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FUEL SUPPLY AGREEMENT

THIS SUPPLY AGREEMENT is made the ___ day of August 2011.

BETWEEN:

THE FEDERATED STATES OF MICRONESIA PETROLEUM CORPORATION, (“Corporation”) of PO Box 1762, Kolonia, Pohnpei FM 96941; Tel: 691.320.6364; Fax: 691.320.7456; email: [email protected].

AND KOSRAE UTILITIES CORPORATION (“Buyer”) of PO Box KUA, Tofol, Kosrae, FM 96944; Tel: 691.370.3799; Fax: 691.370-3798; email: [email protected].

RECITALS

The Buyer wishes to purchase the Products from the Corporation and the Corporation wishes to sell the Products to the Buyer upon the terms and conditions set out in this Agreement.

It is agreed as follows:

1.0 DEFINITIONS AND INTERPRETATION1.1. Definitions

In this Agreement unless the context otherwise requires:“Business Day” means any day during which banks are open in the FSM.“Effective Date” means the date set out in Schedule 1.“Initial Term” means the period set out in Schedule 1.“Immediately Available Funds” means cash, bank check, direct deposit or any other form of payment that the Corporation and the Buyer agree in writing;“Nominated Site” means a site listed in Schedule 1 as amended by the parties from time to time or under clause 6.8.“Pick Up” means the collection of Products by the Buyer at a Terminal.“Products” means the Products described in Schedule 1.“Terminal” means any terminal or depot listed in Schedule 1 as amended by the Corporation from time to time.

FSMPC Product Supply Agreement v2 - 2008 1


1.2. Interpretation(a.) In this Agreement unless the context otherwise requires:

a) words importing the singular include the plural and vice versa;b) a gender includes the other genders;c) the headings are for convenience only and do not affect the interpretation

of this Agreement;d) the word “month” means a calendar month, and the word “year” means 12

months;e) the words “in writing” include any communication sent by letter, facsimile

transmission or email or any other form of communication capable of being read by the recipient;

f) where the day by which anything is to be done is not a Business Day, that thing must be done on or by the next Business Day;

g) a reference to "dollars" and "$" is to the currency of the United States of American, the official currency of the Federated States of Micronesia;

h) wherever "include" or any form of that word is used it must be construed as if it were followed by "(without being limited to)";

i) a reference to any agency or body, if that agency or body ceases to exist or is reconstituted renamed or replaced or has its powers or functions removed (defunct body), means the agency or body which performs most closely the functions of the defunct body; and

j) if there is any inconsistency between the provisions in the body of this Agreement and the provisions in any Schedule to this Agreement, the former shall prevail.

2.0 TERM2.1. This Agreement takes effect from the Effective Date and, subject to the provisions

contained herein, shall continue for the Initial Term. 2.2. In the event that the Corporation continues to supply and the Buyer continues to

purchase the Products beyond the Initial Term, and without the parties having renewed this Agreement or otherwise having entered into a further supply agreement, then this Agreement shall be deemed to continue after the expiry of the Initial Term until either party terminates it by 90 days written notice to the other party or it is earlier terminated in accordance with its provisions.



3.0 SALE AND PURCHASE3.1. The Corporation agrees to sell the Products to the Buyer and the Buyer agrees to

buy the Products from the Corporation upon the terms and conditions set out in this Agreement.

4.0 QUANTITIES4.1. The Buyer must purchase from the Corporation at least the minimum quantities of

each of the Products listed in Schedule 1 (this obligation being separate for each supply location or State where this is detailed in Schedule 1).

4.2. The Corporation need not make available for purchase by the Buyer more than the maximum quantities of each of the Products set out in Schedule 1 (this applying separately for each supply location or State where this i s detailed in Schedule 1).

4.3. Where minimum or maximum quantities are expressed by reference to a period of time, they are pro-rated for any period during this Agreement which is less than that period.

5.0 QUALITY5.1. The Products will comply with the Corporations specifications notified by the

Corporation to the Buyer from time to time. Specifications notified by the Corporation shall always conform with relevant laws. Where the Products include Diesel, the Corporation may from time to time supply Diesel 50 instead of Diesel 500 or Diesel 5000 at any location.

