AGREEMENT FOR IMPLEMENTATION OF AN OPTIMIZED WATERFLOOD PROGRAM FOR THE LONG BEACH UNIT

Exhibit 10.10

AGREEMENT FOR IMPLEMENTATION OF AN

OPTIMIZED WATERFLOOD PROGRAM

FOR THE LONG BEACH UNIT

TABLE OF CONTENTS

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AGREEMENT FOR IMPLEMENTATION OF AN
OPTIMIZED WATERFLOOD PROGRAM
FOR THE LONG BEACH UNIT

THIS AGREEMENT FOR IMPLEMENTATION OF AN OPTIMIZED WATERFLOOD PROGRAM FOR THE LONG BEACH UNIT (this “Agreement”) is made and entered into as of the 5th day of November, 1991, by and among the State of California (the “State”), by and through the State Lands Commission (the “SLC”), the City of Long Beach (the “City”), Atlantic Richfield Company, a Delaware corporation (“ARCO”), and ARCO Long Beach, Inc., a Delaware corporation and a wholly owned subsidiary of ARCO (“ALBI”).  ARCO and ALBI are collectively referred to herein as the “ARCO Parties,” and the State, by and through the SLC, the City and the ARCO Parties are collectively referred to herein as the “Parties.”

RECITALS

A.                                    ALBI believes that, if given the opportunity, it can design and, in conjunction with the City, implement an optimized waterflood program that would result in the production of a substantial volume of oil from the Long Beach Unit over and above the volume of oil that would be produced from continuation of the development program employed historically.  If realized, the increased production would benefit all of the owners in the Long Beach Unit, as well as the State, which has the largest financial interest in the Long Beach Unit.

B.                                    Implementation of an optimized waterflood program will involve substantial additional costs.  Under the existing contractors’ agreements for Tracts 1 and 2 of the Long Beach Unit, the State would bear more than 95% of the additional costs allocated to those Tracts out of the revenues otherwise payable to the State.  The State is unwilling to bear this additional economic risk because (1) there is a significant risk that the additional production will

be insufficient to compensate for the additional costs and (2) important State water, education and general programs that depend upon oil revenue from the Long Beach Unit should not bear the risk of any reduction in revenues resulting from the costs of implementing the optimized waterflood program.

C.                                    Accordingly, in order to induce the State to allow ALBI to design and, in conjunction with the City, to implement an optimized waterflood program for the Long Beach Unit, it is necessary for ALBI to bear these additional costs, and in connection therewith ALBI will agree to make a minimum commitment of $100,000,000 to design and implement the Program.  The State in turn will grant to ALBI a 50% (49% from and after January 1, 2000) net profits interest in the State’s portion of the incremental production that may result from the program, reserving to the State the remaining 50% (51% from and after January 1, 2000) net profits interest from that production.

D.                                    The State and ARCO believe that it is in their respective interests to resolve a dispute concerning development of ARCO’s State oil and gas leases near Coal Oil Point, in State waters offshore Santa ▇▇▇▇▇▇▇ County, by ARCO’s surrender to the State of its interests in two of those leases and dismissal of a pending lawsuit and appeal, entitled Atlantic Richfield Co., et al. v. State Lands Commission, et al., No. C663010 (Los Angeles County Superior Court) and No. 2 Civil B054449 (California Court of Appeal).  The surrender of these leases and dismissal of the lawsuit and appeal will settle for the State the right to maintain the area of the Coal Oil Point leases free from oil and gas development and will relieve the parties to the lawsuit from the burden of continued litigation expense.

E.                                     It is necessary and appropriate that the City perform various accountings under this Agreement.

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F.                                      It is also necessary and appropriate to accomplish these objectives that this Agreement continue for the economic life of the Long Beach Unit and that the existing contractors’ agreements for Tracts 1 and 2 of the Long Beach Unit be extended through the economic life of the Long Beach Unit.  It is fair and equitable to the State and to all other parties to those contracts to provide each party to those contracts with the option to extend the term of its contract and to require that ARCO assume the extended term of any such party refusing the extension.

G.                                    The California legislature has enacted enabling legislation to authorize this Agreement on behalf of the State, to extend the terms of the existing contractors’ agreements and to give ALBI and the City the powers to accomplish the objectives of the optimized waterflood program.

NOW, THEREFORE, in consideration of the mutual promises herein set forth, it is agreed as follows:

ARTICLE 1
DEFINITIONS

1.01                    Terms Defined in LBU Agreements.  Except as otherwise provided herein or unless the specific context in which any such term is used in this Agreement indicates a contrary intention of the Parties, all terms defined in or for purposes of the LBU Agreements shall have the same meanings as used in this Agreement.  The terms “approval,” “determination” and “establish” as used herein (whether as nouns or verbs) shall have their normal meanings, and shall not have the defined meaning set forth in the Unitization Agreements (as defined in Section 1.51 of the Unit Agreement), unless the context so requires.

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(a)                                 LBU Agreements.  “LBU Agreements” shall mean the Unit Agreement, the Unit Operating Agreement; the Contractors’ Agreement and the Tract No. 2 Agreement, as such agreements have been amended, modified or supplemented.

(b)                                 Unit Agreement.  “Unit Agreement” shall mean the Unit Agreement, dated as of November 1, 1964, among the City, the State and certain Working Interest Owners, relating to the unitization of the Long Beach Unit of the Wilmington Oil Field, California.

(c)                                  Unit Operating Agreement.  “Unit Operating Agreement” shall mean the Unit Operating Agreement, dated as of November 1, 1964, among the City, the State and certain Working Interest Owners, relating to the development and operation of the Unitized Formations and the Unitized Area.

(d)                                 Contractors’ Agreement.  “Contractors’ Agreement” shall mean the Contractors’ Agreement, effective as of the effective date of the Unit Agreement and the Unit Operating Agreement, among the City, the Field Contractor and the Nonoperating Contractors named therein, relating to the operation of Tract No. 1 by the Field Contractor under the direction and control of the City.

(e)                                  Tract No. 2 Agreement.  “Tract No. 2 Agreement” shall mean the Tract No. 2 Agreement, effective as of the effective date of the Unit Agreement and the Unit Operating Agreement, between the State and the Contractor named therein, relating to production from Tract No. 2.

1.02                    Other Defined Terms.

(a)                                 Actual Revenues.  “Actual Revenues” for any period shall mean the sum of all Unit revenues recognized for such period that are allocated as “credits” for

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purposes of either Section 4(a)(1) of the Contractors’ Agreement or Section 4(a)(1) of the Tract No. 2 Agreement.

(b)                                 Actual Costs.  “Actual Costs” for any period shall mean the sum of all Unit costs and expenses incurred for such period that are allocated as “charges” for purposes of either Section 4(a)(2) of the Contractors’ Agreement or Section 4(a)(2) of the Tract No. 2 Agreement.

(c)                                  State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2.  “State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2” for any period shall mean the weighted average of the City’s actual weighted average net profits percentage interest for Tract No. 1 and the State’s actual net profits percentage interest for Tract No. 2.

(d)                                 State’s Actual Net Profits.  The “State’s Actual Net Profits” for any period shall mean the difference between Actual Revenues and Actual Costs for such period multiplied by the State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2 for such period.

(e)                                  Base Revenues.  “Base Revenues” for any period shall mean the lesser of (i) Actual Revenues for such period and (ii) Actual Revenues for such period multiplied by the quotient of base oil production for such period divided by total oil production from the Long Beach Unit for such period.  For purposes of the determination of Base Revenues, base oil production for any period shall be calculated by the Computer Program in the manner described in Exhibit A attached hereto.

(f)                                   Base Costs.  “Base Costs” for any period shall mean the sum of (i) Unit costs and expenses, other than the costs of abandoning Unit ▇▇▇▇▇ and Unit Facilities,

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anticipated to be incurred for such period that would be allocated as “charges” for purposes of either Section 4(a)(2) of the Contractors’ Agreement or Section 4(a)(2) of the Tract No. 2 Agreement if the Program were not implemented, as calculated in the manner described in Exhibit B attached hereto, and (ii) any Unit costs or expenses actually incurred during such period by reason of extraordinary events that materially impact Unit operations, including but not limited to (by way of example) a significant change in land use for a non-Unit development project such as an amusement park, an act of God such as a major earthquake, an extraordinary and material expense such as the replacement of all or most of the Unit pipelines, or an extraordinary and material change in environmental or land use regulation, which costs or expenses are allocated as “charges” for purposes of either Section 4(a)(2) of the Contractors’ Agreement or Section 4(a)(2) of the Tract No. 2 Agreement, but only to the extent such costs or expenses would have been incurred if the Program had not been implemented.

(g)                                  State’s Base Revenues.  The “State’s Base Revenues” for any period shall mean the Base Revenues for such period multiplied by the State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2 for such period.

(h)                                 State’s Base Costs.  The “State’s Base Costs” for any period shall mean the Base Costs for such period multiplied by the State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2 for such period.

(i)                                     State’s Base Net Profits.  The “State’s Base Net Profits” for any month shall mean the difference between the State’s Base Revenues and the State’s Base Costs for that, month; provided, however, (i) for any month in which the State’s Base Costs exceed the State’s Base Revenues, the State’s Base Net Profits shall be zero and the amount by which the State’s Base Costs exceeds the State’s Base Revenues shall be added to the State’s Incremental

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Costs for such month, and (ii) if under Section 2.10(a) or 2.14 any future accounting reflects that for any period there exists a positive amount of the State’s Base Net Profits, the State’s Base Net Profits for such period shall be reduced (but not below zero) to the extent of the cumulative amount added to the State’s Incremental Costs pursuant to (i) above, and the State’s Incremental Costs for such month shall be reduced (but not below zero) by an equal amount.  If at any time after Fiscal Year 2000, the aggregate Base Costs for any period of 24 consecutive months are equal to or exceed the aggregate Base Revenues for such period, (i) the State’s Base Net Profits shall be equal to zero through the duration of Article 2, (ii) there shall be no further obligation to calculate the State’s Base Net Profits, the State’s Base Costs, the State’s Base Revenues, Base Costs and Base Revenues and (iii) for each period through the duration of Article 2: (A) the State’s Incremental Net Profits less the State’s entire share of abandonment costs shall be equal to the State’s Actual Net Profits, (B) Incremental Costs plus all abandonment costs allocable to Tract Nos. 1 and 2 shall be equal to Actual Costs, and (C) Incremental Revenues shall be equal to Actual Revenues.

(j)                                    Incremental Revenues.  “Incremental Revenues” for any period shall mean Actual Revenues less Base Revenues for such period.

(k)                                 Incremental Costs.  “Incremental Costs” for any period shall mean (i) Actual Costs less (ii) the sum of Base Costs and the costs allocable to Tract Nos. 1 and 2 of abandoning Unit ▇▇▇▇▇ and Unit Facilities for such period.

