Brief on Tatan LNG Supply Procurement Tender

Vincent I. Hsieh, Team Leader John Eastwood, James Huang, Jane Tsai, Karen Lee, Mark Brown, Mark McVicar

PROJECT SUMMARY

Title: Procurement of Liquified Natural Gas (LNG) Fuel for the Tatan Power Plant Procuring Agent: Taiwan Power Company Contract Period: from signing date through 31 Dec 2032 Estimated Project Value: US$11.6 billion

The bid awardee is required to supply LNG from 1 Jan 2008 to 31 Dec 2032 through a land-based LNG receiving terminal built in northern Taiwan for the 4,000 MW Tatan combined cycle power plant. Bids will be processed in accordance with Taiwan's Government Procurement Law. The lowest bidder under the ceiling price will win the contract in accordance with the tender specifications.

LNG POLICY AND MARKET OVERVIEW

LNG Policy in Taiwan LNG figures prominently in Taiwan’s energy policy objective to establish a liberalized, efficient, clean and stable energy supply and demand system to power the island’s future economic growth. The current administration has a stated goal of tripling Taiwan’s reliance on LNG by 2010. Given the very limited indigenous sources of natural gas in Taiwan, the share of imported LNG in the island’s diversified fuel base is expected to surge in the coming decades for a number of reasons.

Environmental pressures are necessitating a shift toward the kind of cleaner power generation natural gas offers. Heavy reliance on coal- and oil-based power generation that has driven rapid economic growth in the past few decades has contributed to serious environmental degradation in Taiwan and has given rise to strong public opposition to continued implementation of power plants using these energy sources. Although construction of Taiwan’s fourth nuclear power plant (with a capacity of 2,000 MW) continues, there exists a consensus across party lines and throughout society that nuclear power is not a practical option and should be phased out as soon as possible. In particular, the lack of viable long-term storage options for spent nuclear fuel has been a key issue.

Taiwan’s Energy Commission, Ministry of Economic Affairs (MOEA) forecasts that LNG demand will grow 8.5% annually and that natural gas will constitute 14-16% of Taiwan’s primary energy supply by 2020, with the share of gas-fired units involved in power generation increasing from the current 16% to 25% of the total. The current global economic downturn and the migration of Taiwan’s energy-intensive manufacturing industry to China may necessitate a downward revision of projected power demand, and consequently, the level of LNG utilization in Taiwan. Nevertheless, it is generally accepted that Taiwan’s economy will grow between three and five percent annually through 2020. As power generation capacity has not kept pace with growing demand, Taiwan suffers from a perilously thin reserve power capacity margin—a real concern for the island’s energy-intensive manufacturing sector. The government is aware that generation capacity must and be increased and favors gas-fired power generation as it believes LNG satisfies the environmental, efficiency, and stability-of-supply tests better than any other energy options.

Taiwan’s energy market reform initiatives include market liberalization and the privatization of state-owned energy enterprises, Taiwan Power (Taipower) and China Petroleum Company (CPC). Although disappointing in their pace and scope to date, initiatives will continue to promote greater reliance on LNG. Market reforms already in effect open the importation of LNG and participation in power generation to the private sector through the Independent Power Producer (IPP) program. All new IPP plants are to be gas-fired.

Taiwan’s near-total dependence on imported energy makes stability of supplies a major national concern. The oil crisis of the 1970s prompted Taiwan to significantly reduce its reliance on oil as a power generation source and to diversify its energy mix to prevent shortages. Growing global demand for LNG has led to the development of a strong LNG supply system in the region – this abundant, accessible supply makes LNG an attractive option for Taiwan in terms of supply stability.

There are, however, potential barriers to increased utilization of LNG in Taiwan, many of which are linked to energy market reform. For example, current electricity tariffs do not reflect the cost of supply, making rates of return unattractive and discouraging

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private participation in Taiwan’s natural gas-fueled IPP power generation market. To date, only two of eleven approved IPPs are in operation. Unreasonable, anti-competitive contract terms and conditions set by state-owned energy monopolies Taipower and CPC create difficulties in acquiring land and rights-of-way for facilities. Vehement public opposition to new power plant construction and a host of bureaucratic barriers are also longstanding problems that continue to dampen private sector interest in Taiwan’s energy market.

LNG Supply Taiwan began importing LNG from Southeast Asia in 1990. According to CPC, imports of LNG grew from 0.71 million tons that year to 4.43 million tons in 2000. In 2001, a total of 4.74 million tons of LNG was imported. Taiwan’s primary LNG suppliers are Indonesia and Malaysia. CPC estimates 5.2 million tons of LNG will be imported in 2002.