5.2. The above-mentioned Product specifications are subject to change at the sole discretion of the Corporation. If the Product specifications are changed, the Corporation shall inform Buyer of any change in price and the parties shall mutually agree on a price within thirty (30) days of the Corporation notification. If the parties fail to agree on a new price for any Product, the price shall not change but the Corporation may elect a) not to supply the Product or Products that were the subject of a change in

specification; orb) to terminate this Agreement forthwith and neither party shall have any

claim against the other arising out of the termination of this Agreement.5.3. The Buyer may reject all or any part of the Products if the Products fail to meet

the specifications notified by the Corporation to the Buyer from time to time. 5.4. Even if the Buyer initially accepts all or part of the Products, that acceptance does

not affect or waive any rights that the Buyer has under this Agreement in relation to a defect in quality. The Buyer shall not be entitled to exercise any such rights unless written notification of a claim is made within seven days of supply. In any event the Buyer shall be required to use its best endeavors to minimize any losses or damage arising from an alleged defect in quality and the Corporation shall be



given reasonable opportunity to inspect, sample and test any Products in respect of which a claim has been made.

5.5. In the event that the Buyer mixes Products supplied by the Corporation with additives or other liquids not supplied by the Corporation, then the Corporation shall have no liability in respect of any claim relating to or associated with defect in quality.

5.6. If the Corporation is unable to supply Product in full accordance with the above specifications, Corporation will advise Buyer of quality deviations and give Buyer the option of accepting or rejecting the Product available during the period of quality deviation. If Buyer rejects such delivery, and provided Buyer is not in breach of this agreement, the quantity ordered by Buyer from the Corporation shall nevertheless be credited against the Minimum Annual Quantity figures.

5.7. On written request from Buyer, the Corporation will provide copies of the applicable specifications for each location. The Corporation reserves the right to deliver Product meeting the relaxed limits which are footnotes in or appended to the specifications.

5.8. There are no guarantees or warranties, express or implied, with respect to the description, satisfactory quality, fitness suitability of the product for any particular purpose or otherwise, that extend beyond the description and specification of the product contained in this agreement.

6.0 DELIVERY/PICK UP6.1. The Products will be delivered to a Nominated Site and/or collected by the Buyer

at a Terminal. Where there is at least one Nominated Site listed in Schedule 1 and at least one Terminal listed in Schedule 1, the Buyer will have a choice whether or not to require the Corporation to deliver the Products to a Nominated Site or to Pick Up, subject to the Buyer’s obligations under clause 4.1.

6.2. Where Products are required to be delivered to a Nominated Site:a) The Corporation may make or arrange to be made deliveries by such means

of transport and in such tanks or other containers as the Corporation may select;

b) The Corporation shall not be obliged to make any delivery in any quantity smaller than the load of such tanker as the Corporation may select; and

c) The Corporation shall use reasonable endeavors to make deliveries pursuant to the Buyer’s requests, provided that the Buyer gives the Corporation adequate notice of its specific requirements of Products and takes delivery in accordance with the Corporation’s delivery schedule from time to time.

6.3. The Buyer warrants and undertakes:a) that at each bulk delivery point and suitable bulk storage installation, safe

facilities will be provided (including assistance and suitable hose



connections) which comply with all applicable legal and regulatory requirements for Product delivery without risk to property and persons;

b) that for each delivery there will be sufficient ullage for Product on the Buyer’s premises and that any connecting hose will be properly and securely fitted to the filling point for the safe and proper reception of the quantity of Product ordered. The Buyer accepts responsibility for any loss, leakage or contamination of any Product deliverable under this Agreement which may occur as a result of a breach by the Buyer of its obligations under this Agreement;

c) that in the case of highly inflammable products and where otherwise applicable, it will observe strictly any regulations laid down by the Government or other competent authority in respect of the avoidance of smoking, naked lights, fires, stoves or heating appliances of any description in the vicinity of any Product storage facility and the fill, dip and vent pipes connected thereto; and

d) that all storage installations will be clearly and correctly labeled with the description of the grade of Product stored and the tank capacity.

6.4. The Buyer shall be responsible for and shall indemnify and hold the Corporation, its employees and agents harmless against all liability for injury (whether fatal or otherwise) to any persons, including the parties to this Agreement, their employees or agents, loss of or damage to property and any other loss, damage, claims, costs and expenses in any way arising directly or indirectly as a result of the Buyer’s non-observance of the delivery conditions in this Agreement or otherwise out of or in connection with the delivery, lifting or other collection of Product save only for liability, loss or damage arising as a direct result of the negligence of the Corporation, its employees or agents.

6.5. The Corporation shall be responsible for the safe off-loading of its vehicles for the delivery of Product at Nominated Sites. Where Product is delivered in pallets the Buyer must provide all necessary equipment for Product safe off-loading.

6.6. When a delivery to the Buyer cannot be made or is otherwise aborted as a result of the Buyer’s non-observance of any term of this Agreement, the Buyer shall, on request, reimburse the Corporation its costs for the aborted delivery.

6.7. Where the Buyer Picks Up any Products for sale at a Nominated Site, the Corporation may remove that site from the list of Nominated Sites in the event that the Corporations safety requirements, as specified herein, cannot be met. The Buyer shall promptly inform the Corporation if the Buyer ever Picks Up any Products for sale at the Nominated Site.

