LEGAL AND CONTRACT TERMS FOR THE EXPLORATION AND PRODUCTION OF HYDROCARBON IN TUNISIA ______________________ january 2003

PURPOSE BRIEF OVERVIEW OF THE LEGAL, FISCAL INCENTIVES FOR THE EXPLORATION AND PRODUCTION OF HYDROCARBONS IN TUNISIA. REFERENCE : LAW N°99-93 OF AUGUST 17th 1999 AS AMENDED BY LAW N°2002-23 OF FEBRUARY 14 th 2002

CONTENTS 1 – EXPLORATION AND PRODUCTION LICENCES 2 – CONTRACTUAL FRAMEWORK FOR E & P ACTIVITIES 3 – JOINT VENTURE REGIME 4 – PRODUCTION SHARING REGIME 5 – FISCAL TERMS 6 – GAS TERMS 7 – POWER GENERATION REGIME 8 – EXCHANGE CONTROL REGIME 9 – CONCLUSION

1 - EXPLORATION AND PRODUCTION LICENCES May be carried out pursuant to : A. PROSPECTION AUTHORIZATION - Granted for one year only - Non exclusive - For unexplored or under-explored areas - Geological studies only B. PROSPECTING PERMIT (“ Seismic Option ”) - Granted for 2 years (with : Possible extension for maximum 12 months) - Exclusive - Geological and geophysical work (seismic acquisition) - Preferential right to convert into an Exploration Permit subject to terms agreed with the Licensing Authority at the time of the granting of the Prospecting Permit.

EXPLORATION AND PRODUCTION LICENCES C. EXPLORATION PERMIT -Initial validity period of up to 5 years maximum - 2 optional renewals, each for a term of up to 4 years (maximum) and subject to relinquishments - Area of the permit may be extended by up to 50% (maximum) of the initial area - Initial term or of any renewal may be extended for 2 years maximum - Minimum work commitment : * Initial period :  G & G data acquisition, processing, and interpretation for a competitive number of km or km²  Drilling of a competitive number of exploration wells * Renewal periods : One or more exploration well(s). - Agreed estimated minimum amount of expenditures for each period

EXPLORATION AND PRODUCTION LICENCES In case of commercial discovery, a Concession (production licence) will be granted :  Term : 30 years covering both development and production  Development Plan to be approved by Licensing Authority  Fiscal (royalty and income tax) and other terms pursuant to the law PARTICULAR PROVISIONS : Direct application for a Concession without prior requirement to apply for an exploration permit Authorization for Long Term Production Tests(Early Production authorized), subject to terms to be agreed with the Licensing Authority (term, testing program etc.) and a fixed royalty of 15%

2 - CONTRACTUAL DOCUMENTS FOR E & P ACTIVITES  An Agreement (with its Memorandum of Obligations attached) is to be concluded between the State (represented by the Minister in charge of Energy), ETAP and its partner(s). The said Agreement will be approved by presidential decree.  The Agreement and its Memorandum of Obligations adresses the terms governing the Exploration Permit and any Concessions to be derived from such Permit :  Minimum required exploration work program and estimated amount of expenditures for the initial term of validity of the Permit and for each of its optional renewal periods  Fiscal Regime covers :  Royalty  Income Tax  Exemptions from certain duties and taxes such as VAT and import duties the fiscal and tax regime are fixed by law

CONTRACTUAL DOCUMENTS FOR E & P ACTIVITES  The international Price of crude oil is used for the determination of taxable income   Obligations incumbent upon Concession holder(s) :  Domestic Market Supply Obligation : up to 20% of crude oil production to be sold to the State at normal international FOB price less 10%  Royalty to be delivered in kind or paid in cash at the option of the Licensing Authority

CONTRACTUAL DOCUMENTS FOR E & P ACTIVITES CONTRACTUAL FRAMEWORK FOR ASSOCIATION WITH ETAP :  Contract of Association (joint venture agreement) with ETAP as co-holder of the hydrocarbons titles in case the company has opted for the joint venture regime with ETAP ; Or  Production Sharing Agreement with ETAP as holder of the hydrocarbons titles in case the company has opted for the production sharing regime.