Infrastructure Taiwan’s major natural gas/LNG infrastructure projects, either in operation, under construction or planned include: the CPC’s Yungan LNG receiving terminal in southern Taiwan; annual capacity of 4.5 million tons, to be expanded to 7.87 million tons; three faulty tanks are currently under repair the Hsinta natural gas-fired combined-cycle power plant supplied by the nearby Yungan terminal an on-shore trunk gas line with ring gas line extending from Yungan to northern Taiwan; includes around 20 distribution stations along the way a 186-mi (300-km) subsea gas line originating at the Yungan terminal linked to the Tunghsiao facilities in northwestern Taiwan a northern Taiwan LNG receiving terminal under construction by Tungting Corporation; located in the Kuantang industrial park; Tungting plans to supply nearby Tatan power plant and other markets in northern Taiwan; projected annual capacity of up to seven million tons; first stage to be completed in 2004 the proposed Tatan gas-fired combined cycle power plant to be built in the in Tatan Industrial Park in Taoyuan County, northern Taiwan; completion of first phase slated for 2003, operation to begin in 2005; to be supplied by the northern LNG receiving terminal; the plant is expected to provide 10% of Taiwan’s electricity supply.

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OVERVIEW OF TENDERS TO DATE

Previous Tenders The first bid invitation was announced in March 2000. The deadline was extended twice to January 2001. This tender failed as only Tungting Gas Corporation and Hungchung Construction Co., LTD. submitted bids, one bid short of the required three. On 6 August 2001 Taipower held a second round of bidding with the same result. Reports confirmed that despite their strong interest in the tender initially, foreign companies balked at the first tender citing onerous deadlines for construction of the receiving terminal, provision of LNG, and approval of the environmental impact assessment. Compensation in the event of a force majeure situation and the MOEA request that the awardee cooperate with Tungting, which is building a receiving terminal in Tatan, also discouraged foreign competitors.

In the second tender, foreign bidders reportedly considered the MOEA decision to exclude use of a receiving ship to supply LNG unacceptable. This was despite the fact that CPC was unable to provide LNG from its Yungan receiving terminal as faulty tanks reduced their on-site supply. The MOEA did, however, announce that the awardee could build its own northern receiving terminal instead of using Tungting’s terminal (still under construction). The MOEA also indicated that it would assist the awardee in facilitating the procedures required to establish a new receiving terminal. In addition, the compensation for force majeure situations was removed from the purchase agreement, and the deadline for providing LNG from the northern receiving terminal was extended to 1 May 2008.

In October 2001, Taipower abruptly postponed the third tender for one year citing decreased power demand resulting from Taiwan’s sluggish economy. At around the same time, Mitsubishi, a major investor in Tungting, was barred by the government from participating in government bids for one year as punishment for faulty receiving containers it provided for the Yungan LNG receiving terminal.

Current Tender Taipower opened the third round of bidding on 5 November 2002, with bidding scheduled to end on 24 March 2003. To attract bidders, a number of adjustments were made to the third ITB. The deadline for providing LNG from an alternative source other than the northern receiving terminal was extended to 2008, and the deadline for providing LNG from the northern receiving terminal was extended to 2011. Awardees

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are, however, subject to penalties if unable to provide LNG through the northern receiving terminal by the deadline.

Tatan Power Plant Equipment Bid A US$1.7 billion Taipower power generation project—the largest ever in Taiwan. A decision on the Tatan Power Plant tender is expected in May 2003. If the bid fails or is postponed, the deadline for supplying LNG may be adjusted accordingly. The current competitors for this tender are Mitsubishi, GE, ABB, Siemens, and ALSTON.

KEY PLAYERS1

State-owned Enterprises

Taipower. Taipower is a commercial utility managed and operated under the supervision of the MOEA. Taipower has been, until the introduction of IPPs, the sole power supplier for Taiwan since 1946. Taipower maintains monopoly control over power transmission and distribution and is the sole purchaser of privately produced power. It currently has an estimated capitalization of US$1 trillion, annual operating revenues in excess of US$9 billion and employs 25,000 people. Taipower reported in November 2002 that privatization will be completed by 2005.

Taipower has by its actions shown that it has little interest in promoting market liberalization. In its role as both referee and purchaser in the IPP program, Taipower has dictated what many interested parties consider to be unreasonable terms and conditions in power purchase agreements. This has also been a concern with Taipower’s LNG supply tender for its Tatan plant.

CPC. CPC is the dominant player in the production, exploration, refining, storage, transportation, and marketing of petroleum and natural gas in Taiwan. CPC’s net income for 2001 was reportedly US$180 million. Like Taipower, its operations are overseen by the MOEA. CPC employs more than 16,000 people and is one of

1 Sources of information provided in this section include local newspapers, periodicals and other sources.

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Taiwan’s largest companies. CPC has announced that its privatization will be completed by December 2003.

The government initially discouraged CPC from participating in the first ITB, but apparently gave CPC the go-ahead to join subsequent ITBs. CPC, however, did not join the second ITB. Observers judged this to mean that CPC’s strategy was to approach the bid awardee with an offer to cooperate.

Private Sector Competitors

Tungting and EXXON Mobil. Tungting is generally considered to have a substantial advantage over other competitors for the LNG supply tender given its strong political connections and the fact that it has already received approval for and begun construction on an LNG receiving terminal near the Tatan power plant.