6.8. Whenever the Buyer Picks Up, the Buyer’s road tankers and drivers (owned or hired) must meet the Corporation’s Health Safety and Environment standards as apply from time to time. All the Buyer’s road tankers and drivers must be fully accredited, as determined by the Corporation, before they are entitled to the supply of Products under this Agreement. In this respect a non-exclusive list of the Corporation’s accreditation requirements is set out in Schedule 3. The Corporation may, at its absolute discretion and without predjudice to its other rights under this Agreement, refuse to admit into a Terminal, or if admitted, refuse to supply any of



the Buyer’s road tankers or drivers where the Corporation believes such road tanker or driver does not meet the standards or accreditation requirements referred to above or does not meet any safety or operational standards applicable at the Terminal. The Corporation shall not be liable for any costs, losses or expenses the Buyer may incur as a result of such refusal.

6.9. Whenever the Buyer Picks Up, the supply of Products shall be made by the Corporation to the Buyer in the quantities requested by the Buyer on arrival at the Terminal, provided that the Corporation is not obliged to supply less than full tanker loads and the Buyer will accept supplies in accordance with the Corporation’s terminal operating schedules and procedures.

6.10. Property in and risk of the Products supplied to the Buyer shall pass from the Corporation to the Buyer at the time of delivery to Nominated Sites, or in the case of Pick Ups, when the Products pass the vehicle hose connection on the Buyer’s road tankers.

6.11. The Corporation will measure the quantity of Products delivered to the Buyer and the Corporation’s measurement will be conclusive in the absence of manifest error. The Buyer will notify the Corporation within five days after delivery of any discrepancy in the quantities of Products stated on any cash sale or invoice or other the Corporation delivery document compared with the quantity received at the Nominated Sites or into the Buyer’s road tanker. If the Buyer does not so notify the Corporation, the amount stated to have been delivered on the Corporation delivery document will be deemed correct.

6.12. Quantities of Products supplied to the Buyer will be measured at the prevailing temperature of these Products at the point of loading, and will not be temperature corrected unless the Corporation elects or is required by law to temperature correct. If the Corporation elects or is required by law to temperature correct sales to the Buyer, the Corporation will (subject to any applicable law) determine the method and processes by which this will be done and will be entitled by written notice to the Buyer to change the prices payable in respect of those sales by an amount which is reasonable having regard to the fact that sales will be temperature corrected. Where temperature correction is introduced on a retrospective basis, the parties shall meet on a bona fide basis and review the prices paid for the Products by the Buyer in respect of sales made before the date it is introduced, to the extent those sales are made or deemed to be made on a temperature corrected basis.

7.0 PRICE7.1. Subject to the further sub-clauses below of this clause 7, the prices payable by

the Buyer to the Corporation for the Products will be those prices applicable on the date of delivery, calculated in accordance with Schedule 2. For the purpose of this clause, delivery shall be deemed to occur at the time of completion of delivery of the relevant load.

7.2. To the extent the price specified in Schedule 2 does not include excises, taxes, duties and freight to the place of delivery or such price includes these items but



they increase, these items or increases will be added to the price payable by the Buyer.

7.3. If any law requires the price for Products delivered to the Buyer at any Nominated Site to be determined or calculated by reference to a terminal gate price, the prices payable by the Buyer to the Corporation for Products supplied at that Nominated Site will be equal to the relevant terminal gate price (including State Taxes) plus a credit and/or delivery fee and/or less a discount as the case may be of such amounts as are required to ensure that the total prices payable are equal to the prices as calculated in accordance with clause 7.1.

7.4. The Buyer must pay the price without asserting at the time of payment any set-off, counterclaim or right to withhold whatsoever. The Corporation is entitled to payment on time notwithstanding any dispute relating to the transaction or payment. Any adjustments consequent upon settlement of such disputes shall be made within 30 days following the settlement.

7.5. Where there is a legislative change which leads the Corporation to amend the specifications for Products to be supplied under this Agreement and such change results in the costs to the Corporation in supplying such Products increasing, then the Corporation shall be entitled to recover those increased costs from the Buyer.

7.6. If in the opinion of the Corporation, the continued supply of Products becomes uneconomical or causes the Corporation to incur additional costs not incurred as at the commencement date of this Agreement, due to changes or other factors which alter the basis upon which prices were set including without limitation:a) orders made by government bodies or authorities in respect of the prices

the Corporation may charge for Products;b) a change in statutory requirements or industry standards applicable to the

Products; c) then the Corporation may give the Buyer notice requiring a review of the

prices payable by the Buyer. If the parties do not agree upon a renewed price within 15 days of the date of the notice, the Corporation may terminate this Agreement upon 30 days written notice to the Buyer or the parties may agree to continue with this Agreement at the original price payable for the Products.

