Attached files
file | filename |
---|---|
8-K - EGPI FIRECREEK, INC. | v170082_8k.htm |
EX-10.4 - EGPI FIRECREEK, INC. | v170082_ex10-4.htm |
EX-10.1 - EGPI FIRECREEK, INC. | v170082_ex10-1.htm |
EX-10.3 - EGPI FIRECREEK, INC. | v170082_ex10-3.htm |
EX-10.7 - EGPI FIRECREEK, INC. | v170082_ex10-7.htm |
EX-10.6 - EGPI FIRECREEK, INC. | v170082_ex10-6.htm |
EX-10.8 - EGPI FIRECREEK, INC. | v170082_ex10-8.htm |
A.A.P.L.
FORM 610 - 1989
FORM
OPERATING AGREEMENT
OPERATING
AGREEMENT
DATED
___________________________
OPERATOR
|
WHITT OIL & GAS,
INC.
|
CONTRACT
AREA
|
AS
DESCRIBED ON EXHIBIT “A” ATTACHED HERETO.
|
COUNTY
OR PARISH OF
|
SHACKELFORD,
CALLAHAN AND STEPHENS, STATE OF TEXAS
|
COPYRIGHT
1989 - ALL RIGHTS RESERVED AMERICAN
ASSOCIATION
OF PETROLEUM LANDMEN, 4100 FOSSIL
CREEK
BLVD. FORT WORTH, TEXAS, 76137, APPROVED FORM.
A.A.P.L.
NO. 610 - 1989
TABLE
OF CONTENTS
Article
|
Title
|
Page
|
||
I.
|
DEFINITIONS
|
1
|
||
II.
|
EXHIBITS
|
2
|
||
III.
|
INTERESTS
OF PARTIES
|
3
|
||
A.
|
OIL
AND GAS INTERESTS:
|
3
|
||
B.
|
INTERESTS
OF PARTIES IN COSTS AND PRODUCTION:
|
3
|
||
C.
|
SUBSEQUENTLY
CREATED INTERESTS:
|
3
|
||
IV.
|
TITLES
|
4
|
||
A.
|
TITLE
EXAMINATION:
|
4
|
||
B.
|
LOSS
OR FAILURE OF TITLE:
|
4
|
||
1.
|
Failure
of Title
|
4
|
||
2.
|
Loss
by Non-Payment or Erroneous Payment of Amount Due
|
5
|
||
3.
|
Other
Losses
|
6
|
||
4.
|
Curing
Title
|
6
|
||
V.
|
OPERATOR
|
6
|
||
A.
|
DESIGNATION
AND RESPONSIBILITIES OF OPERATOR:
|
6
|
||
B.
|
RESIGNATION
OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
|
6
|
||
1.
|
Resignation
or Removal of Operator
|
7
|
||
2.
|
Selection
of Successor Operator
|
7
|
||
3.
|
Effect
of Bankruptcy
|
7
|
||
C.
|
EMPLOYEES
AND CONTRACTORS: 7
|
|||
D.
|
RIGHTS
AND DUTIES OF OPERATOR: 7
|
|||
1.
|
Competitive
Rates and Use of Affiliates
|
7
|
||
2.
|
Discharge
of Joint Account Obligations
|
7
|
||
3.
|
Protection
from Liens
|
8
|
||
4.
|
Custody
of Funds
|
8
|
||
5.
|
Access
to Contract Area and Records
|
8
|
||
6.
|
Filing
and Furnishing Governmental Reports
|
8
|
||
7.
|
Drilling
and Testing Operations
|
8
|
||
8.
|
Cost
Estimates
|
8
|
||
9.
|
Insurance
|
9
|
||
VI.
|
DRILLING
AND DEVELOPMENT
|
9
|
||
A.
|
INITIAL
WELL:
|
9
|
||
B.
|
SUBSEQUENT
OPERATIONS:
|
9
|
||
1.
|
Proposed
Operations
|
9
|
||
2.
|
Operations
by Less Than All Parties
|
10
|
||
3.
|
Stand-By
Costs
|
12
|
||
4.
|
Deepening
|
13
|
||
5.
|
Sidetracking
|
13
|
||
6.
|
Order
of Preference of Operations
|
14
|
||
7.
|
Conformity
to Spacing Pattern
|
14
|
||
8.
|
Paying
Wells
|
14
|
||
C.
|
COMPLETION
OF WELLS; REWORKING AND PLUGGING BACK:
|
14
|
||
1.
|
Completion
|
14
|
||
2.
|
Rework,
Recomplete or Plug Back
|
15
|
||
D.
|
OTHER
OPERATIONS:
|
15
|
||
E.
