Foreign enterprises investing in upstream oil and gas exploration and production activities in China are required to partner with Chinese State-Owned Enterprises (“SOE”) through Production Sharing Contracts (“PSCs”)

Sino Gas & Energy Limited (“SGE”) recovers exploration and development costs from the revenue generated from the PSC. The exploration investment sunk by SGE is repaid before the accumulated development costs.

The remainder of the revenue is used to pay the Value Added Tax (VAT) and Royalties. The remainder after recoverable costs and taxes will go into the ‘remainder pool’, as shown below.

Depending on the rate of production, a portion of the ‘remainder pool’ will be paid to SGE and the Chinese partners according to each share of interest in the PSCs.