7.7. Where legislative change occurs which prohibits the Corporation from pricing in accordance with this Agreement, the Corporation may terminate this Agreement by not less than 90 days written notice to the Buyer (or such lesser notice as may be required to ensure that the Corporation is not in breach of the relevant legislation).

7.8. If Platts ceases to be published permanently, the Corporation and the Buyer acting reasonably, shall attempt to agree an alternative means of calculating the price for the Products if applicable.

8.0 PAYMENT8.1. Payment shall be made in accordance with the method specified in Schedule 1.



8.2. The Corporation may vary the manner and/or terms of payment including without limitation:a) at any time by at least two months written notice to the Buyer; orb) immediately by verbal notice to the Buyer where the Buyer has failed to pay

the price when due or if the Corporation believes that the reliability or financial responsibility of the Buyer is or has become impaired or unsatisfactory.

8.3. If the Buyer fails to make any payment to the Corporation when due, the Corporation may charge the Buyer interest on the overdue amount, compounding daily, calculated at an annual rate of 3% above the Bank of Guam reference rate from the due date until payment. The Corporation rights under this clause are without prejudice to any other rights it may have following such a failure.

8.4. If at any time, payment of the whole or any part of any account rendered by the Corporation to the Buyer is not made by the due date for payment, every amount then owing by the Buyer to the Corporation and any amount that has not yet become due in respect of deliveries made before that time, shall become immediately payable by the Buyer to the Corporation.

8.5. The Corporation reserves the right to withdraw credit immediately at any time on giving the Buyer notice thereof. In the event credit is withdrawn, all amounts then outstanding shall be due and payable in full, and all future sales by the Corporation to the Buyer shall be paid by certified or cashier’s check or at the Corporation’s option, by electronic funds transfer or other means approved by the Corporation.

8.6. Nothing in this Agreement requires the Corporation to sell any Products to the Buyer unless the Buyer has paid for Products previously supplied for which payment is then due and the Buyer has otherwise complied with this Agreement.

9.0 TAXES, DUTIES AND COSTS9.1. Any tax, duty, charges, levy or fee now or hereafter assessed or imposed by a

governmental agency on Products or the raw materials from which Products are produced ("Fee") whether on or in respect of the sale, delivery or use of such Products or raw materials and provided that the Fee is required to be paid or collected by the Corporation, shall be paid by the Buyer (or if paid by the Corporation shall be repaid to the Corporation by the Buyer) except to the extent (if any) to which the amount of the Fee has been specifically recovered in the prices charged by the Corporation for Products.

9.2. Where the location or nature of sale or use by the Buyer of Products supplied pursuant to this Agreement affects, or may affect, the amount of Fee payable in respect of the Products (or sale or use thereof), then the Buyer must keep full records, and advise the Corporation, of the full details required to facilitate the accurate remittance and recovery of Fee by the Corporation.

9.3. Each party shall bear its own costs arising out of the negotiation, preparation and execution of this Agreement. Except as otherwise provided in this Agreement, all



stamp duty which may be payable on or in connection with this Agreement and any instrument executed under this Agreement shall be borne by the Buyer.

9.4. The Buyer agrees to pay to the Corporation on demand all costs and expenses, including attorney's fees and costs of suit, reasonably incurred by the Corporation in enforcing any of the covenants and agreements herein contained.

10.0TERMINATION10.1. A party is in breach of this Agreement if: (1) the breach is capable of being

remedied; and , (2) the breaching party fails to remedy the breach within 14 days of the said breach. If a party is in breach, regardless of whether the breach has been remedied after the 14 days, the Agreement may be terminated immediately at the sole discretion of the non-breaching party by written notice within a reasonable time after the breach.

10.2. The Corporation may, at any time by giving notice to the Buyer, immediately terminate this Agreement if:a) the Buyer becomes insolvent or enters into any composition or arrangement

with creditors or if a petition is presented or a meeting is called for the purpose of winding up the Buyer for whatever reason or if the Buyer has a manager or receiver or inspector or administrator appointed in respect of the whole or any part of its undertaking or assets; or

b) there is a change in ownership of the Buyer which may adversely affect the ability of the Buyer to comply with any of its undertaking or obligations under this Agreement, and has not first been notified to and approved in writing by the Corporation.

10.3. Termination under this clause or otherwise is without prejudice to the rights of either party which have accrued prior to or upon such termination and the obligations of the parties which are expressed or implied to continue after the termination of this agreement will do so.