3 - JOINT VENTURE REGIME (ETAP/PARTNER(S))  Exploration Permit : granted jointly to ETAP and the company as co-holder  Exploration Costs : at the sole risk and at the expenses of the company  Concession  : ETAP has the option to participate in any commercial discovery upon its development decision up to the maximum percentage rate fixed in the relevant Agreement and Contract of Association In case of its participation in a Concession :  ETAP pays its share of all development and operating costs (Capex and Opex through cash calls)  ETAP reimburses its share of past exploration costs incurred on the permit pursuant to the terms negotiated and agreed under the Contract of Association (generally, through dedication of the value of an agreed percentage of its share of production from the field).

JOINT VENTURE REGIME (ETAP/PARTNER(S)) ETAP’s participation in a concession and fiscal terms :  If ETAP elects to participate in a Concession at a rate equal to or more than 40% then the rate of income tax for that Concession will be fixed at at a flat rate of 50%. Royalty for such will be as per the R factor provisions.  If ETAP elects not to participate in a Concession then the minimum royalty rates for that concession will be fixed at 10% for oil and 8% for gas and will increase as per the R factor provisions . Income tax for such Concession will be as per the R factor provisions.

4 - PRODUCTION SHARING REGIME  ETAP is the sole holder of all Hydrocarbon titles (exploration Permit, Concessions)  Company ,as ETAP’s partner acts as exclusive service contractor ; in case of several partners, one of them is appointed as the operator  Contractor bears all exploration, development and operating costs  Sharing of Production :  « Cost Oil » and/or « Cost Gas » : lifted by the Contractor for the recovery of its costs ; maximum rate negotiable and to be defined under the PSA.  « Profit Oil » and/or « Profit Gas » will be shared between ETAP and Contractor pursuant to negotiable production splits to be defined under the PSA.  No limitation on « Cost Oil » or « cost Gas » as for as depreciation rates applicable to exploration and development costs are concerned.

PRODUCTION SHARING REGIME  Royalties are included in ETAP’s share of « Profit Oil » and/or « profit Gas »  Contractor’s income Tax, will be paid directly by ETAP on its behalf and is included in ETAP’s share of « Profit Oil » and/or « Profit Gas » The income Tax is equal to the value of the Profit Oil or Profit Gas of the Contractor . For Oil ,There is no obligation to supply the Domestic Market

5 - FISCAL TERMS A. Income tax and Royalty Based on profitability « R » factor, to be calculated every tax year for each Concession by each Co-holder according to the following formula :(Cumulated net revenues to Cumulated expenses):  Rn for a given year (n) will be as follows : Sum of revenues from year 1 to year (n), minus the sum of [royalty plus income tax plus any other taxes and levies] from year 1 to year (n-1) Sum of [exploration, development and operating expenditures plus interest charges] from year 1 to year (n)  

ROYALTY AND INCOME TAX RATES FISCAL TERMS ROYALTY AND INCOME TAX RATES ROYALTY : Liquid Hydrocarbons INCOME TAX : Oil RATES « R » VALUES 2% 5% 7% 10% 12% 14% 15% 0 to 0.5 0.5 to 0.8 0.8 to 1.1 1.1 to 1.5 1.5 to 2 2 to 2.5 2.5 and over 50% 55% 60% 65% 70% 75%   0 to 1.5 2.5 to 3 3 to 3.5 3.5 and over

ROYALTY AND INCOME TAX RATES FISCAL TERMS ROYALTY AND INCOME TAX RATES ROYALTY : GAS INCOME TAX : GAS RATES « R » VALUES 2% 4% 6% 8% 9% 10% 11% 13% 15% 0 to 0.5 0.5 to 0.8 0.8 to 1.1 1.1 to 1.5 1.5 to 2 2 to 2.5 2.5 to 3 3 to 3.5 3.5 and over 50% 55% 60% 65%   0 to 2.5

FISCAL TERMS B. OTHER FISCAL TERMS  At each co-holder’s option, up to 30% depreciation of exploration, appraisal and development expenditures Interest charges on development expenditures may be deducted for a loan amount not to exceed 70% of said development expenditures All exploration expenditures may be amortised against any concession derives from the same permit Uplift of 10% to 30% for exploration expenditures relating to :  Difficult access areas  Gas objectives  Deep geological objectives Deepening of wells  Subject to the Licensing Authority’s specific approval, exploration costs incurred on another permit may be depreciated against a Concession provided additional exploration expenditures on said other permit are incurred over and above the contractual commitments. 17