Tungting was originally established by the Tuntex Group and the Central Investment Company (owned by the Kuomintang party, the KMT) to undertake the Kuantang Industrial Park investment project. A financial crisis forced the Tuntex Group and the Central Investment Company to sell most of their shares to Mitsubishi and the China Development Industrial Bank. The current main shareholders of Tungting are Mitsubishi, CDI bank, Evergreen Technology Company (owned by Evergreen Group) and Uni-President International (owned by Uni-President Group). Other shareholders include Great Taipei Gas Corp, and Tuntex Petrochemical, Inc.

EXXON Mobil originally proposed to build an offshore LNG receiving terminal platform. At the end of 2000, RasGas in Qatar (invested by EXXON Mobil) signed an MOU with Tungting for the Tatan LNG supply bid. Following investment by Mitsubishi, Tungting changed its LNG supplier from Australia to RasGas. Prior to that, Tungting had signed an MOU with ALNG in 1999 regarding LNG supplies for the Tatan plant.

Total Fina Elf and Asia Cement. Total Fina Elf (TFE) has LNG resources in Indonesia, Yemen, and Iran. TFE plans to partner with Taiwan’s Asia Cement to vie for the Tatan LNG supply tender. Local media reported that Asia Cement was unsuccessful in convincing CPC to join forces with TFE and Asia Cement. TFE is considering Takuan Industrial Park and Taichung Harbor as possible locations for its northern receiving terminal.

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British Petroleum. British Petroleum (BP) had planned to partner with Pacific Construction, but instead pulled out of the second round of bidding. BP is reportedly planning to establish its receiving terminal in Taichung Harbor and has also expressed an interest in partnering with CPC.

Shell. Shell has announced plans to invest approximately US$580 million to build an LNG receiving terminal near Hsinwu Stream in Taoyuan, to be completed in 2005. In April 2002, Shell submitted its application to the Taoyuan County Government regarding development of this proposed terminal.

KEY REQUIREMENTS OF THE CURRENT TENDER

Bidder Qualifications Bidders must be a registered Taiwan company limited by shares with a paid-up capital of NT$2 billion (approx. US$57.9 million) or a Taiwan preparatory office, provided one or more of the originators are corporate persons and the total investment ratio is at least NT$2 billion (approx. US$57.9 million).

Bid Bond NT$50 million (approx. US$1.45 million) is required for participation

Method of Supply The bid awardee shall import LNG and supply it through a land-based LNG receiving terminal to be built in northern Taiwan (in or north of Taichung city/county). The LNG receiving terminal shall be completed by 2011.

Tentative Annual Procurement Volume The volumes in the table below are projections; Taipower reserves the right to determine the actual annual amount of LNG procured.

Year 2008 2009 2010 2011 Volume (MT) 690,000 1,130,000 1,540,000 1,680,000

Preliminary Timeline for Commercial Operation of Tatan Power Plant The preliminary timeline provides that the plant will operate a total of 8 turbines, two of

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which shall begin operation by 1 July 2005, with the remaining turbines to come online between 2008 and 2010. The actual operation schedule will be determined one month after the signing of the procurement contract for the power supply equipment.

LNG Supply Plan The bid awardee must provide a supply plan report identifying its overseas LNG supplier, the company that will undertake construction of the northern LNG receiving terminal, and the location of the northern receiving terminal. The awardee must also specify the capacity of the northern receiving terminal, the anticipated schedule for obtaining relevant licenses, permits and approvals, and provide a timeline for supply of LNG through the northern receiving terminal.

Bid Evaluation The lowest bid under Taipower’s ceiling price (not made public) will be awarded the contract in a two-stage bidding process: qualification and specification bids followed by price bids.

Performance Bond NT$5 billion (approx. US$145 million)

KEY PROVISIONS OF THE PURCHASE AGREEMENT2 The awardee is required to sign a purchase agreement with Taipower within 90 days of issuance of the award notification.

Article 2: Actual Volume of LNG to be Procured Taipower may determine on an annual basis the volume of LNG to be procured, and this actual volume may differ from the projected volume figures by plus or minus 5%.

Article 3: Gas Procurement Taipower will not begin purchasing LNG from the awardee until the awardee has obtained all licenses and/or permissions related to LNG supply and commercial operation and has concluded an LNG supply contract with the specified overseas LNG supplier.

2 See Attachment 2 for translation of Purchase Agreement document’s table of contents.

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Article 11: LNG Purchase Price The actual purchasing price for LNG is not necessarily the same as the price submitted by the awardee in its bid for this project (the latter is for bid comparison only).

Article 16: Missed Deadlines, Supply Disruptions and Deficiencies The awardee may be subject to punitive damages if it is unable to 1) supply LNG in the amount, and pursuant to, the conditions provided in the Agreement; 2) obtain the necessary licenses and/or permission related to establishing the northern receiving terminal prior to 1 January 2008; 3) provide a partial supply of LNG through the northern receiving terminal prior to 2008; or 4) provide the complete supply of LNG through the northern receiving terminal prior to 2010.

Article 18: Performance Bond Part of the performance bond may be retrieved, provided that the awardee has obtained the licenses and permissions for supply of LNG through the northern receiving terminal within the specified time frame.

Article 19: Advance Supply of LNG The bid awardee may supply LNG in advance of the deadline (the period between 1 January 2005 and 31 December 2007).

