Petroco is the operator of the Milo Block in Hannan where it has a PSC agreement. The state company, Hanoil, came in as a 51% WI partner when the project entered the development stage. In August of Year 10, 1.2 million bbls of oil are produced from the Milo block. This represents 40 thousand bopd. Each party, including the government, takes volumes in-kind. Prior to August, all exploration costs have been recovered, and unrecovered development costs are $205,360,000. Operating costs for the month of August on Milo are $1,200,000. The average fair market price per bbl for the previous month was $80.

There is a 10% royalty provision in the PSC.

Costs are recoverable through cost oil. Cost oil is limited to 50% of gross production. Costs are recoverable in the following order: operating costs, unrecovered exploration costs, unrecovered development costs, abandonment costs. All unrecovered costs are carried forward to the next period. All recoverable costs incurred in the Milo Block are recoverable from revenues from the Milo Block only.

Remaining volumes after cost oil is allocated are considered profit oil.

Profit oil rates shall be determined based on daily total production rates for the contract
area. The profit oil rates are as follows:

Increments of daily                Hannan government             Total WI
Total production rates                      share                            share
0          - 10,000 BOPD                      50%                            50%
10,001 -   25,000 BOPD                      55%                            45%
25,001 - 50,000 BOPD                      60%                            40%
50,001 - 100,000 BOPD                      70%                            30%
Above    100,000 BOPD                      80%                            20%

Determine volume allocations for August.

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