FISCAL TERMS C .ABANDONMENT PROVISION :  Tax deductible (joint venture regime) or cost recoverable (production sharing regime) provision to cover future abandonment costs may be built up during the last 5 years (for offshore fields) 3 years (for onshore fields) of production, or earlier if duly justified and authorised.  The Provision for Abandonment will be calculated according to the following formula : Cumulative provision P = (A x C) / B Where : A = cumulative production, starting from the first year the holder is entitled to constitute the provision. B = total recoverable reserves to be prodced during the period the reserve will be constituted. C = estimate costs of abandonment and site restoration, reduced by any salvage or residual value of any assets, facilities or equipment to be recovered

FISCAL TERMS D. RE-INVESTMENT PROVISION  Provision for further exploration : A Tax deductible provision of up to 20% of the profits from any concession may be constituted for the funding of further exploration activities.

FISCAL TERMS F. EMPLOYEES SOCIAL COVERAGE Tax and Social Security regime applicable to expatriate employees - With regard to income Taxes, expatriate employees engaged in Petroleum activities are not subject to the common Tax regime but, instead, pay a flat 20% Tax rate on their income and benefits. - Expatriate employees may opt for a social security regime other than the Tunisian regime and in such case no Tunisian social security payments will be due.

6 - GAS TERMS   Priority to supply the domestic market with any Gas discovered and which is in excess of the holder’s own needs. The state guarantee* priority of access to the local market to the extent of the demand.  Price for Gas sales to the local market is fixed by Decree, it’s set at 80% of the FOB price for low sulphur content fuel oil (1%).  Holder has the right to export any Gas exceeding the local market requirements. Holder will have the right to use Associated or non Associated Gas for power generation.

7 – POWER GENERATION REGIME  The Holder of the Hydrocarbon Concession may be Authorized to develop non Commercial Gas for Power Generation. The electricity will be exclusively sold to the National Utility Compagny (STEG) Fiscal Regime : - Rate of Income Tax :35% - Exemptions from certain duties and taxes such as VAT and import duties The Parties negociate in good faith a sale Contract that define the rights and obligations of the Parties (term, Sale Price ,quantity, technical and commercial conditions….)

8- EXCHANGE CONTROL REGIME Holder has the right to freely dispose of any revenues resulting from its sales of crude oil and gas in the world market. Gas sold at the Domestic Market is paid for in Dollars and in Tunisian Dinars ,the proportion is agreed annually by the parties and is based on the Operating Budget . Holder has the right to freely convert and transfer any Tunisian dinars balances which are in excess of its local requirements.

COMPARISON :JOINT VENTURE REGIME/ PSA REGIME 9 – CONCLUSION COMPARISON :JOINT VENTURE REGIME/ PSA REGIME JOINT VENTURE P. S. A. CONTRACTUAL FRAMEWORK Agreement with the State   Contract of Association with ETAP Production Sharing Agreement with ETAP TITLE HOLDER(S) ETAP and partner(s) as Co-holders ETAP is sole holder of all hydrocarbons titles EXPLORATION Financing The Company In case of discovery ETAP reimburse its share,as per the agreement

COMPARISON JOINT VENTURE AND PSA REGIMES CONCLUSION COMPARISON JOINT VENTURE AND PSA REGIMES DEVELOPMENT & PRODUCTION Participation Financing JOINT VENTURE REGIME ETAP has the right to participate in each discovery upon partner’s decision to development   ETAP pays its share of development and operating costs trough cash call and reimburses its share of past costs PSA REGIME Not applicable All costs born by Contractor, reimbursed (incl past costs) throug cost oil (rate negotiable)  Profit oil split between ETAP and contractor (rates negotiable) ROYALTY & TAX Progressive rates according to profitability (« R » factor) To be paid by both ETAP and partner(s) Both paid by ETAP out of its share of profit oil/gas

COMPARISON JOINT VENTURE AND PSA REGIMES CONCLUSION COMPARISON JOINT VENTURE AND PSA REGIMES DEPRECIATION RATES JOINT VENTURE Up to 30% per annum PSA Pursuant to cost recovery provisions (negotiable) INTEREST CHARGES Tax deductible up to 70% of loan amount (development only) Pursuant to cost recovery provisions UPLIFT ON CERTAIN EXPLORATION COSTS 10 to 30% for depreciation purposes 10 to 30% for cost recovery purposes ABANDONMENT COSTS Tax deductible provision Cost recoverable