Article 21: Compensatory Damages A cap of NT$23 billion (approximately US$667 million) is set on compensatory damages for either contracting party concerning damages arising from default of contract within one year.

Article 22: Force Majeure Force majeure includes but is not limited to typhoons, natural cataclysm, war, domestic civil unrest, armed conflicts, change of laws and regulations, acts of the Taiwan government, riots, strikes, and resistance fighting.

Article 26: Means of Dispute Resolution Contracting parties shall negotiate to resolve any dispute. If negotiations fail to resolve the dispute, either party may file a complaint, apply for mediation, or initiate litigation in accordance with the Government Procurement Law. If both parties agree to resolve a dispute by arbitration, the ROC Arbitration Association will conduct the arbitration in Taipei in accordance with the Arbitration Law.

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LICENSES, PERMITS AND APPROVALS This section provides an overview of the licenses, permits and approvals relevant to the supply of LNG and the development of the LNG receiving terminal.

Foreign Investment Approval Foreign Investment Approval (FIA) must be obtained from the Investment Commission pursuant to the Statute for Investment by Foreign Nationals prior to obtaining Company Incorporation Registration and Business Registration through the MOEA.

LNG Import Enterprises/ Compulsory Insurance A permit to engage in importation of natural gas must be obtained from the MOEA in accordance with the Energy Management Law. Procedures governing this permit for LNG importation are now being drafted by the MOEA.

The MOEA is also drafting an “LNG Administration Law.” As this law is likely to be similar to the existing Petroleum Administration Law (PAL) covering importation of liquefied petroleum gas (LPG), we refer to relevant provisions of the latter for reference. The PAL provides that a petroleum importer must be a company limited by shares. Before importing LPG, the importer must receive, from the MOEA, an establishment permit (a storage plan and sales or use plan must be attached to the application) and an operation license for LPG import. Importers are also required to obtain public liability insurance coverage and accidental contamination liability insurance.

Industrial District Development According to the Statute for Upgrading Industries, a private enterprise investing in the development of an industrial district is required to prepare a feasibility report and other documents required by the Environment Impact Assessment Law. These documents must be submitted to the central authority in charge of industries who will in turn forward them to the central authorities in charge of regional/urban planning and environmental protection for consent. Upon gaining MOEA approval, the land selected may be designated as an industrial district. Also, a private enterprise applying for development of a designated industrial district is required to prepare a business plan, a development plan, a statement of source of development fund, a cost estimate and a land disposition plan. These documents along with a written application must be filed with the MOEA for approval.

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Land Acquisition. A private enterprise developing an industrial district wishing to use industrial land previously designated under the repealed Statute for Encouragement of Investment or private land within an industrial district designed under the Statute for Upgrading Industries, may negotiate directly with the owner of such land for its purchase. If the land purchase arrangement cannot be consummated due to the lack of registration of property succession upon death of the private land owner or upon death of the administrator of the clan property of an ancestral shrine, or for any other special cause, an application for land expropriation may be filed with the local authority in charge of industries.

The sale of public land within a designated industrial district, which is applied for by a private enterprise developing an industrial district, shall be conducted by the authority administering the public land. The sale price of the public land shall be determined by the authority administering the public land in accordance with the evaluation standard applicable to the disposition of public property.

Rezoning. Should rezoning of the land intended for industrial development be required, applicants must submit a rezoning application to the competent authorities for approval.

Reclaimed Land. Under Taiwan’s rules for development and administration of reclaimed land, should the industrial district development involve reclaimed land, applicants shall apply with the relevant local government for approval to use and develop reclaimed land. If the industrial park is established under the Statute of Upgrading Industries, development of reclaimed land shall also be subject to separate rules regarding review of proposals for development of reclaimed land within industrial park areas.

Environmental Impact Assessment (EIA) Development activities such as the establishment of an industrial park require an EIA. Laws relevant to EIA include the Environment Assessment Act, Environmental Impact Assessment Items and Screening Criteria for Development Activities and its implementation guidelines. During the planning stage, the project proponent is required to conduct and EIA and prepare an Environmental Impact Statement (EIS). When applying for a permit related to the proposed development project, the project

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proponent shall submit the EIS to the MOEA for forwarding to the EPA. If the development activity is likely to have significant adverse environmental impacts, the project shall conclude a Phase II EIA and, upon the expiry of the EIS disclosure period, hold a public meeting to explain the development activities.

Exclusive Industrial Harbor/ Exclusive Wharfs Based on policy needs, or to meet a private enterprise’s operational requirements, the central authority in charge of industries may recommend that the MOEA consult with the Ministry of Transportation and Communications (MOTC) in seeking approval of the Executive Yuan for the construction of an exclusive industrial harbor or exclusive wharfs within an industrial district designated according to the relevant provisions of the Statute for Upgrading Industries. For the delineation and the designation of the zone for an exclusive industrial harbor or exclusive wharfs, the central authority in charge of industries may recommend the MOEA to consult with the MOTC, the Ministry of the Interior and other relevant agencies, who may then jointly request approval from the Executive Yuan.