(l)                                     State’s Incremental Revenues.  The “State’s Incremental Revenues” for any period shall mean the Incremental Revenues for such period multiplied by the State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2 for such period.

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(m)                             State’s Incremental Costs.  Subject to adjustment as provided in Section 1.02(i), the “State’s Incremental Costs” for any period shall mean the Incremental Costs for such period multiplied by the State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2 for such period.

(n)                                 State’s Incremental Net Profits.  The “State’s Incremental Net Profits” for any month shall mean the difference between the State’s Incremental Revenues and the State’s Incremental Costs for that month; provided, however, that, for any month in which the State’s Incremental Costs exceed the State’s Incremental Revenues, the State’s Incremental Net Profits shall be zero and the amount by which the State’s Incremental Costs exceeds the State’s Incremental Revenues shall be added to a “Negative Incremental Net Profits Balance.” For any month that there exists a Negative Incremental Net Profits Balance, the State’s Incremental Net Profits, if any, calculated as in the preceding sentence shall be reduced (but not below zero) to the extent of the existing Negative Incremental Net Profits Balance, which Balance shall be reduced (but not below zero) by an equal amount.

(o)                                 Development Costs.  “Development Costs” for any period shall mean the aggregate amount of Unit Expense during such period for engineering studies, field surveys, data acquisition and analysis, drilling new ▇▇▇▇▇ and redrilling existing ▇▇▇▇▇ and such other capital items as shall be necessary to implement the Program, as such amount is determined by THUMS Long Beach Company and the City.  Development Costs shall not include routine repair and maintenance expenses.

(p)                                 Incremental Development Costs.  “Incremental Development Costs” for any period shall mean the positive amount, if any, of Development Costs for such period minus Base Drilling Capital for such period.  For this purpose, “Base Drilling Capital” for

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any period shall be determined by the Computer Program in the manner described in Exhibit B attached hereto.

(q)                                 State’s Incremental Development Costs.  The “State’s Incremental Development Costs” for any period shall mean the Incremental Development Costs for such period multiplied by the State’s Actual Weighted Average Net Profits Percentage Interest in Tract Nos. 1 and 2 for such period.

(r)                                    Fiscal Year.  “Fiscal Year” means a fiscal year commencing on July 1 and ending on the following June 30, or such different fiscal year as from time to time may be agreed upon among the Parties.  A reference to a specified Fiscal Year shall be a reference to the Fiscal Year ending during such specified year.

(s)                                   Remaining Oil Revenue.  “Remaining Oil Revenue” means “remaining oil revenue” as defined in Section 4(d) of Chapter 138.

1.03                    Terms Defined in Other Sections.  Certain additional terms used herein are defined elsewhere in this Agreement, as follows:

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ARTICLE 2
OPTIMIZED WATERFLOOD PROGRAM

2.01                    Agreement to Implement the Program.  As provided in this Agreement, the City, the State and ALBI hereby agree to implement and to cause the implementation of an optimized waterflood program for the Long Beach Unit (the “Program”) in accordance with the Program Plans to be adopted hereunder.  The scope of the Program shall include and be limited to the types of operational programs described in Exhibit C attached hereto.

2.02                    Services to be Provided by ALBI; Commitment of ALBI.

(a)                                 ALBI hereby agrees to use its reasonable best efforts to increase production above Base Production over the economic life of the Long Beach Unit to the greatest extent feasible using the Program.  ALBI’s efforts shall be reflected in its design of the Program, its proposal from time to time of such modifications to the Program as it shall deem appropriate and its implementation in conjunction with the City of the Program as provided more fully below.  Within 60 days after the end of each Fiscal Year during which the commitment set forth in Section 2.02(b) is in effect, ALBI shall deliver to the SLC and the City a written report, certified by the Business Manager for the Western District of ARCO Oil and Gas Company or another comparable or more senior officer of ARCO or one of its subsidiaries, specifying the costs incurred by or on behalf of ALBI under this Section 2.02(a) during the preceding Fiscal Year that are not Unit Expense (“Section 2.02(a) Expenditures”).  Such costs may include without limitation expenditures for engineering studies and work performed on behalf of ALBI by independent third party contractors or consultants.  Section 2.02(a) Expenditures that are incurred internally by ARCO, ALBI or another of ARCO’s wholly owned subsidiaries shall be accounted for on the basis of actual direct costs (including without limitation salaries, employee

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benefits and associated wage burdens such as social security and payroll taxes) and indirect costs at the rate of 25% of direct costs; provided, however, that no indirect costs factor for computer services shall be includible as Section 2.02(a) Expenditures.  Charges for mainframe and super-computer usage shall be calculated using ARCO’s internal inter-departmental rates.  Section 2.02(a) Expenditures for engineering studies and work performed by independent third party contractors or consultants shall be accounted for on the basis of the ARCO Parties’ actual direct costs with no indirect costs factor applied.  Nothing herein shall prohibit expenditures otherwise eligible for inclusion as Section 2.02(a) Expenditures from being paid by the Long Beach Unit as Unit Expense.  At the time each annual budget is submitted to the SLC pursuant to Section 2.05(b), ALBI shall submit to the SLC a written estimate of the Section 2.02(a) Expenditures to be made during the Fiscal Year covered by the budget proposal.

(b)                                 It is understood and agreed that the Program shall include expenditures for engineering studies, field surveys, data acquisition and analysis, drilling new ▇▇▇▇▇ and redrilling existing ▇▇▇▇▇ and such other capital items as shall be necessary to implement the Program.  In connection with the preparation of each annual budget for the Long Beach Unit contemplated by Section 2.05(a), ALBI, subject to Section 2.20(c), will propose that the budget include expenditures in the form of Incremental Development Costs that, when combined with Section 2.02(a) Expenditures anticipated to be made during the Fiscal Year covered by the budget, would result in the cumulative aggregate expenditure of Incremental Development Costs and Section 2.02(a) Expenditures from the inception of the Program through the end of that Fiscal Year of not less than the amount set forth in the table below opposite the applicable Fiscal Year:

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Notwithstanding any other provision hereof to the contrary, the maximum amount of Section 2.02(a) Expenditures that may be included in the foregoing cumulative expenditures (whether for the purpose of proposing expenditures or for the purpose of determining actual expenditures as provided in Section 2.02(c)) during such period shall be as set forth in the table below:

(c)                                  In the event that the cumulative aggregate sum of Incremental Development Costs and Section 2.02(a) Expenditures is less than the amount set forth in Section 2.02(b) for any such Fiscal Year: (i) ALBI shall within 30 days after the end of such Fiscal Year submit a written report setting forth the reasons for the shortfall in expenditures; and (ii) the SLC may terminate this Article 2 within 105 days after the end of such Fiscal Year in the event ALBI within 60 days after the end of such Fiscal Year has failed to propose a budget or a modification to the budget for the succeeding Fiscal Year pursuant to Section 2.05 or 2.06 that,

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together with the cumulative aggregate Section 2.02(a) Expenditures previously made and estimated for such succeeding Fiscal Year, will result in a total of Incremental Development Costs and Section 2.02(a) Expenditures equal to or greater than the amount set forth in Section 2.02(b) for such succeeding Fiscal Year; and (iii) the SLC may terminate this Article 2 within 45 days after the end of such succeeding Fiscal Year in the event that the cumulative aggregate sum of Incremental Development Costs and Section 2.02(a) Expenditures made through the end of such succeeding Fiscal Year is less than 90% of the amount set forth in Section 2.02(b) for such succeeding Fiscal Year.  If the cumulative aggregate sum of Incremental Development Costs and Section 2.02(a) Expenditures does not equal or exceed $100,000,000 through Fiscal Year 1998 (subject to extension as provided in Section 2.02(f)): (i) the SLC may terminate this Article 2 within 105 days after the end of such period in the event ALBI within 60 days after the end of such period has failed to propose a budget or a modification to the budget for either or both the current and the succeeding Fiscal Years, as appropriate, pursuant to Section 2.05 or 2.06 that, together with the cumulative aggregate Section 2.02(a) Expenditures previously made and estimated for such Fiscal Years, will result in a cumulative total of Incremental Development Costs and Section 2.02(a) Expenditures of not less than $100,000,000 through the end of the 12-month period following Fiscal Year 1998 (subject to extension as provided in Section 2.02(f)); and (ii) the SLC may terminate this Article 2 within 45 days after the end of such 12-month period in the event that the cumulative aggregate sum of Incremental Development Costs and Section 2.02(a) Expenditures made through the end of such period is less than $100,000,000.

(d)                                 (i) For periods succeeding the period covered by Section 2.02(b), as it may be extended by Section 2.02(f), ALBI, subject to Section 2.20(c), will continue in good

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faith to make Section 2.02(a) Expenditures and to propose and implement, in conjunction with the City, budgets including Incremental Costs.

(ii)                                  In the course of its review of an annual budget under Section 2.05(b), the SLC may give written notice to ALBI and the City that it has determined that the Section 2.02(a) Expenditures and the annual budget proposed by ALBI are insufficient to fulfill the obligations of ALBI under Section 2.02(d)(i).  The SLC may terminate this Article 2 within 105 days after any such notice is given in the event ALBI within 60 days after any such notice is given fails to propose either or both additional Section 2.02(a) Expenditures and a revised budget or a modification to the budget pursuant to Section 2.05 or 2.06 sufficient to fulfill such obligations.

(e)                                  Notwithstanding anything to the contrary set forth in Sections 2.03 through 2.06, ALBI and the City shall not be required to make revisions to any Program Plan, Annual Plan, the budget included in any Annual Plan or any amendments or supplements to or modifications of any of the foregoing with respect to any Fiscal Year to incorporate any changes ordered by the SLC that would affect projects, developments or operations designated by ALBI as provided below involving (or reasonably anticipated to involve) up to a total maximum of $16,000,000 of Actual Costs, as increased by the GNP Inflator (as defined in Exhibit B hereto) through the last day of the month prior to the submission of an annual budget or an amendment or supplement thereto or modification thereof pursuant to Section 2.05(b) or 2.06, as applicable; provided, however, that the SLC shall be permitted to order a change otherwise prohibited by the foregoing clause if and only to the extent that the SLC specifically finds that such change is necessary to (i) prevent waste, (ii) conserve oil and gas, (iii) avoid significant safety or environmental risks or (iv) a combination of the foregoing.  The provisions of Sections 2.03

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through 2.06, as applicable, shall govern the procedures by which any changes ordered by the SLC pursuant to the foregoing proviso shall be imposed, challenged and altered.  If the SLC orders any changes pursuant to Section 2.03, 2.04, 2.05 or 2.06 for reasons other than those set forth in this Section, ALBI shall be permitted to designate in writing to the SLC and the City those changes, if any, ordered by the SLC that will not be incorporated as permitted by this Section.  Any such designation by ALBI shall be given within 45 days after the SLC has ordered any such changes.  In the event of a challenge by ALBI alleging that the SLC is prohibited by this Section 2.02(e) from ordering any change, the court hearing the challenge shall determine whether the SLC is prohibited by this Section from ordering the change prior to determining whether the change ordered by the SLC is reasonable.