11.0FORCE MAJEURE11.1. Neither party is responsible for any failure to comply, or any delay in complying,

with this Agreement (except any failure or delay to pay money) if the failure or delay is due to any cause beyond that party’s reasonable control, a strike, other industrial action, compliance with a government request or a shortage of supply. The parties have an absolute discretion whether to settle any strike or other industrial action.

11.2. During a supply shortage, the Corporation may withhold, suspend or reduce supply to the Buyer in its absolute discretion and the Corporation is not required to make good any shortages. The Corporation shall use reasonable endeavors to inform and work with the Buyer to minimize the effect of supply shortage.



11.3. If the Corporation withholds, suspends or reduces supply to the Buyer under this clause, the minimum and maximum quantities referred to in clauses 4.1 and 4.2 will be reduced by a proportionate amount based on the period for which supplies are withheld, suspended or reduced.

11.4. If the period during which a party is excused under this clause from compliance with this Agreement continues for at least one month, the other party may thereafter terminate this Agreement by at least one further month’s written notice to the other party.

12.0REPRESENTATIONS AND BRANDING12.1. Representation

a) Under no circumstances will the Buyer hold itself out as being an agent or representative of the Corporation in respect of the sale of the Products, whether or not supplied to it under this Agreement or in respect of the conduct of its business generally.



12.2. Brandinga) Nothing in this Agreement shall be construed as granting to the Buyer any

right or license to sell the Products, or otherwise conduct its business, under or in association with any name, trademark or other brand or image owned by or associated with the Corporation, unless agreed to in writing by the Corporation. Without limitation, the Buyer shall not use the word ‘PETROCORP’ (or any cognate words) in any form of correspondence (other than internal Buyer communications), advertisement or public representation without the Corporation’s prior written consent.

13.0STORAGE AND HANDLING13.1. The Buyer shall in the storage and handling of the Products comply with all

relevant laws and regulations relating to health, safety and environmental conservation and shall indemnify the Corporation and its directors and employees for any claims, costs and expenses arising out of any failure to comply therewith.

13.2. Upon written notice, the Buyer shall allow the Corporation’s representatives access to the premises where the Products are stored to enable the Corporation to inspect those premises in connection with the storage and handling of the Products relevant to health, safety and the environment. Nothing in this clause places any responsibility on the Corporation for the Buyer’s compliance with such laws and regulations and the Corporation may withhold supply of the Products to the Buyer at any time the Corporation becomes aware of or believes any supply would cause any risk or danger to health, safety or the environment.

14.0OWNERSHIP AND USE OF CONTAINERS14.1. Where deliveries are made otherwise than in bulk, ownership of any container in

which product is sold (other than LUBECUBE containers/pallets) passes to the Buyer with the product unless otherwise stated in Schedule 1. Further, the Buyer must pay to the Corporation in accordance with clause 8, the container purchase price or package differential specified in Schedule 2 (if any).

14.2. To the full extent permitted by law, the Buyer indemnifies and releases the Corporation in respect of all claims, proceedings, liabilities, losses, damages, costs and expenses whatsoever (including solicitors’ fees and expenses on a solicitor/client basis) arising out of or as a consequence of the filling of the Buyer’s empty drums (or other containers) and the subsequent use of any Products filled into those drums (or other containers), including without limitation, loss of or damage to real or personal property and personal injury to or death of any person.

14.3. If the Product is available and supplied in LUBECUBE containers and / or on pallets, the Buyer shall ensure that appropriate facilities are available for off-loading and loading the containers and / or pallets. The Buyer shall be responsible for the safe storage and handling of the containers and / or pallets



whilst in its possession and shall not use them for any purpose other than the storage of Product supplied by the Corporation.

14.4. The Buyer shall notify the Corporation promptly when the LUBECUBE containers and / or pallets are ready for collection and shall ensure that they are empty and safe to handle. PETROCORP reserves the right to invoice the Buyer for the costs to the Corporation of replacing lost or damaged containers or pallets at the costs prevailing at the time of loss or damage.

15.0CONFIDENTIALITY15.1. Each party agrees to keep, and procure its employees, agents, auditors and

advisers keep, confidential the terms of this Agreement and any information supplied by the other party, except where disclosure is required by law or the information was in the first mentioned party’s control before receiving it from the other party or the information becomes generally known to the public otherwise than by the first mentioned party’s disclosure of it in breach of this Agreement. The obligations of the parties under this clause survive the termination of this Agreement.

16.0OPERATION OF AGREEMENT16.1. It is acknowledged by the Buyer that the Buyer is entering into this Agreement

relying on the Buyer’s own investigations and the Buyer’s own assessment of the suitability of the Products for the use to which they will be put, and the Corporation makes no warranties or representations in relation to the Products other than those contained in this Agreement.