The Regulation Regarding Private Enterprise Investment and Development of an Exclusive Industrial Harbor in an Industrial District (民營事業投資開發工業區內工業專用港輔導及管理辦法) provides guidance on the establishment, operation and administration of exclusive industrial harbors and exclusive wharves.

A private enterprise developing industrial harbors may be eligible for a prime rate loan of up to NT$10 billion (approximately US$290 million) pursuant to the Guidelines for Encouragement Private Enterprise Investment and Development of an Exclusive Industrial Harbor in an Industrial District through Loans.

LNG Storage Facility and Fire Safety Requirements According to the Regulations Governing the Use of Rural Land and the Enforcement Rules for Rural Land Rezoning, investors, upon receiving the competent authority’s approval of its business plan, may apply with the local government for the rezoning of rural land for use by a special purpose enterprise, necessary for establishing an LNG storage facility.

As previously mentioned, the MOEA is drafting an “LNG Administration Law” which is likely to be similar to the existing PAL. As such, we refer to relevant provisions in the latter for reference regarding the required procedures for establishing an LNG storage facility. The PAL provides that to establish a petroleum storage facility, a construction

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license and special approval of the competent authority is necessary. Moreover, relevant regulations regarding the establishment and administration of petroleum storage facilities require that a petroleum business must submit its establishment plan to the local government for approval. After construction of the storage facility, the petroleum business should submit required permits and approvals for the facility to the competent authority for approval before commencing operation.

Permission from the competent authority is required for fire-safety facilities and equipment for the storage facilities, according to the Regulations Governing Safety Standards for Hazardous Substances and High Pressure Combustibles. The applicant should get the approval of the fire-safety authorities for the location, structure, and the relevant equipment of the facilities. After construction is completed, the owner of a reservoir facility for liquid hazardous substances shall pass an examination administered by an independent institution designated by the fire-safety authority. The fire-safety equipment of the reservoir facility should also meet the requirements of the Standards for Fire Safety Equipment for Designated Places（各類場所消防安全設備設置標準）.

Pipelines As previously mentioned, the PAL permits the construction of pipelines through or upon rivers, trenches, sea territory, bridges, dikes, harbors, roads, forest, grass, parks, or other public land. Approvals from the relevant authority in charge must be obtained in advance. Compensation may be due for damage resulting from the construction of such pipelines. A pipeline route survey must be submitted to the Ministry of Interior for approval to construct sea territory pipelines.

Fees and Taxes Applicants can expect to pay a number of fees related to the various approvals and licenses. In the process of applying for approval, official fees, i.e., cost fees and reviewing fees, are required. Upon obtaining approval, development impact fees and reward compensation are required.

Land-value and land-value-increment taxes regarding land, construction on land, and leased properties may be required depending on the facts.

Stamp Tax for construction agreements executed for completion of specifically ordered work or tasks, LNG purchase agreements, and deeds for sale of movable payments, will be required subject to the law.

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In the operational stage, import tariffs, income tax, VAT, commodity tax are required.

GENERAL INVESTMENT and TAX

Investment Laws

Statute for Investment by Foreign Nationals. Investors are prohibited from investing in industries that affect national security, public order, good customs and practices, national health, or those otherwise prohibited by the law. Foreign investment in categories listed in the MOEA’s “Negative List for Investment by Overseas Chinese and Foreign Nationals” is prohibited.

Statute for Upgrading Industries. Only companies incorporated under Taiwan’s Company Law are eligible for incentives under this law.

Investment Incentives: On 1 January 2000, the Statute for Upgrading Industries was amended to extend preferential measures for another 10 years until 31 December 2009. The main preferential measures include accelerated depreciation of machinery; tax credits for investment in R&D, personal training, and equipment and technology related to automation, recycling and pollution control, utilization of new and clean energy sources, energy saving, industrial wastewater recycling, reduction of greenhouse gas emission, and higher energy efficiency, and investment in resource-poor or lesser-developed rural areas; five-year tax exemptions or shareholder investment credits for companies in important emerging industries; and preferential taxes for mergers and company reinvestment.

Environmental Protection. Industrial investment plans must first be approved by the Investment Commission, MOEA and then submitted to the local environmental protection authorities. If a project is not in an industry controlled under the environmental protection regulations, investors may apply with the relevant local bureau of construction for a factory building permit. Otherwise, the project must be evaluated and approved by the EPA. Only after obtaining the necessary documents (e.g., EIA, effluent discharge permit, stationary sources installation and operation permit) can an application for factory construction be filed. Relevant laws and regulations include the Environmental Impact Assessment

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Act, Water Pollution Control Act, Air Pollution Control Act, Noise Pollution Control Act, Waste Disposal Act, and Toxic Chemical Substances Control Act.

Foreign Exchange. The Statute for Foreign Exchange Regulation covers transactions involving foreign cash, negotiable instruments, and securities. The administrative agency for the management of foreign exchange market is supervised by the Central Bank. Companies may exchange amounts of up to US$50 million per year.