(f)                                   ALBI shall be relieved of its commitments set forth in this Section if and to the extent: (i) the budget or budgets, or any amendments or supplements thereto or any modifications thereof, approved in accordance with this Agreement and the LBU Agreements do not provide for expenditures sufficient to meet such commitments, or such expenditures are budgeted but not made, as a result of actions or omissions of the SLC or the City; (ii) the SLC concurs in the determination of ALBI and the City that additional expenditures are not necessary to increase production to the greatest extent feasible using the Program; (iii) the expenditure of such funds has been prevented, in whole or in material part, by strikes, lockouts, fire, war, civil disturbances, acts of God, federal, state, county or municipal laws, orders or regulations, inability to secure materials, accidents or other causes beyond the reasonable control of either or both of ALBI and the City, in which case such commitments shall be deferred and extended for as long as such circumstances prevent the expenditures; or (iv) the SLC otherwise determines that good cause exists for the failure to make such expenditures.

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(g)                                  The SLC’s sole remedy against the ARCO Parties for any failure by the ARCO Parties to meet the commitments set forth in this Section is to terminate this Agreement in accordance with the above provisions and retain all of the benefits theretofore granted the State under this Agreement (including the settlement of the Coal Oil Point dispute provided for in Article 4 and the benefits of any expenditures made by or on behalf of ALBI pursuant to this Article 2).  Any such termination shall be effective upon the giving of a notice of termination by the SLC to ALBI and the City.  Any termination pursuant to Section 2.02(c) shall not be subject to Section 2.21(b).

(h)                                 Except as provided elsewhere in this Agreement, the ARCO Parties shall not be entitled to any payments or fees from the City or the State in connection with their services under this Section or Sections 2.03 through 2.08.

2.03                    Program Plans.

(a)                                 ALBI and the City shall prepare plans (“Program Plans”) pursuant to which the Program is to be implemented and carried out.  Each Program Plan shall cover a period of five years commencing on the first day of the term of the immediately succeeding Annual Plan (except that the first Program Plan shall cover a period of approximately four and one-half years commencing as soon as practicable after December 31, 1991).  Each Program Plan shall also include two schedules setting forth for each of the first two years all of the matters (except the itemized budget of intended expenditures) required to be included in annual plans of development and operation as contemplated by Section 5(a) of Chapter 138 and Section 4.2 of the Unit Agreement.  The schedule for the first year included in the first Program Plan shall cover the period from a date as soon as practicable after December 31, 1991 through June 30, 1992.  Each Program Plan shall be subject to review and revision by the SLC for consistency

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with good oil field practice, the Program and the Unit and Unit Operating Agreements and for environmental and safety concerns.  Subject to Section 5(c) of Chapter 138, ALBI and the City shall revise each Program Plan to incorporate the changes ordered by the SLC where the SLC has found the changes to be necessary to assure that the Program Plan (i) is consistent with good oil field practice, or (ii) is consistent with the Program, or (iii) is consistent with the Unit and Unit Operating Agreements, or (iv) does not involve significant safety or environmental risks, or for any combination of the foregoing reasons (i) through (iv).  The SLC shall specify in writing with particularity the reason or reasons for each ordered change.  Either or both of ALBI and the City may apply to a court of competent jurisdiction to challenge the changes ordered by the SLC.  Subject to Section 5(c) of Chapter 138, the Program Plan adopted by ALBI and the City with whatever changes are ordered by the SLC shall go into effect and stay in effect, subject to any additional approvals that may be required by the Unit Agreement, unless and until a court of competent jurisdiction determines in the exercise of its independent judgment that the SLC is prohibited by Section 2.02(e) hereof from ordering any changes or that any changes ordered by the SLC are not reasonable.  In the event of such a judicial determination, the Program Plan shall be altered to revoke any changes ordered by the SLC found by the court to be prohibited by Section 2.02(e) or in other cases as ordered by the court.  The first Program Plan shall be prepared and formally submitted to the SLC not later than 60 days after this Agreement becomes effective in accordance with Section 5.02.  Each subsequent Program Plan shall be prepared and formally submitted to the SLC at least 100 days prior to the expiration of the second Annual Plan adopted pursuant to the then current Program Plan.  Each Program Plan shall be informally submitted in draft form to the staff of the SLC at the same time that it or any budget based upon it is formally submitted to the City Council of the City.  The SLC shall have a period of 45 days

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following the formal submission of each Program Plan to complete its review of the Program Plan.  If the SLC does not order any changes to a Program Plan within 45 days of its formal submission, such Program Plan shall be deemed to be reviewed and accepted by the SLC.

2.04       Amendment of Program Plans.  Any Program Plan may be amended, supplemented or modified as and when deemed necessary or appropriate by ALBI and the City, subject to review and revision by the SLC in accordance with the provisions of Section 2.03 hereof, except that the 45-day period set forth in Section 2.03 shall be a 30-day period for purposes of this Section 2.04.

2.05       Annual Plans.

(a)           Each year, ALBI and the City shall prepare an annual plan for the implementation of the then current Program Plan and as contemplated by and sufficient for purposes of Article 4 of the Unit Agreement (an “Annual Plan”).  Each Annual Plan shall consist of the appropriate schedule from the current Program Plan and an itemized budget of intended expenditures, which budget shall not be organized by operational programs but shall be organized by categories of total expenditures.  In the event that ALBI and the City are unable to resolve any dispute relating to the budget included or to be included in any Annual Plan or any amendment or supplement thereto or modification thereof, each of ALBI and the City shall submit to the SLC a statement of its position with respect to such dispute.  Subject to the rights of the SLC to order changes to a budget as provided in Section 2.05(b), the SLC shall resolve the dispute during the course of its budgetary review provided for in Section 2.05(b) by selecting for inclusion in the budget either the entire proposal of ALBI or the City; provided, however, that the SLC shall not be permitted to select a proposal of the City that would require a greater expenditure of Incremental Costs than the proposal of ALBI unless and only to the extent that the

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SLC specifically finds that such greater expenditure is necessary to avoid subsidence or significant environmental or safety risks.  Any such decision by the SLC shall be final and binding on ALBI and the City; except that either ALBI or the City may apply to a court of competent jurisdiction to challenge any decision made by the SLC pursuant to the proviso set forth in the preceding sentence.  The adoption of an Annual Plan or an amendment or supplement thereto or modification thereof under this Agreement shall constitute the adoption of such Annual Plan or such amendment, supplement or modification by the City and the State (subject to the rights of the SLC under Section 2.05(b)) for purposes of Article 4 of the Unit Agreement.  The City, the State and the ARCO Parties hereby covenant and agree to vote for, approve of and consent to each and every Annual Plan, and any and all amendments or supplements thereto or modifications thereof, after adoption under this Agreement to the extent that under any LBU Agreement any of them may or is required to vote on, approve of or consent to any such Annual Plan, amendment, supplement or modification.

(b)           Each proposed budget and each proposed amendment or supplement to or modification of a budget included in an Annual Plan shall be subject to review and revision by the SLC for consistency with the current Program Plan.  Subject to Section 5(c) of Chapter 138 and the limitations set forth below, ALBI and the City shall revise each budget, amendment, supplement or modification to incorporate changes ordered by the SLC where the SLC has found the changes to be necessary to assure the consistency of the budget with the Program Plan.  The SLC shall specify in writing with particularity the reason or reasons for each ordered change.  Either or both of ALBI and the City may apply to a court of competent jurisdiction to challenge the changes ordered by the SLC, with the challenge of ALBI limited to whether the SLC is prohibited by Section 2.02(e) hereof from ordering such changes.  Subject to

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Section 5(c) of Chapter 138 and the limitations set forth below, the budget, amendment, supplement or modification to a budget adopted by ALBI and the City with whatever changes are ordered by the SLC shall go into effect and stay in effect, subject to any additional approvals that may be required by the Unit Agreement, unless and until a court of competent jurisdiction determines in the exercise of its independent judgment that the SLC is prohibited by Section 2.02(e) hereof from ordering any changes or that any changes ordered by the SLC are not reasonable.  In the event of such a judicial determination, the budget shall be altered to revoke any changes ordered by the SLC found by the court to be prohibited by Section 2.02(e) or in other cases as ordered by the court.  Except as otherwise specifically provided in Section 2.05(a): (i) in the event the SLC orders any change to be made in a budget reviewed by it hereunder, any increase in any category of expenditures in excess of the amount set forth in the proposal of ALBI and the City (or the proposal of ALBI if ALBI and the City submit separate proposals as contemplated by Section 2.05(a)) shall be deemed to be Base Costs for all purposes of this Agreement; and (ii) if the aggregate Base Costs for any period of 24 consecutive months equal or exceed the aggregate Base Revenues for such period, the SLC thereafter shall not have the right to order any change to be made in a budget reviewed by it hereunder that would result in an increase in any category of expenditures in excess of the amount set forth in the proposal of ALBI and the City (or the proposal of ALBI if ALBI and the City submit separate proposals as contemplated by Section 2.05(a)).  Each proposed budget shall be prepared and formally submitted to the SLC at least 100 days prior to the first day of the Annual Plan year covered by such budget.  Each budget shall be informally submitted in draft form to the staff of the SLC at the same time that it is formally submitted to the City Council of the City.  The SLC shall have a period of 45 days following the formal submission of each budget to complete its review of the

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budget.  If the SLC does not order any changes to a budget within 45 days of its formal submission, such budget shall be deemed to be reviewed and accepted by the SLC.

(c)           Notwithstanding Section 2.05(b), the first Annual Plan, including the budgetary portion thereof, shall cover the period from a date as soon as practicable after December 31, 1991 through June 30, 1992, and shall be sufficient for purposes of constituting an amendment to the annual plan for Fiscal Year 1992 adopted pursuant to Article 4 of the Unit Agreement; and the first proposed budget to be included in the first Annual Plan shall be submitted to the SLC concurrently with the submission of the first Program Plan.

2.06       Amendment of Annual Plans.  The nonbudgetary portion of an Annual Plan may be amended, supplemented or modified as and when deemed necessary or appropriate by ALBI and the City, subject to review and revision by the SLC in accordance with the provisions of Section 2.04.  The budgetary portion of an Annual Plan may be amended, supplemented or modified as and when deemed necessary or appropriate by ALBI and the City, subject to review and revision by the SLC in accordance with the provisions of Section 2.05(b), except that the 45-day period set forth in Section 2.05(b) shall be a 30-day period for purposes of such review.  Any disputes between ALBI and the City with respect to any such amendment, supplement or modification shall be resolved by the SLC in accordance with the provisions of Section 2.05(a).  Notwithstanding the foregoing, the executive officer or acting executive officer of the SLC shall have the power to consent to an amendment or supplement to or modification of any portion of an Annual Plan, provided that such officer’s consent shall be subject to ratification by the SLC at its next regular meeting.  In the event the SLC does not ratify the consent of its executive officer or acting executive officer to such amendment, supplement or modification,

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neither the City, the ARCO Parties nor the Field Contractor shall be liable to the State for any actions taken or omitted under the consent or authority of the executive officer or acting executive officer.

