Avner Oil - Annual Report 2011 - Delek Energy Systems

according to the PSC, and Noble has absolute discretion to carry out such operations andthe Partnerships have no standing in the decision to drill, formulation of the drilling plan orfixing its date.All the costs covered by Noble regarding the rights transfer to the general partners will bedivided equally between Noble and the general partners, except for certain costs, asspecified in the agreement, which the Partnership will cover.In the period until completion of the rights transfer to the Partnership, Noble hasundertaken to report to the general partners occurrence of any of the incidents specifiedin the agreement which might impair Nobel's rights in the PSC or the transfer of rights tothe Partnership, subject to the confidentiality liability applicable to the PSC. If DelekDrilling Management or Avner Oil and Gas fail to pay on the applicable payment dateaccording to the agreement, that party will be in breach and the payment will bear interestof Libor + 5% per year. If Delek Drilling Management and Avner Oil and Gas breach theprovisions of the agreement, Noble Cyprus will have the right to arbitration, as set out inthe agreement, or to terminate the agreement immediately.(2) The production sharing contractAs Noble Cyprus informed the Partnerships, on the October 24, 2008, Noble Cyprus andthe Republic of Cyprus signed a production sharing contract. The production sharingcontract defines the terms for oil exploration and production in Block 12, including theagreement period, project area, project work plan, guarantees to be provided to ensurethat the work will be carried out, tax provisions, bonuses payable according to projectdevelopment stages, and the right of Cyprus to a share in any oil and/or gas that may berecovered, if recovered, according to the arrangements defined in the production sharingcontract. As opposed to the manner that the issue of royalties is regulated in explicitlegislation in the Official Gazette in Israel, in Cyprus payments to the authorities areregulated in production sharing contracts with the Cypriot government. This information isnot public. Under the model PSC published by the Cypriot government in the website ofthe Ministry of Commerce, Industry and Tourism 186 , which to the best of the Partnership'sknowledge is substantially the same as the production sharing contract, the Cypriotauthorities have a share in the income to the concessionaire (after deduction of itsexpenses using the mechanism fixed in the production sharing contract), which isgraduated and: (1)in the event of crude oil, it is a function of the average daily oilproduction (barrels per day) and the oil price per barrel; (2) in the event of gas, it is afunction of the average daily production on an annual basis (in BCF per day). The shareof the Cypriot authorities in the concessionaire's income also includes the corporate taxwhich must be paid to them. The term of the agreement was based on the progress of thework stages.(3) Joint operating agreement (JOA)Simultaneous to signing the transfer agreement, Delek Drilling Management, Avner Oiland Gas Ltd. and Noble Cyprus signed a JOA applicable to Block 12, in order to regulatethe operating issue if the transfer is approved as specified in section ‎7.26.7‎(4) above. TheJOA covers the same issues included in the JOA for the Yam Tethys project described insection ‎7.26.2 above, wherein resolutions are adopted by a decisive majority vote,meaning a positive vote in favor of a decision, by at least two participants who are notaffiliated parties and who jointly hold at least 65% of the license rights. In addition, Noblewas appointed as the operator.(4) Option agreementSubject to receiving the approval of the Cypriot government and valid since July 10,2011, the general partner will transfer all of its rights, liabilities and commitmentsaccording to the transfer agreement to the Partnership, including the JOA. The generalpartner also undertook to indemnify Nobel for any damage or loss incurred by filing theapplication to the Cypriot government to transfer 15% of the rights in the PSC prior to thedate when the general partner is entitled to make investments from assets outside Israeland receive this type of transfer.186At: http://www.mcit.gov.cy/mcit/mcit.nsf/All/FE3EB5707ADA0E6EC225771B0035B0D2?OpenDocument.A-180