Taxation There are 16 tax categories in Taiwan at the national, special municipality, country, and city levels. The highest executive body for taxation is the Ministry of Finance (MOF). The central authority is the Department of Tax, MOF. National customs duties are collected by the offices of the Directorate General of Customs in Taipei, Keelung, Kaohsiung, and Taichung. Other taxes, excluding mineral tax, are collected by Taipei City and Kaohsiung City, and by regional tax offices in northern, central, and southern Taiwan. Special municipality taxes are levied by the tax bureaus in Taipei City and Kaohsiung City. Other county and city taxes are collected by the respective county and city tax bureaus. Taxpayers with grievances may apply for administrative relief at the concerned tax office.

Tax Regulations Relevant to the Tender. Income Tax: The Income Tax Law provides that any profit-seeking enterprise with its head office within the territory of the Republic of China, will have income tax levied on its total income derived within or without the territory of the Republic of China. However, income derived outside the territory and taxed under the laws of that source country for the same business year (supported by evidence from the source country’s tax office and certified by a Taiwan representative office or Republic of China consular office) can be deducted from the amount of tax payable by the taxpayer at the time of filing final returns for its income tax. Such deductions cannot be used to offset amounts attributable to domestic profits. Sales by foreign companies directly to clients in Taiwan are considered international transactions, and income derived from such sales is not taxable. The tax rate is normally 25%.

Business Tax (VAT): The value-added business tax rate is 5% and is levied on the sale of goods or services within the territory of the Republic of China (R.O.C.) and on the import of goods.

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Import Tariffs: Tax rates vary for different goods. Customs duty shall be levied on goods imported from abroad. The duty-payer shall be the consignee of the imported goods, or the bearer of the bill of lading, or the holder of the imported goods.

Other Relevant Taxes: The Stamp Tax is levied upon monetary receipts, deeds of moveable property transactions, contract agreements, and real estate deeds; the Commodity Tax is levied upon all taxable goods whether imported or domestically produced; the Stock Transaction Tax is levied upon all securities transactions except for government bond transactions; the Land Tax, which includes the land value tax, farmland tax and incremental tax on value.

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Attachment 1

Taipower Tatan LNG Fuel Supply Project

[Translation — Text in “[]” was added for clarification or to enhance readability.]

A. Table of Contents

I. Outline of Taipower Tatan Power Plant Project

1. Location 2. Plant capacity 3. Type of generation units 4. Unit capacity 5. Number of generation units 6. Preliminary timetable for commercial operation

II. Content of procurement and terms for gas suppliers

1. Procurement target 2. Preliminary annual procurement volume 3. Timetable for the start of gas provision 4. Contract period 5. Natural gas quality standards 6. Delivery location 7. Method of supply

III. Bidding companies

1. Qualifications of bidding companies 2. Supply from overseas sources 3. Method of gas supply 4. Financial information

IV. Submission of bidding documents

1. Format of bidding documents 2. Bidding method 3. Validity deadline for bidding documents 4. Rejection and return of bidding documents 5. Invalid bidding documents

V. Bid bond

1. Amount of bid bond 2. Forfeiture of bid bond 3. Refund of bid bond

VI. Tender opening and evaluation

1. Phased tender opening 2. Opening and evaluation of qualification and specification tenders 3. Opening of pricing tenders 4. Unlawful tenders

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VII. Determination of the pricing tender

1. Setting of the minimum bid 2. Appraisal of price calculation 3. Principles of awarding bids 4. Comparison of pricing reduction 5. Rights reservation

VIII. Natural gas trading contract and performance bond

1. Performance bond 2. Terms and deadline for signing agreement 3. Rights and obligations of the agreement

IX. Miscellaneous

1. Nature of the procurement 2. Responsibility for expenses 3. Request for interpretations and deadline for interpretations 4. Objections and appeals 5. Ineligible bidders 6. Applicable regulations and governing agency 7. Compilation and printing format for tenders and attachments 8. Complaint handling authority 9. Anti-corruption hotline

B. Table of Attachments

Attachment 1 -- Preliminary commercial operation timetable

Attachment 2 -- Letter issued by the head of the energy authority for liquefied natural gas in the country in which the [supplying] gas field is located

Attachment 3 -- Key items in liquefied natural gas supply letter of intent between bidding company and gas supplying company

Attachment 4 -- Gas supply agreement letter issued by investment partners of overseas gas supply company

Attachment 5 -- Qualifications and specifications of companies tendering for the Taipower Tatan Power Plant natural gas supply bid.