2.07       Expenditures in Excess of Budget.  Notwithstanding the adoption of an Annual Plan hereunder, but subject to the approval, if required, of any parties to the Unit Agreement other than the State, the City or the ARCO Parties, the City, as the Unit Operator, acting with the consent of ALBI (which shall not be unreasonably withheld), shall have the authority to cause the expenditure of funds for Unit Operations in excess of the amount set forth in any budget included in an Annual Plan; provided, however, that no such expenditure shall be incurred that would result in any category of expenditures set forth in the budget to exceed 120% of the budgeted amount for that category.  Such categories of expenditures may include without limitation operating cost, staff expenses, taxes (other than income taxes), development drilling, geological/geophysical exploration and plant capital.

2.08       Implementation of the Program.  Each Party hereby agrees to do all things and to take all actions as shall be reasonably necessary, appropriate or convenient to formulate, adopt, modify and implement timely the Program, the Program Plans and the Annual Plans.  In addition to the procedures specifically provided for in this Article 2, the Parties shall consult with one another on an informal basis as shall be necessary, appropriate or convenient in connection with the implementation of the Program or the performance of this Article 2.

2.09       Standard of Care.  In any claim, action or proceeding by one or more of the Parties against any other Party or its directors, officers, employees, agents or independent contractors arising out of the design, formulation, proposal, adoption, amendment, supplementation, modification or implementation of the Program, any Program Plan or any Annual Plan, such other Party or person shall be held to the same standard of care as set forth for

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the Unit Operator in Section 7.9 of the Unit Operating Agreement.  This Agreement, however, shall not affect the standard of care or other liability standard set forth in any of the LBU Agreements with respect to any conduct to which such LBU Agreement applies.

2.10       Monthly Accountings.

(a)           For so long as this Article 2 remains in effect, the State shall receive as its total revenue from the Contractors’ Agreement and the Tract No. 2 Agreement for any period the sum of the State’s Base Net Profits plus 50% (51% from and after January 1, 2000) of the State’s Incremental Net Profits for such period, after adjusting for (by subtracting) the State’s allocable portion of abandonment costs for such period provided for in Section 2.18.  Subject to Section 2.14 hereof, an accounting of the State’s Base Net Profits, the State’s Incremental Net Profits, the Incremental Development Costs, the State’s Incremental Development Costs, the State’s entire share of abandonment costs and the State’s allocable portion of abandonment costs shall be made on a monthly basis, commencing on January 1, 1992 (the “Program Commencement Date”).  The accounting shall be made by the City in addition to the other accountings it performs under the LBU Agreements.  Each such monthly accounting shall be completed and reported in writing to ALBI and the SLC on or before the last working day of the following month.  Each accounting shall provide sufficient detail to permit the verification of the accounting by ALBI and the SLC.

(b)           In performing the accountings, the City will be required to have certain calculations made by the Computer Program as described in Exhibits A and B hereto.  The calculations made by the Computer Program will generate data on a quarterly basis, which must be converted to a monthly basis in order to perform the required accountings.  The City shall convert such data by dividing each item of data by the actual number of days in the quarter

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in question, and thereupon multiplying the resulting quotient by the actual number of days in the month in question.  If, for purposes of the determination of Base Revenues under Section 1.02(e) or the determination of Base Costs under clause (i) of Section 1.02(f), there shall be any conflict between the calculations contained in the Computer Program and the descriptions of such calculations set forth in Exhibit A or Exhibit B hereto, the calculations contained in the Computer Program shall control.  All additional calculations required in connection with this Agreement that are not made by the Computer Program shall be made in accordance with the relevant provisions of this Agreement.

(c)           The accountings to be made pursuant to Section 2.10(a) shall have no effect on the calculation of Remaining Oil Revenue for purposes of distributing to the City a portion of Remaining Oil Revenue; provided, however, that the costs incurred by the City in performing such accountings shall be included as amounts “expended by the City in administering oil and gas operations on the Long Beach tidelands” under Section 4(d) of Chapter 138.

2.11       Payments by ALBI.  If any monthly accounting pursuant to Section 2.10(a) reflects that (i) the aggregate sum for the month of the State’s Base Net Profits plus 50% (51% from and after January 1, 2000) of the State’s Incremental Net Profits, after adjusting for (by subtracting) the State’s allocable portion of abandonment costs provided for in Section 2.18, exceeded (ii) the State’s Actual Net Profits for the month, ALBI shall pay to the City, on or before the 35th day following the end of the month to which the accounting relates, an amount equal to such difference for such month, as set forth in the accounting made by the City.  The portion of any and all such payments in respect of Tract No. 1 shall be added to Tract No. 1 revenues in determining Remaining Oil Revenue for distribution between the State and the

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City.  The portion of any and all such payments in respect of Tract No. 2 shall be paid in its entirety by the City to the State.

2.12       Payments to ALBI and the City.  If any monthly accounting pursuant to Section 2.10(a) reflects that (i) the State’s Actual Net Profits for the month exceeded (ii) the aggregate sum for the month of the State’s Base Net Profits plus 50% (51% from and after January 1, 2000) of the State’s Incremental Net Profits, after adjusting for (by subtracting) the State’s allocable portion of abandonment costs provided for in Section 2.18, the City shall pay to ALBI, on or before the 35th day following the end of the month to which the accounting relates (but in any event prior to the payment to the State of any funds with respect to such month), an amount equal to such difference for such month, as set forth in the accounting made by the City.  In addition, commencing January 1, 1996, the State shall pay monthly to the City, at the same time of each payment to ALBI under this Section, the amount required by Section 2(b)(1) of the Enabling Legislation.  Each such payment shall be made by the retention of funds by the City otherwise due to the State from Tract No. 1.  Any and all such payments by the City to ALBI and itself shall be paid by the City on behalf of the State prior to any distribution between the SLC and the City from Remaining Oil Revenue.  Notwithstanding any other provision of this Agreement to the contrary, the State shall be and remain liable to ALBI for any and all payments to be made under this Agreement by the City to ALBI even if Remaining Oil Revenue and revenues of the State derived from production from Tract No. 2 are at any time insufficient to make such payment.

2.13       City as Agent for Tract No. 2 Payments.  In order to facilitate the accountings by the City required under this Agreement, the City shall act as agent for the State with respect to the receipt of net profit payments due the State from the Tract No. 2 Contractor.

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The City shall receive monthly the net profit payments directly from the Tract No. 2 Contractor and hold these payments in a separate interest-bearing account.  The City shall determine each month whether any portion of the payment is needed to make any payments to ALBI required by Sections 2.12 and 2.14.  As soon as it determines that no portion of the monthly net profit payment is needed to make the next payment to ALBI under Section 2.12 or any then due payment to ALBI under Section 2.14, the City shall transmit to the State the Tract No. 2 net profit payment with any interest earned and collected thereon.  If all or any portion of the Tract No. 2 net profit payment is needed to make a payment to ALBI, the City shall use this money to make that payment and then immediately transmit to the State any remaining balance with any remaining interest earned and collected thereon.

2.14       Adjustments in the Value of Oil.  If and when the Value of Oil Allocated to a Contractor or the Value of Oil Allocated to the Contract Lands, respectively, is adjusted pursuant to Section 9(e) of the Contractors’ Agreement or Section 7(e) of the Tract No. 2 Agreement (including any subsequent adjustments required upon the successful challenge by a Contractor under the Contractors’ Agreement or the Contractor under the Tract No. 2 Agreement of an adjustment made pursuant to Section 9(e) of the Contractors’ Agreement or Section 7(e) of the Tract No. 2 Agreement, as provided therein), all monthly accountings made pursuant to Section 2.10(a) hereof covering periods affected by any such adjustments shall also be adjusted in the same manner.  Adjustments under this Agreement shall be made by the City and reported in writing to ALBI and the SLC within 10 days after any such adjustments under the Contractors’ Agreement or the Tract No. 2 Agreement are made.  Each adjustment under this Agreement shall provide sufficient detail to permit the verification of the adjustment of the accountings by ALBI and the SLC.  Within 15 days after the adjustment payments under the

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Contractors’ Agreement and Tract No. 2 Agreement are received by the City, ALBI or the City shall pay to the other, and the State or the City shall pay to the other, the amount necessary to give effect to the adjustment made hereunder.  Any such payments to or by ALBI shall be made by or to the City, as the case may be, on behalf of the State.  Any such payment made by the City to ALBI or itself shall be made in the manner and in accordance with the priorities set forth in Section 2.12.

2.15       No Late Payment Charges.  There shall be no late penalties or interest assessed or payable in respect of any payments required under Sections 2.11, 2.12 and 2.14 that are not made when due.

2.16       Accounting Disputes.

(a)           In order to permit verification of the written reports provided by the ARCO Parties pursuant to Section 2.02(a), authorized representatives of the SLC may with respect to any such report (i) inspect the supporting accounting records of the ARCO Parties and (ii) obtain such additional information from the ARCO Parties as is relevant thereto within two years after such report has been delivered by the ARCO Parties.  In order to permit verification of the accountings made by the City pursuant to Section 2.10(a) and Section 2.14, authorized representatives of either the SLC or ALBI may with respect to any such report (i) inspect the supporting records of the city and (ii) obtain such additional information from the City as is relevant thereto for a period of two years after such report has been delivered by the City.  Notwithstanding the foregoing, (A) the two-year time limitation provided for in this Section shall be extended to five years with respect to any inspection or inquiry made for the purpose of determining whether one or more accounting errors have been made on a repetitive and recurrent basis, and (B) in the event that any Party formally disputes an accounting pursuant to Sections

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2.16(c) and (d) or 2.17, the rights provided for in this Section shall continue with respect to such accounting for the duration of the dispute.

(b)           For purposes of inspections and inquiries made under Section 2.16(a), the authorized representatives of a Party may include accounting, legal and engineering personnel of or retained by the Party.  Any Party desiring to conduct such an investigation shall give the Party whose records are to be inspected a notice requesting access for such purpose.  The involved Parties shall agree upon a reasonable time and place for the inspection to be made.  It shall be presumed to be reasonable if the Party whose records are to be inspected offers to permit the inspection to be made at the location where such records are regularly maintained within 10 business days after it receives the inspection request.  For purposes of this Section 2.16, the term inspection shall include the right to take notes of, make extracts from and make photocopies of the accounting records being inspected.  Any accounting records made available hereunder for inspection shall be held in confidence and shall not be disclosed by any of such persons to any third party except in connection with any disputes under Sections 2.16(c) and (d) or 2.17.  Neither the ARCO Parties nor the City shall dispose of any accounting records subject to inspection under this Section 2.16 until after the maximum time period for inspection permitted hereunder has expired.