|
ABANDONMENT
OF WELLS:
|
15
|
||
1.
|
Abandonment
of Dry Holes
|
15
|
||
2.
|
Abandonment
of Wells That Have Produced
|
16
|
||
3.
|
Abandonment
of Non-Consent Operations
|
16
|
||
F.
|
TERMINATION
OF OPERATIONS:
|
17
|
||
G.
|
TAKING
PRODUCTION IN KIND:
|
17
|
||
(Option
1) Gas Balancing Agreement
|
20
|
i
(Option
2) No Gas Balancing Agreement
|
18
|
|||
VII.
|
EXPENDITURES
AND LIABILITY OF PARTIES
|
18
|
||
A.
|
LIABILITY
OF PARTIES:
|
18
|
||
B.
|
LIENS
AND SECURITY INTERESTS:
|
19
|
||
C.
|
ADVANCES:
|
20
|
||
D.
|
DEFAULTS
AND REMEDIES:
|
20
|
||
1.
|
Suspension
of Rights
|
20
|
||
2.
|
Suit
for Damages
|
21
|
||
3.
|
Deemed
Non-Consent
|
21
|
||
4.
|
Advance
Payment
|
21
|
||
5.
|
Costs
and Attorneys’ Fees
|
21
|
||
E.
|
RENTALS,
SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
|
21
|
||
F.
|
TAXES:
|
22
|
||
VIII.
|
ACQUISITION,
MAINTENANCE OR TRANSFER OF INTEREST
|
22
|
||
A.
|
SURRENDER
OF LEASES:
|
22
|
||
B.
|
RENEWAL
OR EXTENSION OF LEASES:
|
23
|
||
C.
|
ACREAGE
OR CASH CONTRIBUTIONS:
|
24
|
||
D.
|
ASSIGNMENT;
MAINTENANCE OF UNIFORM INTEREST:
|
24
|
||
E.
|
WAIVER
OF RIGHTS TO PARTITION:
|
24
|
||
F.
|
PREFERENTIAL
RIGHT TO PURCHASE:
|
25
|
||
IX.
|
INTERNAL
REVENUE CODE ELECTION
|
25
|
||
X.
|
CLAIMS
AND LAWSUITS
|
25
|
||
XI.
|
FORCE
MAJEURE
|
26
|
||
XII.
|
NOTICES
|
26
|
||
XIII.
|
TERM
OF AGREEMENT
|
26
|
||
XIV.
|
COMPLIANCE
WITH LAWS AND REGULATIONS
|
27
|
||
A. LAWS, REGULATIONS AND ORDERS: |
27
|
|||
B. GOVERNING LAW: |
27
|
|||
C. REGULATORY AGENCIES: |
27
|
|||
XV.
|
MISCELLANEOUS
|
28
|
||
A. EXECUTION: |
28
|
|||
B. SUCCESSORS AND ASSIGNS: |
28
|
|||
C. COUNTERPARTS: |
28
|
|||
D. SEVERABILITY |
28
|
|||
XVI.
|
OTHER
PROVISIONS
|
28
|
ii
OPERATING
AGREEMENT
THIS
AGREEMENT, entered into by and between
WHITT
OIL & GAS, INC. ,
hereinafter designated and referred to as “Operator,” and the signatory party or
parties other than Operator, sometimes hereinafter referred to individually as
“Non-Operator,” and collectively as “Non-Operators.”
WITNESSETH:
WHEREAS,
the parties to this agreement are owners of Oil and Gas Leases and/or Oil and
Gas Interests in the land identified in Exhibit “A,” and the parties hereto have
reached an agreement to explore and develop these Leases and/or Oil and Gas
Interests for the production of Oil and Gas to the extent and as hereinafter
provided,
NOW,
THEREFORE, it is agreed as follows:
ARTICLE
I.
DEFINITIONS
As used
in this agreement, the following words and terms shall have the meanings here
ascribed to them:
A. The
term “AFE” shall mean an Authority for Expenditure prepared by a party to this
agreement for the purpose of estimating the costs to be incurred in conducting
an operation hereunder.
B. The
term “Completion” or “Complete” shall mean a single operation intended to
complete a well as a producer of Oil and Gas in one or more Zones, including,
but not limited to, the setting of production casing, perforating, well
stimulation and production testing conducted in such operation.
C. The
term “Contract Area” shall mean all of the lands, Oil and Gas Leases and/or Oil
and Gas Interests intended to be developed and operated for Oil and Gas purposes
under this agreement. Such lands, Oil and Gas Leases and Oil and Gas Interests
are described in Exhibit “A.”
D. The
term “Deepen” shall mean a single operation whereby a well is drilled to an
objective Zone below the deepest Zone in which the well was previously drilled,
or below the Deepest Zone proposed in the associated AFE, whichever is the
lesser.