Attachment 5-1 -- Key items in the Tatan Power Plant gas supply plan

Attachment 5-2 -- Letter of intent to invest from bidding companies (companies being organized for establishment)

Attachment 6 -- Price tender of companies bidding for Taipower Tatan Power Plant natural gas supply contract

Attachment 7 -- Bidding companies' bid documents cover sheet

Attachment 8 -- Bidding companies' declaration

Attachment 9 -- Bidding companies' itemized list of bid documents

Attachment 10 -- Form of bid bond

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Attachment 10-1 -- Application to pledge certificate of time deposit as bid bond

Attachment 10-2 -- Acknowledgement of pledge of certificate of time deposit as bid bond

Attachment 10-3 -- Irrevocable letter of credit as bid bond

Attachment 10-4 -- Declaration of joint and several liability for bid bond

Attachment 10-5 -- Proof of insurance of joint and several liability for bid bond

Attachment 11 -- Tender qualification and specification examination criteria

Attachment 12 -- Letter of authorization

Attachment 13 -- Form of performance bond

Attachment 13-1 -- Application to pledge certificate of time deposit as performance bond

Attachment 13-2 -- Acknowledgement of pledge of certificate of time deposit as performance bond

Attachment 13-3 -- Irrevocable letter of credit as performance bond

Attachment 13-4 -- Declaration of joint and several liability for performance bond

Attachment 13-5 -- Proof of insurance of joint and several liability for performance bond

Attachment 2

Tatan Power Plant Natural Gas Supply Contract

[Translation — Text in “[]” was added for clarification or to enhance readability.]

[Table of Contents]

Article 1 -- Definitions

Article 2 -- Consent for procurement/supply of natural gas 1. Contracted annual procurement volume 2. Increasing procurement volume 3. Means of supply

Article 3 -- Prerequisites of gas procurement

Article 4 -- Natural gas quality, inspection and testing 1. Natural gas quality standards 2. Scheduled inspection and testing 3. Random (spot) inspection and testing 4. Handling of heat values not in compliance with standards 5. Handling of flawed gas quality 6. Designation of escrow companies

Article 5 -- Fixed gas usage volume 1. Annual gas usage volume 2. Monthly gas usage volume 3. Daily gas usage volume

Article 6 -- Gas supply and usage patterns 1. Mutual coordination of gas supply and usage 2. Initial gas usage period and subsequent usage pattern 3. Gas re-supply for other power plants 4. Gas supply capabilities

Article 7 -- Border of demarcation of responsibilities

Article 8 -- Volumetric meters, heat flux meters and pressure gauge equipment 1. Natural gas measuring station and equipment 2. Inspection and verification 3. Regularly scheduled rectification 4. Non-scheduled (spot) rectification 5. Other relevant facilities 6. Maintenance and dismantling

Article 9 -- Gas supply pressure 1. Range of gas supply pressure 2. Amended range of gas supply pressure 3. Breach of contract penalties for generation unit shutdowns or reduced carrying capacity due to non-compliant gas supply pressure

Article 10 -- Calculation of price-setting calorific values

1. Calorific values as measured by the heat meter 2. Price-setting calorific values

3. Adjusted calorific values as measured by the heat meter

Article 11 -- Pricing 1. Benchmark gas price for the base period 2. Unit gas price for the given month 3. Tax rate adjustments 4. Temporary payment of unit gas price 5. Gas price negotiations 6. Negotiating gas price discounts

Article 12 -- Volume calculation 1. Assessment of gas procurement volume 2. Calculation of gas procurement volume 3. Unit of volume calculation and conversion standards

Article 13 -- Fee calculation 1. Gas price to be paid for a given month 2. Reimbursements for gas price adjustments

Article 14 -- Supplementing gas delivery shortfalls 1. Price calculation of gas delivery shortfall volume 2. Notification of supplementary gas delivery 3. Deduction of excess gas delivery 4. Settlement following expiration of the contract

Article 15 -- Payment 1. Gas price to be paid for a given month 2. Reimbursement for gas price adjustments 3. Price calculation of gas delivery shortfalls 4. Delays 5. Corrections

Article 16 -- Penal provisions for missed deadlines, supply disruptions and supply deficiencies

Article 17 -- Contract period 1. Commencement and termination date 2. Extension

Article 18 -- Performance bond 1. Amount of performance bond 2. Deduction and supplementation 3. Elimination of bond responsibilities 4. Appropriate form of performance bond 5. Pledges and renunciation of rights 6. Forfeiture of performance bond 7. Updating of performance bond

Article 19 -- Early [advance] gas supply 1. The right to supply gas in advance 2. Notification of advance gas supply 3. Volume of advance gas supply 4. Pricing of advance gas supply 5. Applicability of agreement provisions from initial period of gas usage

Article 20 -- Termination 1. Mutual termination 2. Buyer termination without notice 3. Buyer termination with notice

4. Supplier's rights to terminate 5. Termination where negotiations have failed to reach agreement 6. Effect of termination 7. Buyer liability for compensation 8. Seller liability for compensation

Article 21 -- Compensatory damages 1. Liability for compensation 2. Maximum compensation amount 3. Exceptions to the maximum compensation amount

Article 22 -- Force majeure 1. Definitions 2. Exemptions and minimizing losses 3. Notification 4. Termination and extension 5. Downward adjustment of agreed annual gas supply volume

Article 23 -- Transferal

Article 24 -- Legal basis 1. Applicable laws 2. Supplementary applicability

Article 25 -- Amendments to the agreement

Article 26 -- Means of dispute resolution

Article 27 -- Notification

Article 28 -- Confidentiality obligations

Article 29 -- Miscellaneous 1. Waiver of rights 2. Independence of clauses 3. Scope of agreement 4. Proof of payment of penalty payment 5. Article subtitles 6. Copies