(c)           In the event that the SLC or ALBI disputes any accounting made under Section 2.02(a), 2.10(a) or 2.14, it shall give written notice to the other Party and the City, specifying with particularity the errors it alleges in such accounting.  Such notice must be given within two years after the accounting was delivered by the Party responsible therefor; provided, however, that the foregoing two-year time limitation shall be extended to five years with respect to any dispute alleging that one or more accounting errors have been made on a repetitive and

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recurrent basis.  Promptly after any such notice has been given, the involved Parties shall in good faith attempt to resolve the dispute on a fair and equitable basis.

(d)           If the involved Parties are not able to resolve the dispute within 60 days after the initial written notice has been given under Section 2.16(c), the dispute shall be submitted for binding arbitration pursuant to Section 2.17.

2.17       Dispute Resolution.  Disputes arising under this Article 2 that are neither to be resolved by the SLC as provided in Section 2.05(a) nor specifically reserved herein to be heard by a court of competent jurisdiction shall be resolved by a general reference conducted in Los Angeles County, California, by a retired judge from the panel of Judicial Arbitration & Mediation Services, Inc. (JAMS), appointed pursuant to the provisions of California Code of Civil Procedure Sections 638(1) et seq.  The Parties intend this general reference agreement to be specifically enforceable in accordance with said Section 638(1).  If the Parties cannot agree upon a member of the JAMS panel, one shall be appointed by the Presiding Judge of Los Angeles County Superior Court.

2.18       Abandonment.  This Agreement shall not in any way affect the responsibility for abandoning any Unit ▇▇▇▇▇ or Unit Facilities, which responsibility shall remain as set forth in the LBU Agreements and under existing law.  This Agreement shall allocate between the State and ALBI the State’s share of the costs of abandoning Unit ▇▇▇▇▇ and Unit Facilities, as follows:

(a)           The State shall bear its entire share of the costs of abandoning any Unit ▇▇▇▇▇ and Unit Facilities existing as of the Program Commencement Date (“Existing Unit ▇▇▇▇▇” and “Existing Unit Facilities”) and any Unit Facilities that simply replace Existing Unit Facilities or that otherwise would have been built even if the Program had not been implemented.

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The Existing Unit ▇▇▇▇▇ and Existing Unit Facilities shall be identified on a written inventory to be provided to ALBI and the SLC by the City within 60 days of the Program Commencement Date.  For purposes of this Section, any redrill of an Existing Unit Well other than a surface redrill shall be considered an Existing Unit Well.

(b)           ALBI shall bear 50% of the State’s entire share of the costs of abandoning any Unit Facilities built after the Program Commencement Date and that would not have been built had the Program not been implemented.

(c)           The State shall bear on a well-by-well basis that portion of its entire share of the costs of abandoning any Unit ▇▇▇▇▇ not existing as of the Program Commencement Date equal to the sum of (i) the quotient of 1.42 times the number of Base Production ▇▇▇▇▇ (as defined in Exhibit A) theoretically drilled after the Program Commencement Date pursuant to the base development plan embodied in the Computer Program and described in Exhibit A divided by the total number of unit ▇▇▇▇▇ (excluding redrills other than surface redrills) actually drilled after the Program Commencement Date, plus (ii) 50% of the remaining percentage of the State’s entire share of abandoning any Unit Well covered by the foregoing clause (i) but not borne by the State pursuant to such clause (i).

(d)           ALBI shall bear on a well-by-well basis the remainder of the State’s entire share of abandoning any Unit Well covered by subsection (c) above but not borne by the State pursuant to subsection (c).

(e)           The costs of abandoning Unit ▇▇▇▇▇ or Unit Facilities are neither Base Costs nor Incremental Costs.  The allocations in subsections (a) through (d) above are and shall be independent of Base Costs and Incremental costs.  Notwithstanding the foregoing, the accountings to be made under Sections 2.10 through 2.12 shall be adjusted, as provided therein,

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to give effect to the allocation of the State’s entire share of abandonment costs provided for in this Section 2.18.

2.19       Deposit of Computer Program.  The base development plan described in Exhibits A and B hereto is based upon a model embodied in a computer program and related software (the “Computer Program”) developed jointly by the ARCO Parties and the SLC, which Computer Program is hereby incorporated by reference into this Agreement.  In order to protect and preserve the Computer Program in the form agreed upon by such Parties, an exact copy of the Computer Program shall be transferred to a disk or disks (or other media) and stored by a mutually acceptable independent third party in accordance with the procedures and provisions of a Depository Agreement substantially in the form attached hereto as Exhibit D, which shall be entered into concurrently with this Agreement.  No Party shall be permitted to have access to such disk or disks (or other media) except as provided in the Depository Agreement.

2.20       Termination of the Program.  The obligations of the Parties under this Article 2 shall terminate upon the first to occur of the following:

(a)           The written agreement of ALBI and the State to terminate such provisions.

(b)           The termination of the Unit Agreement in accordance with Section 15.1 thereof.

(c)           Upon 60 days’ prior written notice from ALBI to the State in the event that ALBI determines, in its discretion, that continuation of the Program is not in the economic interests of ALBI.

(d)           After the expiration of the period covered by Section 2.02(b), as it may be extended by Section 2.02(f), 60 days after the last day of any Fiscal Year for which there

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were no Incremental Costs but only if there were no Incremental Revenues for that Fiscal Year and for the immediately preceding Fiscal Year, upon written notice that the State elects to terminate delivered by the SLC to ALBI within such 60-day period.

(e)           A termination by the SLC pursuant to Section 2.02 hereof.

(f)            A termination by the ARCO Parties pursuant to Section 5.01 hereof.

2.21       Effect of Termination.

(a)           The termination of this Article 2 shall not affect the rights and liabilities of the Parties to one another with respect to the performance of this Article 2 during the period prior to such termination, which rights and liabilities shall survive such termination.  Any such termination shall have no effect on any provisions of this Agreement other than this Article 2 or on any provisions of any LBU Agreement.

(b)           Except as otherwise expressly set forth in section 2.02(g), it shall be a condition of any termination of this Article 2 by the State pursuant to Section 2.02 or Section 2.20(d) that the State shall pay to ALBI an amount equal to the Negative Incremental Net Profits Balance as of the effective date of the termination and after giving effect to the final accounting pursuant to Sections 2.10(a) and 2.14.  Any such payment shall be made within 35 days of the effective date of the termination, with an adjusted payment, if necessary, made by the appropriate Party within 30 days after the final accounting pursuant to Section 2.14.

2.22       Effect of this Agreement on Sell-Offs.  This Agreement shall not in any way affect the provisions of agreements relating to the sell-off of oil pursuant to Article 11(a) of the Contractors’ Agreement or the State’s right to take in-kind oil pursuant to Article 9 of the Tract No. 2 Agreement, including without limitation Article 5(d) of the Contractors’ Agreement,

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providing for payment of excess value, and Articles 9(b)(3) and (4) and Article 9(e) of the Contractors’ Agreement and Articles 7(b)(3) and (4) and Article 7(e) of the Tract No. 2 Agreement, providing for adjustments to the value of oil allocated.  The rights to sell off oil or to take in-kind oil shall continue to apply to all oil actually produced without regard to whether such oil is classified as base or incremental production for purposes of this Agreement.

ARTICLE 3
EXTENSION OF CONTRACTORS’ AND TRACT NO. 2 AGREEMENTS

3.01       Extension of Contractors’ Agreement.  If the provisions of Article 2 of this Agreement have not been terminated in accordance with the provisions of this Agreement by January 1, 1995, the term of the Contractors’ Agreement shall be extended as of June 30, 1995, from and after April 1, 2000, to be coterminous with the Unit Agreement, with respect to each Contractor whose interest has not otherwise terminated pursuant to Article 30 of the Contractors’ Agreement (the “CA Extended Term”).  If so extended, the extension of the Contractors’ Agreement shall be evidenced by an amendment thereto substantially in the form of Exhibit E attached hereto (the “CA Amendment”), with only such changes as shall be ministerial in nature or shall have been approved in writing by ARCO and the City.  During January 1995, the City shall send a written notice to each Person Comprising the Field Contractor or a Nonoperating Contractor as of that date (the “CA Offerees”), which notice shall offer to each CA Offeree the right to maintain its interest in the Contractors’ Agreement during the CA Extended Term.  Such offer shall inure to the benefit of the permitted successors and assigns of each CA Offeree.  Such offer shall state that it shall remain open and irrevocable by the City (subject to the continued effectiveness of the Contractors’ Agreement with respect to the applicable CA Offeree and the continued effectiveness of the Unit Agreement) until 4:30 p.m. on June 30, 1995.  The notice

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shall provide an exclusive means by which the offer contained therein may be accepted in writing, which shall include the submission of a duly executed and notarized signature page to the CA Amendment.  ARCO hereby agrees that it shall be deemed automatically to have accepted the offer, if made, with respect to its entire interest as a Contractor or a Person Comprising a Contractor under the Contractors’ Agreement.  Accordingly, ARCO and the City hereby agree to dispense with any notice and acceptance of such offer to and by ARCO.  If one or more CA Offerees fail to accept the offer by the City as provided in the notice to be given by the City, then for the CA Extended Term, ARCO shall become, as provided in the CA Amendment, the Contractor or Person Comprising a Contractor with respect to any and all interests of all such CA Offerees (including their respective successors and assigns) under the Contractors’ Agreement.

3.02       Extension of Tract No. 2 Agreement.  If the provisions of Article 2 of this Agreement have not been terminated in accordance with the provisions of this Agreement by January 1, 1995, the term of the Tract No. 2 Agreement shall be extended, as of June 30, 1995, from and after April 1, 2000, to be coterminous with the Unit Agreement, unless sooner terminated in accordance with the provisions of Article 23 of the Tract No. 2 Agreement (the “T2 Extended Term”).  If so extended, the extension of the Tract No. 2 Agreement shall be evidenced by an amendment thereto substantially in the form of Exhibit F attached hereto (the “T2 Amendment”), with only such changes as shall be ministerial in nature or shall have been approved in writing by ARCO and the SLC.  During January 1995, the SLC shall send a written notice to each Person Comprising the Contractor as of that date (the “T2 Offerees”), which notice shall offer to each T2 Offeree the right to maintain its interest in the Tract No. 2 Agreement during the T2 Extended Term.  Such offer shall inure to the benefit of the permitted

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successors and assigns of each T2 Offeree.  Such offer shall state that it shall remain open and irrevocable by the SLC (subject to the continued effectiveness of the Tract No. 2 Agreement and the Unit Agreement) until 4:30 p.m. on June 30, 1995.  The notice shall provide an exclusive means by which the offer contained therein may be accepted in writing, which shall include the submission of a duly executed and notarized signature page to the T2 Amendment.  If one or more T2 Offerees fail to accept the offer by the SLC as provided in the notice to be given by the SLC, then for the T2 Extended Term, ARCO shall become, as provided in the T2 Amendment, the Person Comprising the Contractor with respect to any and all interests of all such T2 Offerees (including their respective successors and assigns) under the Tract No. 2 Agreement.