16.2. Where the law implies warranties or conditions into this Agreement and the Corporation is not permitted by law to exclude them, then those warranties or conditions shall apply, provided that the Corporation’s liability for breach of them is limited to replacement of the Products, where this is permitted by law.

16.3. To the extent permitted by law, the Corporation shall have no liability under or in connection with this Agreement, whether for breach of this Agreement, negligence or any other tort, breach of statutory duty or otherwise, for any:a) loss of profits, income, revenue, contracts or production;b) business interruption or increased costs in operations;c) damage to goodwill or reputation;d) damage to plant, equipment or machinery as a result of any late delivery of

Products; ore) indirect losses or expenses or consequential damages whatsoever; whether

suffered by the Buyer or any third party.

17.0SECURITY



17.1. If requested by the Corporation at any time or times, the Buyer shall at the Buyer’s cost (including stamp duty, registration fees and legal expenses):a) execute and furnish such security document (such as an Irrevocable

Standby Letter of Credit); and/orb) obtain such guarantees, as are acceptable to the Corporation in respect of

the Buyer’s obligations under this Agreement.

18.0BUSINESS STANDARDS18.1. The Buyer shall establish and maintain precautions to prevent its employees,

agents or representatives from making, receiving, providing, or offering substantial gifts, entertainment, payments, loans, or other consideration to employees, agents, or representatives of the Corporation for the purpose of influencing those persons to act contrary to the best interests of the Corporation. This obligation shall apply to the activities of the employees of the Buyer and its contractors in their relations with the employees of the Corporation and their families and/or third parties arising from this Agreement.

18.2. Accuracy of records - The Buyer agrees that to the extent applicable all financial settlements, billings, reports and other documents delivered to the Corporation or its representative shall reflect properly the facts about all activities and transactions with the Corporation, which data may be relied upon as being complete and accurate in any further recordings and reporting made by the Corporation or its representatives for whatever purpose. To ensure compliance by the Buyer with this Agreement, the Corporation shall have the right during the term hereof and for a period of three years thereafter to inspect and audit the facilities, equipment, records, books and accounts of, and to interview the employees and contractors of, Buyer upon reasonable notice in relation to all transactions between the parties. Buyer shall provide all reasonable assistance to the Corporation to conduct such audits.

18.3. Compliance with law - The Buyer agrees and will secure agreement by its employees, agents and contractors to comply with all applicable laws. Notwithstanding anything in this Agreement to the contrary, no provision shall be interpreted or applied so as to require the Corporation or the Buyer to do, or refrain from doing, anything which would constitute a violation of, or result in a loss of economic benefit under, United States anti-boycott and other export laws and regulations.

18.4. Business Ethics and Foreign Corrupt Practices Act -For the purposes of this clause, "Official" means and includes: (a.) any officer or employee of any government or any department, agency or

instrumentality (i.e., any legal entity controlled by the government) thereof, or any person acting in an official capacity on behalf of any such government, department, agency or instrumentality;

(b.) any political party; (c.) any official of a political party;



(d.) any candidate for political office; or (e.) any officer or employee of a public international organization (e.g., United

Nations, IMF, World Bank).18.5. The Buyer represents that it has not offered, paid, promised to pay, authorized

the payment of, or transferred, money or anything of value to an Official to secure any improper advantage or benefit in relation to the matters contemplated by this Agreement, either directly or indirectly through a third party. Without limiting the generality of the preceding statement, and in recognition of the principles of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions which entered into force on 15 February 1999, the Buyer represents and agrees that it will not, directly or indirectly, in connection with this Agreement and the matters resulting there from, offer, pay, promise to pay, or authorize the giving of money or anything of value to an Official, or to any other person while knowing or being aware of a high probability that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly to an Official, for the purpose of influencing the act, decision or omission of such Official to obtain or retain business related to this Agreement, to direct business related to this Agreement to any person, or to obtain any improper advantage or benefit. The Buyer represents that no Official or close relative of an Official has any direct or indirect ownership or other legal or beneficial interest in it or any of its affiliates, or in the contractual relationship established by this Agreement, and that no such Official serves as an officer, director, employee, or agent of the Buyer. This representation shall be continuing. The Buyer agrees to notify the Corporation promptly and in writing of any changes in its direct or indirect ownership in it or its affiliates that would make it or them an Official as defined in this Agreement. The Buyer covenants that should the Corporation notify it of any concerns that there has been a breach of the provisions of this clause, it shall cooperate in good faith with The Corporation in determining whether such a breach has occurred. If the Corporation determines in its sole discretion that there has been such a breach or that the Buyer has taken any action that would create a material risk of liability for the Corporation under any applicable law, it shall be entitled to treat the breach as an Event of Termination and to exercise any rights it may have under this Agreement or any orders upon the occurrence of an event of default without regard to any waiting periods or cure periods specified in this Agreement. The Buyer further agrees that it will require its employees, agents and contractors to agree to and comply with contractual provisions substantially identical to those contained in this clause.