Attachments

Attachment 1: Natural gas quality standards

Attachment 2: Preliminary procurement volume

Attachment 3: JCC crude oil prices

Attachment 4: Key point of liquid natural gas procurement contract

Attachment 5: Tatan generation units' hourly gas usage requirements and scope of planned measuring station natural gas delivery pressure

Attachment 6-1: Topographic map of site of planned Tatan thermal power plant

Attachment 6-2: Diagram of division of responsibilities within the natural gas measuring station

Attachment 6-3: Construction plot diagram of Tatan power plant natural gas measuring station (1)

Attachment 6-4: Construction plot diagram of Tatan power plant natural gas measuring station (2)

Attachment 7: Gas supply declaration

Attachment 8: Measurement table of transformation coefficients (sample)

Attachment 9: Payment request notification form (sample)

Attachment 10: Means for calculating agreed daily gas consumption (sample)

Appendices

Appendix 1: Bidding points of attention

Appendix 2: Price tender

Appendix 3: Performance bond

Appendix 4: Qualification and specification tender

Media Timeline3

Oct 1998 Taipower announces plans to invest US$ 3.72 billion for construction of the Tatan Combined Cycle Power Project 19 Nov 1998 Taiwan offers Malaysia $1bn in LNG-linked credit towards purchase 30 Aug 1999 Taipower issues draft form of specifications for Tatan LNG Nov 1999 Hyundai Heavy Industries undertakes $150-million contract from CPC to install 186-mi (300-km) gas line from Yung An LNG receiving terminal 15 Nov 1999 Australia LNG Pty. Ltd. reaches understanding with Tuntex concerning the supply of 4 million tons a year of liquid natural gas from Australia beginning in 2003. 14 March 2000 Taipower opens 1st tender on Tatan LNG supply project 30 May 2000 Australian consortium lobbies for LNG supply deal to seal NT$400bn gas deal with MOEA Minister Lin Hsin-yi 17 July 2000 Vice ministerial-level conference between the Republic of China and Australia slated for end of July 2000, LNG project to be discussed. Sept 2000 Taipower adjusts 1st ITB and extends the submission date to November 30 18 Jan 2001 Bidders pull out of 1st ITB 6 April 2001 MOEA proposes to assist bid awardee in gaining necessary land and other licensing for northern LNG receiving terminal 7 April 2001 Taipower opens 2nd ITB for Tatan LNG supply project. ITB terms adjusted: Awardee must: provide any form of fuel supply for the Tatan plant by October 1, 2003 (previously 1May 2003); supply LNG by October 2005 (previously May 2005); funnel LNG from an LNG receiving station located anywhere north of Taichung by April 2008 (previously July 2007). Suppliers no longer subject to a 5 percent penalty payment if they fail to provide fuel supply according to schedule due to uncontrollable factors. 11 April 2001 Petramina expresses interest in supplying LNG for Tatan project 14 May 2001 Liu Tai-ing, largest shareholder of Tung-ting, is appointed Tung-ting Director (solidifying Tung-ting’s bid award)

Mitsubishi and Evergreen invest in Tung-ting LNG plan 14 June 2001 Chiyoda Corporation announces that the consortium of Chiyoda and CTCI Corporation (Taiwan) has been awarded a basic contract for basic design,

3 Sources: Taipei Times, Taiwan News, China Post, and other local media sources.

engineering, procurement and construction for Tung Ting Gas LNG Terminal Project from Tung Ting Gas Corporation. 13 July 2001 Taiwan’s Pacific Construction Co plans to bid for contract to supply natural gas to Taiwan Power Co’s Tatan Power plant. Petramina will supply LNG to Pacific, if it wins the contract. Pacific also plans to build an LNG receiving terminal 31 July 2001 Mitsubishi Heavy Industries LNG storage tanks in Kaohsiung deemed flawed 6 Aug 2001 Bidders balk at 2nd Tatan LNG bid Bidding for the 25-year contract to supply Taiwan Power Co (台電) with LNG will close on Aug. 16, but with only Tung Ting Gas Corp (東鼎液化瓦斯), and a consortium led by Kaohsiung-based Hung Chung Construction Co (宏總建設) 22 Nov 2001 Taipower proposes to delay Tatan LNG supply project bidding for one year; Construction and Planning Agency bars Mitsubishi from participating in bids for one year 30 Jan 2002 CPC announces plans to build a 2nd LNG receiving terminal in another northern port (in addition to Tung-ting’s) once the Tatan plant is online 19 Aug 2002 Vice President Lu reportedly offers to buy three million ton of LNG from Indonesia for 400 billion Taiwan dollars (11.8 billion US) over 25 years. Just days before her visit, the PRC awarded a massive LNG contract to Australia rather than Indonesia. 5 Nov 2002 Taipower opens 3rd round of bidding for Tatan LNG Supply. Taipower modifies bid document terms including extending operation start to 2008 and LNG supply to northern receiving terminal to 2011; bid bond set at NT$5 billion (min. of NT$1.5 billion).

WIP023/ Tatan LNG Report 12z2