ARTICLE 4
COAL OIL POINT SETTLEMENT

4.01       Dismissal and Releases.  Based on the consideration and provisions set forth in this Agreement, promptly after the effective date of this Agreement,

(a)           The parties to the action and the appeal entitled Atlantic Richfield Co., et al. v. State Lands Commission, et al., No. C663010 (Los Angeles County Superior Court) and No. 2 Civil B054449 (California Court of Appeal) shall file with the court a dismissal with prejudice of all causes of action asserted in that action except for the Fifth Cause of Action, which is asserted only against the Santa ▇▇▇▇▇▇▇ County defendants, and with the Court of Appeal a dismissal of the appeal;

(b)           Each of the parties plaintiff to that action shall exchange with each of the parties defendant to that action releases in the form of Exhibit G hereto; and

(c)           ARCO shall deliver to the State a quitclaim of ARCO’s rights under State Oil and Gas Leases Nos. 308 and 309, P.R.C., dated March 4, 1947, as amended,

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substantially in the form of Exhibit H hereto.  The quitclaim shall be determinable upon the termination of this Agreement pursuant to Section 5.01 during the time period specified in Section 5.01.  The quitclaim shall become void and shall have no further force or effect upon such a termination of this Agreement during such time period and the satisfaction by ARCO of the payment condition provided for by Section 5.01.

ARTICLE 5
ENABLING LEGISLATION AND
EFFECTIVENESS OF THIS AGREEMENT

5.01       Enabling Legislation.  The legislation attached hereto as Exhibit I (the “Enabling Legislation”) adopted by the California Legislature and approved by the Governor of the State of California authorizes the State to enter into this Agreement.  The Enabling Legislation shall be deemed to be a part of this Agreement and is hereby incorporated herein by reference.  The Parties agree not to challenge the validity of the Enabling Legislation at any time, which agreement shall survive any termination of this Agreement pursuant to any of subsections (a) through (e) of Section 2.20.  In the event that the Enabling Legislation is finally determined by the courts to be void or unconstitutional in any material respect, which determination has an adverse effect on the rights or obligations of either or both of the ARCO Parties provided for in or contemplated by this Agreement, the ARCO Parties shall have the right to terminate this Agreement by written notice given to the other Parties within 60 days after such final determination.  Any such termination shall not affect the rights and liabilities of the Parties to one another with respect to this Agreement during the period prior to such termination or pursuant to this Section, which rights and liabilities shall survive such termination; provided, however, that if the ARCO Parties terminate pursuant to this provision prior to the 15th

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anniversary after the date of recordation of the quitclaim provided for by Article 4 (subject to extension as provided in the quitclaim) as a result of a determination of voidness or unconstitutionality, made at any time, in a lawsuit or other proceeding commenced prior to January 1, 1997, such quitclaim shall have no further force and effect as provided therein, and ARCO’s rights under Leases Nos. 308 and 309 then shall be in full force and effect notwithstanding anything in such leases or the SLC regulations to the contrary if and only if within 60 days after such termination ARCO makes a payment to the City, which shall receive and apply the payment in the same manner as provided in Section 2.11, equal to the sum of (i) 50% of the aggregate amount of the State’s Incremental Net Profits from the Program Commencement Date through the earlier of December 31, 1999 and the date of termination and (ii) 49% of the aggregate amount of the State’s Incremental Net Profits from January 1, 2000 through the date of termination (if the date of termination occurs after December 31, 1999), after adjusting for (by subtracting) ALBI’s allocable portion of abandonment costs for such period or periods provided for in Section 2.18.

5.02       Effectiveness of this Agreement.  Sections 5.01 and 6.04 of this Agreement shall become effective upon the date of this Agreement.  The remainder of this Agreement shall become effective on the latest of (i) the date of the last delivery required by Section 6.04, (ii) the date that each of the County of Santa ▇▇▇▇▇▇▇, the Santa ▇▇▇▇▇▇▇ County Air Pollution Control District and the Sierra Club Legal Defense Fund give irrevocable written notice to ARCO and the State that they will participate in the dismissal of the lawsuit and the exchange of releases described in Section 4.01 and (iii) the date of this Agreement.

37

ARTICLE 6
REPRESENTATIONS AND WARRANTIES

6.01       Representations and Warranties of the State.  The State hereby represents and warrants to the ARCO Parties that:

(a)           It has the power and authority to enter into this Agreement and the Exhibits hereto to be executed and delivered by it hereunder and to perform its obligations hereunder and thereunder.

(b)           It has taken all action and has secured the consents of all persons necessary to authorize the execution, delivery and performance of this Agreement and the Exhibits hereto to be executed and delivered by it hereunder.

(c)           This Agreement has been duly executed and delivered by it and constitutes a valid and binding obligation of it, enforceable against it in accordance with its terms.

(d)           Each Exhibit hereto to be executed and delivered by it hereunder, when so delivered, will have been duly executed and delivered by it and will constitute a valid and binding obligation of it, enforceable against it in accordance with its terms.

(e)           This Agreement does not require the approval of the Governor of the State of California pursuant to Section 6107 of the California Public Resources Code.

6.02       Representations and Warranties of the City.  The City hereby represents and warrants to the ARCO Parties that:

(a)           It has the power and authority to enter into this Agreement and the Exhibits hereto to be executed and delivered by it hereunder and to perform its obligations hereunder and thereunder.

38

(b)           It has taken all action and has secured the consents of all persons necessary to authorize the execution, delivery and performance of this Agreement and the Exhibits hereto to be executed and delivered by it hereunder.

(c)           This Agreement has been duly executed and delivered by it and constitutes a valid and binding obligation of it, enforceable against it in accordance with its terms.

(d)           Each Exhibit hereto to be executed and delivered by it hereunder, when so delivered, will have been duly executed and delivered by it and will constitute a valid and binding obligation of it, enforceable against it in accordance with its terms.

(e)           The City is not a party to the lawsuit described in Section 4.01 and makes no representation, warranty or covenant with respect to such lawsuit or to Section 4.01.

6.03       Representations and Warranties of the ARCO Parties.  Each of the ARCO Parties hereby represents and warrants to the State and the City that:

(a)           It has the corporate power and authority to enter into this Agreement and the Exhibits hereto to be executed and delivered by it hereunder and to perform its obligations hereunder and thereunder.

(b)           It has taken all action and has secured the consents of all persons necessary to authorize the execution, delivery and performance of this Agreement and the Exhibits hereto to be executed and delivered by it hereunder.

(c)           This Agreement has been duly executed and delivered by it and constitutes a valid and binding obligation of it, enforceable against it in accordance with its terms.

39

(d)           Each Exhibit hereto to be executed and delivered by it hereunder, when so delivered, will have been duly executed and delivered by it and will constitute a valid and binding obligation of it, enforceable against it in accordance with its terms.

6.04       Deliveries Following Execution.

(a)           Upon the execution of this Agreement or as soon thereafter as practicable, each of the ARCO Parties shall deliver to the SLC and the City a duly executed certificate of resolutions adopted by their respective Boards of Directors substantially in the forms attached hereto as Exhibit J in the case of ARCO and Exhibit K in the case of ALBI.

(b)           Upon the execution of this Agreement or as soon thereafter as practicable, (i) the SLC shall deliver to the ARCO Parties and the City a duly certified copy of minutes of a meeting of the SLC reflecting the approval of this Agreement and (ii) the City shall deliver to the ARCO Parties and the SLC a duly certified copy of minutes of a meeting of the City Council of the City reflecting the approval of this Agreement.

ARTICLE 7
MISCELLANEOUS PROVISIONS

7.01       Expenses.  Except as set forth herein, each Party shall pay its costs and expenses, including without limitation the fees of counsel, incurred by it in connection with this Agreement and the transactions contemplated hereby.

7.02       Entire Agreement.  This Agreement, the Exhibits hereto and the other agreements, documents and instruments delivered or to be delivered pursuant hereto or contemplated hereby, set forth the entire understanding of the Parties with respect to the subject matter hereof, supersede any and all prior agreements, arrangements and understandings with respect to the subject matter hereof, and may be modified only by a written instrument duly

40

executed by each Party affected by any such modification.  The Exhibits attached to this Agreement shall be deemed to be a part of this Agreement and are hereby incorporated by this reference.

7.03       Waivers; Accord and Satisfaction.  No breach of any covenant, condition, agreement, warranty or representation made herein or in any Exhibit hereto or the other agreements, documents or instruments delivered pursuant hereto or contemplated hereby, shall be deemed waived unless expressly waived in writing by the Party who might assert such breach.  Any such waiver by or on behalf of either or both of the ARCO Parties shall be effective only if it is signed by the Vice President of the Western District of ARCO Oil and Gas Company.  Any such waiver by or on behalf of the State shall be effective only if it is signed by the executive officer or acting executive officer of the SLC.  Any such waiver by or on behalf of the City shall be effective only if it is signed by the city manager or the acting city manager of the City.  Any such waiver may be made in advance or after the right waived has arisen or the breach or default waived has occurred.  Any such waiver may be conditional.  No such waiver shall be deemed to be a waiver of any other matter, whenever occurring and whether identical, similar or dissimilar to the matter waived.  No receipt or acceptance by any Party of any payment of any amount made hereunder in respect of the payment obligations set forth herein which is less than the amount due shall be deemed to be other than on account of the amount due before such receipt, acceptance or payment, and no endorsement or statement accompanying or in respect of any receipt, acceptance or payment shall be deemed an accord and satisfaction.

7.04       Counterparts.  This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed to constitute an original.

41

7.05       Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts-of-laws rules and laws.

7.06       Notices.  Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, return receipt requested, or delivered by commercial courier against receipt or in person, as follows:

If to the State:

Executive Officer

State Lands Commission

▇▇▇▇ - ▇▇▇▇ ▇▇▇▇▇▇

▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

with a copy to:

Chief, Mineral Resources Management

State Lands Commission

▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇

▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

If to the City:

City Manager

13th Floor, City Hall

▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇

▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

with a copy to:

Director of Department of Oil Properties

2nd Floor, City Hall

▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇

▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

If to ARCO:

ARCO Oil and Gas Company

▇.▇.  ▇▇▇ ▇▇▇

▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (for mail delivery only)

42

or

▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇

▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

Attention: Vice President and General Manager

with a copy to:

Atlantic Richfield Company

▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇

▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

Attention: Senior Vice President and General Counsel

If to ALBI:

ARCO Long Beach, Inc.