18.6. Notice of non-compliance - The Buyer agrees to notify the Corporation promptly upon discovery of any instance where the Buyer fails to comply with this clause. If the Buyer discovers or is advised of any errors or exceptions related to its invoicing for services, the Buyer and the Corporation will together review the nature of the errors or exceptions, and the Buyer will, if appropriate, promptly take corrective action and adjust the relevant invoice or refund overpayments.

19.0APPLICABLE LAW



19.1. This Agreement is governed by the law in force in the Federated States of Micronesia and any proceedings arising out of this Agreement shall be determined by a court of competent jurisdiction in that Country.



20.0WAIVER20.1. No failure to exercise or delay in exercising any right, power or remedy by a party

operates as a waiver. Single or partial exercise or any right, power or remedy does not preclude any other or further exercise of that or any other right, power or remedy. A waiver is not valid or binding on the party granting that waiver unless made in writing.

21.0ASSIGNMENT21.1. The Corporation may at any time, assign any of its rights or transfer by novation

any of its rights and obligations under this Agreement to any person or combination of persons and must give notice of any such assignment as soon as reasonably possible thereafter to the Buyer, such assignment should not have any deleterious effect on the Buyer.

21.2. At the request of the Corporation, the Buyer must do anything necessary, including the execution of documents including directors guarantees or the amending of this Agreement to effect any assignment or novation by the Corporation under Clause 22.1.

21.3. The Buyer must not assign its rights under this Agreement without the prior written consent of the Corporation.

21.4. The Buyer acknowledges that the Corporation may use sub-contractors in the performance of its obligations under this Agreement, but the Corporation will remain liable to the Buyer to comply with this Agreement in all respects.

22.0AMENDMENT22.1. No amendment or variation to this Agreement is valid or binding on a party unless

made in writing executed by both parties.

23.0FURTHER ASSURANCES23.1. Each party agrees to do all such things and execute all such deeds, instruments,

transfers or other documents as may be necessary or desirable to give full effect to the provisions of this Agreement and the transactions contemplated by it.

24.0ENTIRE AGREEMENT24.1. This Agreement contains the entire agreement between the parties with respect

to its subject matter and supersedes all prior agreements, representations and understandings between or by the parties in connection with it.

24.2. Any terms and conditions incorporated in the Corporation’s invoice or delivery documentation in relation to Products delivered to the Buyer deviating from or inconsistent with the provisions of this Agreement (including any statement that such terms and conditions shall prevail) are hereby expressly excluded.



EXECUTED BY THE PARTIES:

Signed for and on behalf of ) .......................................................THE FSM PETROLEUM ) Signature of authorized personCORPORATION by its )authorized officer in the presence of: ) . Jared C. Morris, CEO. Name of authorized person (printed)

........................................................Signature of witness

.......................................................Name of witness

Signed for and on behalf of ) .....................................................Kosrae Utilities Authority ) Signature of authorized person by its authorized officer in the )presence of: ) ..Fred N. Skilling, GM, KUA...........Name of authorized person (printed)

.......................................................Signature of witness



SCHEDULE 1PRODUCTS

Proposal: Proposed for Effective Date of 18th August 2011, FSMPC shall institute a uniform and standard price restatement policy for Kosrae Utilities Corporation (KUA). The following shall be implemented for supply of diesel and lubricants to KUA.

A Commencement Date TBA

B Review Date Bi-annually from Effective Date

C Products See Minimum & Maximum Quantities of Products below

E Notification Two working days (minimum)

F Price Effective Date By the 10th of each month

G Notification Process Fax: 691.370-3798 /or email: [email protected]

H Supply Terms FSMPC Standard Terms and Conditions (STC) for the Supply of Petroleum Products

I Commercial Terms Schedule 2

Minimum and Maximum Quantities of Products:(Clauses 4.1 and 4.2)

Product Minimum Annual Quantity Maximum Annual Quantity

ADO – 0.5%S Distillate, Diesel, Diesoline,

420,000 US gallons 900,000 US gallons


mailto:[email protected]




LUBR

ICA

NT Minimum Annual Quantity

Lube Oil or Equivalent Qty UnitShell Rimula R3X or equivalent 30 Drums

Maximum Annual Quantity Lube Oil or Equivalent Qty UnitShell Rimula R3X or equivalent 60 Drums

Nominated Sites: KUA - Power Plant

Terminals: Lube oils to be picked up by KUA from FSMPC – Kosrae TerminalAny quantity smaller than optimal load of PetroCorp tanker, and / or less than optimal pick-up load of lube oil.

