to implement this Contract, but the CONTRACTOR shall remain responsible for the faithful performance of this Contract.

SECTION XXV
HEALTH, ENVIRONMENTAL PROTECTION AND SAFETY

25.01    In the performance of the Petroleum Operations, the CONTRACTOR shall be subject to the laws, decrees and regulations on environmental protection, indigenous peoples rights and safety promulgated by the Government and endeavor to make its best efforts to prevent pollution and damage to the atmosphere, oceans, rivers, lakes, harbors and land, and secure the safety and health of the operating personnel.  The CONTRACTOR shall use all reasonable endeavors as are applicable to eliminate promptly any pollution occurring in the performance of the Petroleum Operations and minimize its consequences.

25.02    When the Government assigns any person to inspect for environmental protection and safety within the scope of the Petroleum Operations according to relevant laws, decrees, rules and regulations, the CONTRACTOR shall provide such reasonable facilities and assistance as are applicable to enable the inspectors to carry out such inspection smoothly.  The CONTRACTOR shall be given reasonable notice of at least 15 days of all such inspections.

SECTION XXVI
FORCE MAJEURE

26.01    Force Majeure

  1. Any failure or delay on the part of either Party in the performance of its obligations or duties hereunder shall be excused to the extent attributable to Force Majeure.  If operations are delayed, curtailed, or prevented by such causes, then the time for enjoying the rights and carrying out of the obligations thereby affected, and all rights and obligations hereunder shall be extended for a period equal to the period of delay, curtailment or prevention.
  2. Force Majeure shall include Acts of God, storms, typhoons, earthquakes, unavoidable accidents, acts of war or conditions attributable to or arising out of war (declared or undeclared), laws, rules, regulations, and orders by any government or governmental agency, strikes, lockouts, or other labor or political disturbances, insurrections, riots, and other civil disturbances, hostile acts of hostile forces constituting direct and serious threat to life and property, and all other matters or events of a like or comparable nature beyond the control of the Party concerned; Provided, that laws, rules, regulations, and orders of the Government or any of its agencies shall not constitute Force Majeure as to the DEPARTMENT.
  3. The Party whose ability to perform its obligations is impaired due to Force Majeure shall notify the other Party in writing of such fact within a period of sixty (60) days from the existence of the Force Majeure with reasonable detail as to the cause and nature thereof and both Parties shall do what is reasonably within their power to remove such cause.

SECTION XXVII
TERMINATION

27.01    This Contract shall be terminated as provided in Sections 4.01, 4.02, 5.6, 5.7, 6.3 and 19.4 hereof.

SECTION XXVIII
GENERAL PROVISIONS

28.01    The headings for the Sections and sub-Sections of this Contract are made for convenience only and shall not be construed so as to limit or in any way change the substantive provisions of any part of this Contract.

28.02    None of the rights, requirements or provisions of this Contract shall be deemed to have been waived by any Party by reason of such Party’s failure to enforce any right or remedy granted it hereunder, or take advantage of any default, and each Party shall at all times hereunder have the right to require the strict compliance of the other Party with the provision of this Contract.

28.03    If and for so long as any provision of this Contract shall be deemed to be judged invalid for any reason whatsoever, such invalidity shall not affect the validity or operation of any other provision of this Contract.

28.04    This Contract constitutes the entire agreement between the parties and supersedes all prior negotiations and agreements, whether oral or written.

 
IN WITNESS WHEREOF, the Parties hereto have executed this Contract as of the day and year first above written.

 

GOVERNMENT OF THE
REPUBLIC OF THE PHILIPPINES
THROUGH THEDEPARTMENT OF ENERGY 
                                     

 

 

__________________________________

 

By:

 

 

By:

 

 

__________________________________
Secretary

 

 

__________________________________

 

Witness:

 

 

 

 

 

 

__________________________________
Director
Energy Resource Development Bureau

 

 

_________________________________

 

 

 

 

ACKNOWLEDGMENT

REPUBLIC OF THE PHILIPPINES    }
________CITY, METRO MANILA    } S. S.

Before me, a Notary Public for and in the City of Manila, this _____ day of ________________ 2014, personally appeared:

 

Name Passport No. / Driver’s License No. Place Issued Date Issued
       
       
       
       

known to be the same persons described in the foregoing instrument, who acknowledged before me that their signatures on the instrument were voluntarily affixed by them for the purposes stated therein, and who declared to me that they executed the instrument as their free and voluntary act and deed as well as the free and voluntary act and deed of the corporation herein represented.

This instrument consisting of ________ (__) pages, including the page on which the acknowledgment is written, is signed on each and every page thereof by the parties and their instrumental witnesses and sealed with my notarial seal.

WITNESS MY HAND AND SEAL on the date and at the place first above-written.

    NOTARY PUBLIC

Doc. No.  _______;
Page No.  _______;
Book No. _______;
Series of 2014.