▇▇▇ ▇▇▇▇▇▇▇▇▇

▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

Attention: Business Unit Manager

with a copy to:

Atlantic Richfield Company

▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇

▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇

Attention: Senior Vice President and General Counsel or to such other address as such Party shall have furnished in writing in accordance with the provisions of this Section.  Any notice or other communication mailed by registered or certified mail shall be deemed given at the earlier of the time of its receipt by the addressee or seven days after the time of mailing thereof.  Any notice given in any other fashion shall be deemed to have been given when actually received by the addressee.  Payments required to be made under Article 2 hereof shall be made by wire transfer of immediately available funds to the account of the proper Party as such Party shall from time to time specify by written notice or by such other means as shall be agreed upon from time to time between the paying and receiving Parties.

43

7.07       Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, legal representatives and assigns.  Except as set forth in Section 7.17, the ARCO Parties shall be permitted to assign (i) to one or more wholly owned subsidiaries of ARCO any or all of their respective rights and obligations hereunder and/or (ii) to any one or more other persons ALBI’s rights to make or receive up to and including 45% of the remaining payments to ALBI called for by Article 2 of this Agreement; provided, however, that any such assignment and assumption shall not relieve the ARCO Parties from liability with respect to any obligations or payments.  Except as provided in the preceding sentence, the ARCO Parties shall not be permitted to assign, pledge, hypothecate, encumber or otherwise transfer to any other person any of their respective obligations under or in respect of Article 2 of this Agreement without the prior written consent of the SLC.  For purposes of this Section, the sale by an ARCO Party of any of the stock of a wholly owned subsidiary to which it has made an assignment pursuant to this Section shall constitute an assignment to another person, requiring the prior written consent of the SLC.

7.08       Headings.  The headings of the Sections herein are inserted for convenience of reference only and are not intended to be a part of, or to affect the meaning or interpretation of, this Agreement.

7.09       Severability; Waiver of Applicable Laws.  If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby.  To the extent permitted by applicable law, each Party hereby waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect.

44

7.10       Construction.  The language in all parts of this Agreement shall in all cases be construed according to its fair meaning and not strictly for or against any of the Parties.

7.11       Remedies Cumulative.  Except as otherwise specifically provided herein, the remedies provided herein are cumulative with one another and with any other remedies which any Party may have at law, in equity, under any agreements of any type or otherwise, and the exercise or failure to exercise any remedy shall not preclude the exercise of that remedy at another time or of any other remedy at any time.

7.12       Equitable Remedies.  In addition to legal remedies to the extent allowed under this Agreement or by law, in recognition of the fact that remedies at law may not be sufficient, the Parties shall be entitled to equitable remedies, including without limitation specific performance and injunction.

7.13       Agreement Not Admissible.  This Agreement is made, at least in part, in compromise of litigation.  In the event that this Agreement does not become effective, neither this Agreement nor the discussions and negotiations between the parties shall be admissible in the Coal Oil Point lawsuit referred to in Section 4.01 or any related litigation.

7.14       Time of the Essence.  Time is of the essence in the performance of this Agreement.

7.15       Attorneys’ Fees and Costs.  If any litigation, reference or other proceeding between or among the Parties is commenced in connection with or related to this Agreement, the losing Party or Parties shall pay the costs and expenses of the prevailing Party or Parties.  Each Party shall bear its own attorneys’ fees.

7.16       Relationship of Parties.  Nothing set forth herein shall ever be construed to create an association, trust or partnership or impose a trust or partnership duty, obligation or

45

liability on or with regard to any one or more of the Parties hereto.  Except for the quitclaim referenced in Article 4 hereof, nothing herein grants, conveys, gives, alienates or vests in any Party for any purpose whatsoever any title, interest or estate in or to any lands whatsoever, or any title, interest or estate in or to any oil, gas and/or other hydrocarbons and/or other minerals.

7.17       Guarantee of Performance.  ARCO hereby guarantees the full performance by ALBI and its successors and assigns of all the obligations of ALBI under this Agreement.  This guarantee by ARCO may not be assigned without the express written consent of the SLC and the City.

7.18       Further Assurances.  Each Party agrees promptly to execute and deliver such documents and to do such other acts as are requested by another Party and are in the reasonable judgment of the requesting Party necessary or appropriate to effectuate the purposes of this Agreement.

46

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

The foregoing Agreement for Implementation of an Optimized Waterflood Program for the Long Beach Unit is hereby approved as to form this 5th day of November, 1991.

47

Exhibit A

Determination of Base Development Plan

Section 1

Introduction

1.1                               Purpose.  The purpose of this Exhibit A is to set out the technical method to quantify Base Production for purposes of Section 1.02 of the Agreement. The methods, formulae and procedures set forth are based on a theoretical development plan, “Base Development Plan,” described in the Exhibit.

1.2                               Definitions.  Unless defined herein all initially capitalized terms shall have the meaning set forth in the Agreement.

(a)                                 Base Development Plan The Base Development Plan is the theoretical LBU development which would have occurred if this Agreement had not been executed. Inclusive in this plan is the Base Oil, Base Water, Base Production ▇▇▇▇▇ and associated injection ▇▇▇▇▇ resulting from it.

(b)                                 Base Production Well is a theoretical producing well added in the Base Development Plan.

(c)                                  Base Oil is the theoretical gross oil production from the entire Long Beach Unit that would be produced by the Base Development Plan.

(d)                                 Base Water is the theoretical gross water production from the entire Long Beach Unit that would be produced by the Base Development Plan.

(e)                                  Base Production as the term is used herein means either or both Base Oil or Base Water as the context requires.

(f)                                   Base Gross Fluid is the sum of Base oil and Base Water.

(g)                                  Base Cumulative Oil is the theoretical cumulative oil production at any point in time for the entire Long Beach Unit that would be produced by the Base Development Plan as of that point in time.

(h)                                 Payout Time is the time in years or fraction thereof required for a Base Production Well to produce enough oil that when multiplied by the then current oil price would equal or exceed the total costs to drill, complete, equip, and operate the well.

(i)                                     Payout Criterion is the maximum Payout Time for which a new Base Production Well will be drilled in the Base Development Plan.

1.3                               Procedure.  Because it is impossible to physically measure Base Production and because it is necessary to identify that portion of the actual oil and water production in the Long Beach Unit that is Base Production, a means to determine Base oil and Base Water is required. Base oil

A-1

and Base Water will be determined in each quarter through the use of the calculation procedure defined in Section 3 of this Exhibit.

Section 2

Theoretical Basis for the Base Development Plan

2.1                               Background.  Oil and gas producing reservoirs exhibit statistically consistently behaved performance patterns which can be applied to the Long Beach Unit (“LBU”) for use in forecasting Base Production. Certain management practices in the LBU have controlled the timing and development of the LBU hydrocarbon reserves. The major premise of the Base Development Plan is that the LBU will continue previously established performance trends and management practices. A model which projects these performance trends and management practices in a statistically consistent manner has been developed to forecast the Base Development Plan.

2.2                               Waterflood Response.  Oil reservoirs producing under waterflood exhibit a semi-logarithmic relationship between the instantaneous water-oil ratio and cumulative oil production. Since oil recovery from the reservoir is finite, ▇▇▇▇▇ drilled later in the life of a reservoir will normally have a higher water-oil ratio and lower ultimate oil recovery than ▇▇▇▇▇ drilled earlier. Producing history indicates that the LBU reservoirs follow these trends. A key assumption in the Base Development Plan is that the LBU reservoirs will continue to perform according to their previously established trends.

2.3                               Oil Rate Performance.  Oil reservoirs are known to exhibit certain oil rate performance trends over time. Oil reservoirs usually follow a hyperbolic oil rate decline versus time relationship represented by the following equation:

Equation 1

-1/n

qt = qi (1 - nDit)

where:

A special case of the hyperbolic oil rate decline is the exponential decline where n=0 and oil rate is represented by the following equation:

A-2

Equation 2

Dit

qt = qi e

where:

LBU history shows that ▇▇▇▇▇ grouped by the year they were drilled initially exhibit an exponential oil rate relationship. It has been found that these same ▇▇▇▇▇ at high water/oil ratios have a hyperbolic performance. The model utilized to formulate the Base Development Plan incorporates these observations.

2.5                               Producing ▇▇▇▇▇ - Existing and Future.  The model predicts the performance of all active producing ▇▇▇▇▇ in the LBU as of July 1, 1990 and forecasts the performance of such ▇▇▇▇▇ for every quarter in the future. The Base Development Plan also incorporates the continued development of the LBU reservoirs through the addition of new producing and associated injection ▇▇▇▇▇. The rate and performance of these new ▇▇▇▇▇ are determined by extrapolations of historical reservoir performance data. The number of new ▇▇▇▇▇ drilled in the Base Development Plan is limited by the Payout Time of each new well. As the LBU reservoirs mature, the quality of new ▇▇▇▇▇ which can be drilled decreases. In the Base Development Plan the Payout Time is used to determine the number of new well opportunities. A drilling program results with decreasing numbers of new ▇▇▇▇▇ drilled over time.

2.6                               New Well Ouality.  In addition to decreasing development opportunities over time, there are also variations in the qualities of new ▇▇▇▇▇ which can be drilled at any single time. As the LBU has matured, the number of ▇▇▇▇▇ which met the Payout Criterion has decreased. In years when oil prices have been higher than the historical average, more ▇▇▇▇▇ were drilled with Payout Time within the Payout Criterion. In years when oil prices have been lower than the historical average, fewer ▇▇▇▇▇ were drilled such that the well with the longest Payout Time still paid out without exceeding the Payout Criterion.

2.7                               Performance - New Base Production ▇▇▇▇▇.  The performance characteristics of Base Production ▇▇▇▇▇ in the future will be predicted from extrapolations of past LBU performance. The Payout Time for each Base Production Well will be represented by application of the then-current oil price averaged over the year prior to the addition of the new well combined with the predicted performance characteristics of the well. The number of Base Production ▇▇▇▇▇ to be drilled is determined by finding the last well with a Payout Time less than or equal to the applicable Payout Criterion.

A-3

Section 3

Components of Base Development Plan

3.1                               Background.  Base Oil, Base Water, and Base Production ▇▇▇▇▇ associated with the Base Development Plan will be determined as follows:

A.                                    Oil and water production for ▇▇▇▇▇ which existed prior to July 1, 1990 will be taken from Attachment 1 to this Exhibit.

B.                                    Production characteristics for and the number of new Base Production ▇▇▇▇▇ to be added in each quarter will be determined as described in Section 3.2.B.

C.                                    Oil and water production in each quarter for all Base Production ▇▇▇▇▇ added in the previous quarters will be determined as described in Section 3.2.C.

D.                                    All monetary values associated with the Computer Program are in terms of January 1, 1990 dollars.

