All PSAs are structured similarly. The basic commercial terms of all PSAs incorporate provisions on: (1) the scope of exploration, development and production rights; (2) participating interest shares; (3) warranties and general rights and work obligations of the parties; (4) contractors' use of land and sea beds necessary to carry out petroleum operations; (5) contractors' recovery of petroleum costs and production sharing; (6) tax treatment of petroleum operations; (7) valuation of petroleum; (8) contractors' export and import rights; (9) bonus payments and acreage fees; (10) government guarantees; and (11) applicable law, economic stabilization and dispute resolution.

SOCAR's ownership interest in each production consortium varies. In the ACG off-shore fields, for example, SOCAR's initial 20% interest was subsequently reduced to 10%, and is now generally believed to be even lower due to farmouts. SOCAR's interest in the Karabakh offshore field amounts to 71/2%. For Dan Ulduzu/Ashrafi off-shore field, the SOCAR interest is 20%; for Shah Deniz, it is 10%; and for Lenkoran/Talysh fields, it is 25%. Under the PSAs, contractors are granted the sole and exclusive exploration, development and production rights within the contract areas. The PSAs provide for exploration periods of three years and production periods of either twentyfive or thirty years. All of the PSAs also contemplate additional exploration period of eighteen months in a case of discovery.

Contractors are obligated to undertake minimum obligatory work and development programs with respect to the contract areas, including the obligation to provide the necessary funds to explore, appraise, evaluate and develop the petroleum resources, and to conduct exploration, production and development activities in a diligent, safe, and efficient manner in accordance with generally accepted principles of the petroleum industry. Development programs are subject to approval by SOCAR, and should include terms relating to: (1) spacing, drilling and completion of wells; (2) production and storage installations; (3) transportation and delivery facilities for the production, storage and transportation of petroleum; and (4) minimum infrastructure investments. Production and environmental pollution forecasts and safety assessments are also to be included into the development programs.

Under the PSAs, contractors are entitled to recover all operating costs from total production. In contrast, capital costs can be recovered by contractors only from a maximum of 50% of the total production remaining after deduction of the operating costs.

Contractors are liable for profit taxes with respect to the petroleum activities conducted in Azerbaijan at a fixed rate of 25%, as are their foreign sub-contractors carrying out their business activities in Azerbaijan. Business activities of contractors not related to petroleum operations are subject to the applicable laws and regulations of Azerbaijan. Contractors are also liable to provide all mandatory social security payments with respect to their employees who are citizens of Azerbaijan (such payments include but are not limited to contributions to the social insurance, pension, unemployment and the medical insurance funds).

Both contractors and their foreign sub-contractors are fully exempted from the Value Added Taxes (VAT) on: (1) all goods, works and services supplied in connection with petroleum operations; (2) their exports of petroleum and all products processed or refined from such petroleum; and (3) imports of goods and services made in connection with such petroleum operations.

Each of the PSAs contemplates payment of a significant bonus amount. Under all five PSAs, the total bonus payable to SOCAR should be made in three installments. The first installment, under all five PSAs, is due within thirty (30) days after the effective date of the PSA (the date of parliamentary ratification). The amount of the bonus payment as well as the terms of other two installments, however, are different in each particular case. Except for the ACG fields, contractors also pay annual acreage fees during the exploration and additional exploration periods.

Valuation of petroleum is necessary to enable calculation of cost recovery and the production splits. Petroleum should be appraised to arrive to the weighted average per unit price (WAUP) adjusted for pipeline tariffs and taxes, transit fees, transit losses, terminal fees, tanker and other costs incurred by the parties in connection with transportation of crude oil to the delivery point or point of sale 1 ("Net Back Value"). PSAs distinguish petroleum valuation depending on the total volume of arm's length export sales 2 or swaps of crude oil from the contract area.

Under the "Economic Stabilization" provisions of the PSAs, contractors are protected against any changes in the legal regulatory regime in Azerbaijan, should such changes contravene the provisions of the PSAs or should such changes adversely affect the rights and interests of contractors. In such event, the terms of the PSAs should be adjusted to re-establish the economic equilibrium of the parties. If the rights and interests of contractors remain adversely affected by virtue of these changes, then SOCAR is required to indemnify contractors for any resulting loss or damages. No rights and/or interests of contractors can be amended, modified or reduced without prior consent of the contractors.

Pursuant to the dispute resolution provisions of the PSAs, except for certain valuation disputes to be referred to an expert, all disputes should be submitted to arbitration, to be administered in accordance with principles of law common to the law of Azerbaijan and English law; to the extent that no common principles exist with regards to the matter in arbitration, then in accordance with the principles of the common law of Alberta and Canada.

The Government of Azerbaijan provides contractors with numerous guarantees, including but not limited to: (1) exclusivity of rights to the contract area; (2) protection against any infringement by the Government on the rights and interests of the contractors; (3) the right to full and prompt compensation of any right, interest and property of contractors expropriated, nationalized or otherwise taken away by the Government; (4) enforceability of the PSAs according to the terms thereof; (5) obligations of the Government to provide the contractors with licenses, approvals, visas, resident permits, customs clearances and with any other permissions necessary for the contractors to carry out their petroleum activities in Azerbaijan; and (6) the right of contractors to access, inter alia, onshore construction and fabrication facilities, supply bases and vessels, warehousing and all necessary transportation and infrastructure facilities. PSAs also stipulate that privatization, insolvency, liquidation, reorganization or any other change in the business form of SOCAR shall not affect the obligations of the Government under the PSAs. All rights to sovereign immunity are waived by the Government.

Pending draft legislation on the mineral resources sets forth the basic terms and conditions for conducting petroleum activities in Azerbaijan. The new draft contemplates licensing of the exploration, development and production activities: exploration rights are to be granted for ten-year terms; development and production rights for twenty-year terms; and combined exploration and development rights for thirty-year terms. Nevertheless, the draft law does not, and cannot possibly cover all possible issues related to exploration, development and production activities. Foreign investors, however, should not be discouraged to proceed with their investments in the petroleum industry of Azerbaijan since issues not addressed by the new draft law are open for negotiations with the Government.

1. Point of sale is the geographical location or locations where title to crude oil passes from a seller to a buyer irrespective of the terms under which the said crude oil is to be delivered to the buyer (i.e., whether it is F.O.B., C.I.F., C. and F., etc.).

2. Arm-length sales is a sale or exchange of crude oil between a willing and non-affiliated buyer and seller on the international petroleum market.

3. All rights, interests and property should be compensated at the full market value according to the discounted cash flow method.