Effective Date: 18th day of August 2011Initial Term: A period of 3 years from the Effective Date.Payment Terms: Line of Credit up to maximum of 30 days – (subject to periodical review of the Buyer’s financial performance) to be fully secured pursuant to Clause 17.1, including but not limited to, Kosrae State’s share of benefit from the 2008 Japan Non-Project Grant Aid. (Clause 8.1)Payment Method: All orders on credit must be accompanied by a valid Purchase Order from the Buyer. Payment will be by company check. (Clause 8.2)Ownership of Containers: Ownership of containers is to be retained by the Corporation (Clause 14)



SCHEDULE 2PRICE OF PRODUCTS

Pricing for Mechanism for Products (Clause 7)A. Schedule 2 of the Standard Terms and Conditions of Petroleum Supply shall be as follows for the KUA, and will determine the price payable for each gallon of Petroleum Product (ADO) sold to the Buyer.The Price Base (A) shall be restated within the first 10 days of each month.Price advice shall be provided to the Buyer in the following detail:

COMPONENT EFFECTIVE RATE

(A) PRICE BASIS (US$/BBL) MOPS (0.5% S ADO)

(B) PLUS ADD-ON (US$/BBL) $54.60

(C) PLUS (US$/BBL) Duties, fees and taxes.

TOTAL =(A)+(B)+(C) (US$/BBL) CONTRACT PRICE

TOTAL =(A)+(B)+(C) /42

(US$/USGAL) DELIVERED PRICE

Price Basis The price basis is the reference international market price for the product. The Mean of Platts Singapore (MOPS) is the average of the mean of the high and low quotations for the relevant Product specification at Singapore as published in the Platt's APAG marketscan, and is reflective of the Free-On-Board (FOB) price for Product ex-Singapore.The Price Basis shall be restated on a monthly basis, reflecting the most recent FOB Singapore price of the Corporations inventory.

Add-On The Add-On shall be reviewed 6 monthly basis, and is inclusive of Supplier Margin, Medium Range Tanker

Freight from Singapore to Guam, Guam storage and handling costs, and secondary transportation by Local Coastal Tanker from Guam to Kosrae for Free-Into-Store (FIS) Cost; and

The Corporations domestic costs of operations, including maintenance and repairs, delivery charges, and financing costs.

Applicable Fees & Import Duty ; Kosrae State Excise Tax; Gross Receipts



Taxes Tax; and any other local tax

B. The FSM Petroleum Corporation is to supply lubricants and solvent (as detailed in Schedule 1) in conformity with the following terms and conditions.The Price Base (B) below shall be reviewed bi-annually.

COMPONENT EFFECTIVE RATE

(A) PRICE BASIS (US$/Liter) Corporation’s Landed Cost

(B) PLUS ADD-ON (US$/Liter) $0.5221/liter for 50 plus drums/year;0.6441/liter for 21-49 drums/year;0.7512/liter for 20 drums or less / year; or 1.55/liter for pails

(C) PLUS (US$/liter) Duties, fees and taxes.

TOTAL =(A)+(B)+(C)

(US$/liter) CONTRACT PRICE

TOTAL =(A)+(B)+(C)

(US$/liter) DELIVERED PRICE

Price Basis The price basis is the average Corporation’s CIF cost of landing product into the State.

Add-On The Add-On shall be reviewed bi-annually, and is inclusive of Supplier Margin, Freight from source to

Kosrae for Free-Into-Store (FIS) Cost; and The Corporations domestic costs of operations,

including maintenance and repairs, delivery charges, and financing costs.

Applicable Fees & Taxes Payment Term

Import Duty; Gross Receipts Tax; and applicable Kosrae State Taxes.Net of 30 days for all lube oil sales.

1. Supply of lube oil for a 12 month-rolling basis based on pricing methodology as detailed above and agreed between the FSMPC and Kosrae, provided the Buyer provides notice of 1st order at least 2 months lead time before current inventory/stock will be exhausted.



2. FSMPC would guarantee that at least 2 months supply of the basic commodities are on island at all times, however, Kosrae will buy all remaining stocks of products at end of contract if CHANGE of supplier.



SCHEDULE 3ACCREDITATION REQUIREMENTS (Clause 6.8)

Road tankers All vehicles to be inspected and approved by PETROCORP before commencement

of supply under this Agreement. All vehicles to meet defined AIP standards for road tankers. Vehicle details to be provided to PETROCORP (eg vehicle numbers, compartment

capacities before commencement of supply).

Drivers All drivers must have a valid Dangerous Goods License. All drivers must have an approved AIP driver passport. All drivers to have successfully completed a driver induction program at the

relevant Terminal.


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