Laws of the People's Republic of China

   Article 1. In the interest of developing the national economy, expanding international economic and technological cooperation and encouraging the exploitation of offshore petroleum resources in China, these Regulations 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".

   Article 2. Any Chinese and foreign enterprises engaging, in accordance with the laws, in exploitation of offshore petroleum resources within the inland water, territorial sea and continental shelf of the People's Republic of China and in all sea area within the limits of national jurisdiction of the People's Republic of China shall pay royalty in accordance with these Regulations.

   Article 3. Royalty shall be computed and paid on the basis of the Annual Gross Production of Crude Oil or Natural Gas of each oil or gas field at the following rates:

1. Crude Oil:

Royalty shall be exempted on the portion of the Annual Gross Production of Crude Oil not exceeding one million tonnes;

Royalty rate for the portion of the Annual Gross Production of Crude Oil within one million tonnes to 1.5 million tonnes shall be 4%;

Royalty rate for the portion of the Annual Gross Production of Crude Oil within 1.5 million tonnes to 2 million tonnes shall be 6%;

Royalty rate for the portion of the Annual Gross Production of Crude Oil within 2 million tonnes to 3 million tonnes shall be 8%;

Royalty rate for the portion of the Annual Gross Production of Crude Oil within 3 million tonnes to 4 million tonnes shall be 10%; and

Royalty rate for the portion of the Annual Gross Production of Crude Oil exceeding four million tonnes shall be 12.5%.

2. Natural Gas

Royalty shall be exempted on the portion of the Annual Gross Production of Natural Gas not exceeding 2 billion cubic meters;

Royalty rate for the portion of the Annual Gross Production of Natural Gas within 2 billion cubic meters to 3.5 billion cubic meters shall be 1%;

Royalty rate for the portion of the Annual Gross Production of Natural Gas within 3.5 Billion cubic meters to 5 billion cubic meters shall be 2%; and

Royalty rate for the portion of the Annual Gross Production of Natural Gas exceeding five billion cubic meters shall be 3%.

   Article 4. Royalty for both Crude Oil and Natural Gas shall be paid in kind.

   Article 5. Royalty of Crude Oil and Natural Gas shall be collected and administered by the tax authorities.

Royalty for the Sino-foreign cooperative oil and/or gas field shall be first withheld by the operator of such oil and/or gas field and handed over to the China National Offshore Oil Corporation which will be responsible for the royalty payment.

   Article 6. Royalty shall be calculated on annual basis and pre-payable periodically or on the basis of operation. The final settlement shall be made after the end of each year. The timing for prepayment and settlement shall be determined by the tax authorities.

   Article 7. The operator of each oil and/or gas field shall provide to the tax authorities the production data of the said oil and/or gas field and other related information required by the tax authorities within 10 days after the end of each quarter.

   Article 8. The withholding agent and paying agent shall make the royalty payment within the time limit prescribed by the tax authorities. The tax authorities shall impose a late payment penalty of 1:1000 per day on the amount of the royalty in arrears, counting from the first day on which the payment becomes overdue.

   Article 9. The tax authorities may, acting at their discretion, impose a penalty of less than Rmb5,000 on any operator of oil and/or gas field who has violated the provisions of Article 7 hereof, by not submitting the royalty, the actual production data of the oil and/ or gas field or relevant information required to the tax authorities in time. A penalty of less than five times of the royalty otherwise payable shall be imposed on those who make false report on the actual production.

   Article 10. The definitions of the following terms as used in these Regulations are:

1. "Crude Oil" means solid and liquid hydrocarbons in their natural state, including any liquid hydrocarbons extracted from natural gas except for methane (CH4).

2. "Natural Gas" means non-associated natural gas and associated natural gas in their natural state.

"Non-associated Natural 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.

"Associated Natural 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.

3. "Annual Gross Production of Crude Oil" means the total amount of Crude Oil produced from each oil field within the contract area in each calendar year less the amount of crude oil used for petroleum operations and the amount of losses.

4. "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 in each calendar year less the amount of natural gas used for petroleum operations and the amount of losses.

   Article 11. These Regulations shall go into effect from January 1, 1989.