Laws of the People's Republic of China

    Article 1  These Provisions are formulated in accordance with the
"Regulations of the People's Republic of China on the Exploitation of Offshore
Petroleum Resources in cooperation with Foreign Enterprises", in order to
promote the development of national economy, to expand international economic
and technological cooperation, and to encourage the exploitation of China's
offshore petroleum resources.

    Article 2  All Chinese and foreign enterprises, which are engaged in the
exploitation of offshore petroleum resources pursuant to the law in the inland
sea, territorial sea and continental shelf of the People's Republic of China
and in any other sea areas under the jurisdiction of the People's Republic of
China, shall pay royalties in accordance with these Provisions.

    Article 3  Royalties shall be computed and imposed on the basis of the
gross output of crude oil or natural gas produced every calendar year from
each oil or natural gas field. The rates of the royalties are as follows:

    1. Crude oil

    the portion of annual gross output of crude oil not exceeding 1 million
tons, shall not be subject to the payment of royalties;

    for the portion of annual gross output of crude oil from 1 million to 1.5
million tons, the rate shall be 4%;

    for the portion of annual gross output of crude oil from 1.5 million to 2
million tons, the rate shall be 6%;

    for the portion of annual gross output of crude oil from 2 million to 3
million tons, the rate shall be 8%;

    for the portion of annual gross output of crude oil from 3 million to 4
million tons, the rate shall be 10%;

    for the portion of annual gross output of crude oil exceeding 4 million
tons, the rate shall be 12.5%.

    2. Natural gas

    the portion of annual gross output of natural gas not exceeding 2 billion
cubic meters, shall not be subject to the payment of royalties;

    for the portion of annual gross output of natural gas from 2 billion to
3.5 billion cubic meters, the rate shall be 1%;

    for the portion of annual gross output of natural gas from 3.5 billion to
5 billion cubic meters, the rate shall be 2%;

    for the portion of annual gross output of natural gas exceeding 5 billion
cubic meters, the rate shall be 3%.

    Article 4  The royalties for crude oil and natural gas shall be paid in
kind.

    Article 5  The royalties for crude oil and natural gas shall be levied
and administered by the tax authorities.

    With respect to the royalties of Chinese-foreign Cooperative oil or gas
fields, the operators shall act as agents for withholding the royalties, and
shall hand over the royalties withheld to China National Offshore Petroleum
Corporation, which, in turn, shall act as an agent for making the payment of
the royalties.

    Article 6  The royalties shall be computed annually and paid in advance
in installments either based on times or on terms; and the final settlement
shall be made after the end of the tax year. The time limits for advance
payment and final settlement shall be set by the tax authorities.

    Article 7  The oil or gas fields operators shall, within 10 days after the
end of each quarter, submit to the tax authorities a report on the output of
oil or gas fields and any other related materials required by the tax
authorities.

    Article 8  The withholding agents and paying agents with regard to the
royalties must, in accordance with the time limits set by the tax authorities,
pay the royalties. In case of failure to pay the royalties within the time
limits, the tax authorities shall impose a surcharge for overdue payment equal
to 1% of the overdue royalties for everyday in arrears, starting from the
first day the payment becomes overdue.

    Article 9  In the case that the oil or gas fields operators, in violation
of the provisions in Article 7, fail to submit on time to the tax authorities
the reports on output of oil or gas fields and other related materials
required by the tax authorities, the tax authorities may impose a fine in
light of the circumstances up to but not exceeding RMB 5,000 yuan; in dealing
with those who conceal the actual output, the tax authorities, in addition to
pursuing the royalties payment, may impose a fine, in light of the
circumstances, up to but not exceeding five times of the amount of royalties
that shall be made up.

    Article 10  The following terms, used in these Provisions, are defined
below:

    (1) Crude oil: refers to solid and liquid hydrocarbon in the natural
state as well as any liquid hydrocarbon extracted from natural gas, except
for methane ( CH4).

    (2) Natural gas: refers to non-associated natural gas and associated
natural gas in the natural state.

    Non-associated natural gas: refers to all gaseous hydrocarbon extracted
from gas deposits, including wet gas, dry gas, and residual gas remaining
after the extraction of liquid hydrocarbon from wet gas.

    Associated natural gas: refers to all gaseous hydrocarbon extracted from
oil deposits simultaneously with crude oil, including residual gas remaining
after the extraction of liquid hydrocarbon.

    (3) Annual gross output of crude oil: refers to the total amount of crude
oil produced by each oil or gas field in the same contracted area, in one
calendar year, less the quantity of oil used for petroleum operations and that
of wasted.

    (4) Annual gross output of natural gas: refers to the total amount of
natural gas produced by each oil or gas field in the same contracted area, in
one calendar year, less the quantity of natural gas used for petroleum
operations and that of wasted.

    Article 11  These Provisions shall become effective as of January 1, 1989.