3.2                               Calculation Methodology.  For each quarter, the Base Production ▇▇▇▇▇, Base Oil Production, Base Water Production, and Base Cumulative Oil will be calculated in the following manner:

A.                                    The oil and water Production for ▇▇▇▇▇ which existed prior to July 1, 1990 is listed in Attachment 1 for each quarter starting in July 1, 1990 through January 1, 2020. After January 1, 2020 the oil production for these ▇▇▇▇▇ for each quarter thereafter will be equal to their oil production for the preceding quarter multiplied by 0.97, and the water production for each quarter thereafter will be equal to their water production for the preceding quarter multiplied 0.98.

B.                                    At the beginning of each quarter, new Base Production ▇▇▇▇▇ may be added into the Base Development Plan. All new Base Production ▇▇▇▇▇ added in an individual quarter will be treated as a single group in all future calculations. The production characteristics for each of the new Base Production ▇▇▇▇▇ will be determined as a function of the Base Cumulative Oil for the Long Beach Unit at the start of the quarter. The number of new Base Production ▇▇▇▇▇ to be added in the quarter will be determined such that each well will meet the Payout Criterion for that quarter.  The production characteristics from each new Base Production Well will be appropriately combined to reflect the composite characteristics for all Base Production ▇▇▇▇▇ added in the quarter.

(i)                                     The production characteristics to be determined for each new Base Production Well are the slope and intercept of the ln(water/oil ratio) versus cumulative oil and the slope and intercept of the ln(oil rate) versus time and will be determined as described below.

(a)                                 The relationship between water/oil ratio (“WOR”) and cumulative oil production for each new well (represented by the subscript x) will be determined from the following equations (Equations 3 through 9):

A-4

Equation 3

[ (WA) (x) + WB ]

WORix = e

where:

Equation 4

WA = (3.9351x10-10) (BCO) - (0.15094)

where:

Equation 5

WB = (1.6104x10-9) (BCO) - (0.80521)

where:

Equation 6

( ln (25.0) – ln(WORix) )

SWORx =                                                                                            Res25x

where:

A-5

Equation 7

[ (RA) (x) + (RB) ]

Res25x = e

where:

Equation 8

RA = (-6.2312x10-10) (BCO) + (0.24767)

where:

Equation 9

RB = (-2.7510x10-9) (BCO) + (14.993)

where:

(b)                                 The relationship between oil rate and time for each new Base Production Well added in the quarter will be determined from the following equations (Equations 10 through 16):

Equation 10

(▇▇▇) (t)

qtx qix e

where:

A-6

Equation 11

[ (QA) (x) + (QB) ]

qix = e

where:

Equation 12

QA = (-4.3810x10-10) (BCO) + (0.097410)

where:

Equation 13

QB = (-2.0273x10-9) (BCO) + (7.0175)

where:

Equation 14

▇▇▇ = (-1.0) ABS [ (DA) (x) + (DB) ]

where:

A-7

Equation 15

DA = (1.2500x10-12) (BCO) - (0.000375)

where:

Equation 16

DB = (1.7500x10-10) (BC0) + (0.0575)

where:

(ii)                                  After the production characteristics for each new Base Production Well in a quarter have been calculated, the Payout Time for each new well is determined. The calculation procedure for determining the payout for each new Base Production Well is as follows: The oil production per well to payout for each new Base Production Well added in the quarter is calculated from Equation 17 by iteratively solving for Npx. The tolerance allowed for solution of Equation 17 is 0.5%.

Equation 17

[ (SWORx) (Npx) ]

Invx = Npx (P-Costo - Costgf) - (Costgf) (WORi) [ e                                                                                                                                                                            -1 ]

SWORx

where:

A-8

(iii)                               After Npx has been calculated for each new Base Production Well, the Payout Time for each well will be determined as follows:

A-9

Equation 18

Payout Timex = ln [ (Npx (▇▇▇) / [ (qix) (365.) ] +1 ]

▇▇▇

where:

(iv)                              After the Payout Time has been calculated for each new Base Production Well in the quarter, the number of new Base Production ▇▇▇▇▇ to be added in the quarter will be determined. These new ▇▇▇▇▇ will be added starting with the first well until the last well exceeds the Payout Criterion as defined below. If one well has a Payout Time less than the Payout Criterion and the next well has a Payout Time greater than the Payout Criterion, then a fractional well will be added as follows. The fractional portion of the well will be calculated by linearly interpolating between the payout of the last whole well which has a Payout Time less than the Payout Criterion and the next well’s payout such that the fractional well has a Payout Time exactly equal to the Payout Criterion. Notwithstanding the Payout Criterion set forth below, no more than 1.5 Base Production ▇▇▇▇▇ can be added in a quarter beyond the number of ▇▇▇▇▇ added in the previous quarter, not to exceed 18 total ▇▇▇▇▇ added in any quarter.

The Payout Criterion are:

(a)                                 Prior to January 1, 2000, the maximum Payout Time will be 3.5 years.

(b)                                 Beginning on January 1, 2000 and thereafter, the maximum Payout Time will be 2.5 years.

(c)                                  Notwithstanding the above, if in any quarter, the difference between the Base Revenue and the Base Operating Expense is less than or equal to $3,000,000 adjusted for inflation to January 1, 1990 dollars using the GNP deflator as defined in Exhibit B, then no new Base Production ▇▇▇▇▇ will be added in the subsequent quarter.

(v)                                 After the total number of new Base Production ▇▇▇▇▇ from each category have been determined, the composite production characteristics for all the new Base ▇▇▇▇▇ added in the quarter will be calculated as follows:

A-10

C.                                    Once any new Base Production ▇▇▇▇▇ have been added, their composite production will be accounted for in all future quarters as described as follows. At the beginning of each quarter, the oil production and water production for each group of Base Production ▇▇▇▇▇ added through the end of that quarter will be determined for that quarter as set forth below. Base Oil Production for the quarter is the sum of the oil production from ▇▇▇▇▇ which existed prior to July 1, 1990, as described in Section 3.2.A, and the oil production from each Base Production Well group. Base Water will be calculated in the same manner. Oil and water production from each Base Production Well group will be calculated as follows.

(i)                                     If the ratio of water production divided by oil production for any Base Production Well group was less than 7.0 in the previous quarter, then the oil production for that group for the current quarter, OilBaseij will be determined from Equations 19 - 21. This method is referred to as the “exponential calculation procedure.”

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Equation 19

T2 = ln [(Cumij-1) (Sratei) / [ (Iratei) (365) ] + 1.0] / (Sratei)

where:

Equation 20

Cumij = (Iratei (365)  [e  [(Sratei) (T2=0.25)] -1.0]

(Sratei)

where:

Equation 21

OilBaseij = (Cumij) - (Cumij-1)

where:

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(ii)                                  If the ratio of water production divided by oil production for any Base Production Well group is equal to or greater than 7.0 in the current quarter and the same ratio for that group was less than 7.0 in the previous quarter, then for all future quarters that group of ▇▇▇▇▇ will be treated with the “hyperbolic calculation procedure” which follows in Equations 22 - 27, and 21 for determination of oil production, OilBasij.  The last quarter in which the exponential calculation procedure was used for this group of ▇▇▇▇▇ will be recorded for future reference. In addition, the instantaneous oil production rate at the end of the last quarter in which the exponential calculation procedure was used, qih, will be calculated using Equation 22.

Equation 22

qih = (Irate1) (365)e [ (Sratei) (T2+0.25)]

where:

Equation 23

Cumhij = (Cumij-1)-(Cumij)

where:

Equation 24

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where:

Equation 25

[-1/(n)]

Q3 = qih [1-(n) (SRatei) (t2+0.25)]

where:

Equation 26

where:

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Equation 27

Cumij = Cumij-1 + DCUM

where:

Equation 21

OilBaseij = (Cumij)-(Cumij-1)

where:

(iii)                               After the oil production has been calculated for each group of Base Production ▇▇▇▇▇ in a quarter, the water production will be calculated for each group of Base Production ▇▇▇▇▇.  The water production, WtrBaseij, is calculated as follows:

Equation 28

[(SWORi) (Cumij)+(IWORi)]

WtrBaseij = (OilBaseij)e

Where:

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(iv)                              For each group of ▇▇▇▇▇ in each quarter, the Variable Profitability, Profij, will be calculated as follows:

Equation 29

Profij                   = (OilBaseij) (P) - [(WtrBaseij) + (Oi1Baseij)] (Costgf)

- (Oi1Baseij) (Costo)

where:

(v)                                 If, for any group of ▇▇▇▇▇ in a quarter, the Variable Profitability, Proij, is less than or equal to zero, then the oil production, OilBaseij, and the water production, WtrBasij, for that group of ▇▇▇▇▇ will be set equal to zero, and the cumulative oil production at the end of the quarter, Cumij, for that group of ▇▇▇▇▇ will be set equal to the cumulative oil production at the end of the previous quarter, Cumij-1.

(vi)                              The total LBU Base Oil will be calculated by adding together the oil production in the current quarter from the ▇▇▇▇▇ existing prior to July 1, 1990 and all the oil production from Base Production Well groups added through the end of the quarter. The total LBU Base Water Production will be summed in the same manner.

The computer program listed in Attachment 2 includes the foregoing methodology, equations, and formulas.

Section 4

Adjustments at Program Commencement Date

4.1                               Section 4 controls Over Section 3.  Notwithstanding the other provisions of this Exhibit A, Base Oil and Base Water Production shall be determined and calculated in accordance with the adjustment factors set forth in this Section 4, as and if applicable.

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4.2                               Adjustment if Actual Production Exceeds Base Production (See Attachment 3).  If the average daily actual oil production rate from the LBU for the three full calendar months prior to the Program Commencement Date (“Actual Production at Commencement”) exceeds the average daily Base Oil Production rate for the same period calculated pursuant to Section 3 of this Exhibit A (“Assumed Production at Commencement”), then for each of the first 24 months following the Program Commencement Date Base oil Production and Base Water Production for each such month shall be the respective amounts determined and calculated as provided in Section 3 of this Exhibit A multiplied by an adjustment factor. The adjustment factor for the first such month shall be the ratio of Actual Production at Commencement over Assumed Production at Commencement. The adjustment factor for each of the remaining 23 months shall be linearly decreased sufficient to result in an adjustment factor of 1.00 for the 24th month. Commencing with the 25th month following the Program Commencement Date, there shall be no adjustment made pursuant to this Section 4.2.

4.3                               Adjustment if Base Production exceeds Actual Production (See Attachment 4).  If Assumed Production at Commencement exceeds Actual Production at Commencement, then Base Oil Production and Base Water Production shall remain constant at Actual Production at Commencement until Base Oil from the Computer Program for any full calendar month is equal to or less than Actual Production at Commencement multiplied by the number of days in the month, at which time there shall be no further adjustments made pursuant to this Section 4.3.

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Attachment 1

Listing of Base Oil and Base Water

By Quarter Attributed to ▇▇▇▇▇ Completed Prior to July 1, 1990