E. The
terms “Drilling Party” and “Consenting Party” shall mean a party who agrees to
join in and pay its share of the cost of any operation conducted under the
provisions of this agreement.
F. The
term “Drilling Unit” shall mean the area fixed for the drilling of one well by
order or rule of any state or federal body having authority. If a Drilling Unit
is not fixed by any such rule or order, a Drilling Unit shall be the drilling
unit as established by the pattern of drilling in the Contract Area unless fixed
by express agreement of the Drilling Parties.
G. The
term “Drillsite” shall mean the Oil and Gas Lease or Oil and Gas Interest on
which a proposed well is to be located.
H. The
term “Initial Well” shall mean the well required to be drilled by the parties
hereto as provided in Article VI.A.
I. The
term “Non-Consent Well” shall mean a well in which less than all parties have
conducted an operation as provided in Article VI.B.2.
J. The
terms “Non-Drilling Party” and “Non-Consenting Party” shall mean a party who
elects not to participate in a proposed operation.
1
K. The
term “Oil and Gas” shall mean oil, gas, casinghead gas, gas condensate, and/or
all other liquid or gaseous hydrocarbons and other marketable substances
produced therewith, unless an intent to limit the inclusiveness of this term is
specifically stated.
L. The
term “Oil and Gas Interests” or “Interests” shall mean unleased fee and mineral
interests in Oil and Gas in tracts of land lying within the Contract Area which
are owned by parties to this agreement.
M. The
terms “Oil and Gas Lease,” “Lease” and “Leasehold” shall mean the oil and gas
leases or interests therein covering tracts of land lying within the Contract
Area which are owned by the parties to this agreement.
N. The
term “Plug Back” shall mean a single operation whereby a deeper Zone is
abandoned in order to attempt a Completion in a shallower Zone.
O. The
term “Recompletion” or “Recomplete” shall mean an operation whereby a Completion
in one Zone is abandoned in order to attempt a Completion in a different Zone
within the existing wellbore.
P. The
term “Rework” shall mean an operation conducted in the wellbore of a well after
it is Completed to secure, restore, or improve production in a Zone which is
currently open to production in the wellbore. Such operations include, but are
not limited to, well stimulation operations but exclude any routine repair or
maintenance work or drilling, Sidetracking, Deepening, Completing, Recompleting,
or Plugging Back of a well.
Q. The
term “Sidetrack” shall mean the directional control and intentional deviation of
a well from vertical so as to change the bottom hole location unless done to
straighten the hole or drill around junk in the hole to overcome other
mechanical difficulties.
R. The
term “Zone” shall mean a stratum of earth containing or thought to contain a
common accumulation of Oil and Gas separately producible from any other common
accumulation of Oil and Gas.
Unless
the context otherwise clearly indicates, words used in the singular include the
plural, the word “person” includes natural and artificial persons, the plural
includes the singular, and any gender includes the masculine, feminine, and
neuter.
ARTICLE
II.
EXHIBITS
The
following exhibits, as indicated below and attached hereto, are incorporated in
and made a part hereof:
X
|
A.
|
Exhibit
“A,” shall include the following
information:
|
(1)
Description of lands subject to this agreement,
(2)
Restrictions, if any, as to depths, formations, or substances,
(3)
Parties to agreement with addresses and telephone numbers for notice
purposes,
(4)
Percentages or fractional interests of parties to this agreement,
(5) Oil
and Gas Leases and/or Oil and Gas Interests subject to this
agreement,
(6)
Burdens on production.
X
|
B.
|
Exhibit “B,”
Form of Lease.
|
X
|
C.
|
Exhibit
“C,” Accounting Procedure.
|
X
|
D.
|
Exhibit
“D,” Insurance.
|
______
|
E.
|
Exhibit
“E,” Gas Balancing Agreement.
|
______
|
F.
|
Exhibit
“F,” Non-Discrimination and Certification of Non-Segregated
Facilities.
|
______
|
G.
|
Exhibit
“G,” Tax Partnership.
|
______
|
H.
|
Other:
________________________________________
|
If any
provision of any exhibit, except Exhibits “E,” “F” and “G,” is inconsistent with
any provision contained in the body of this agreement, the provisions in the
body of this agreement shall prevail.
2
ARTICLE
III.
INTERESTS
OF PARTIES
A. Oil
and Gas Interests:
If any
party owns an Oil and Gas Interest in the Contract Area, that Interest shall be
treated for all purposes of this agreement and during the term hereof as if it
were covered by the form of Oil and Gas Lease attached hereto as Exhibit “B,”
and the owner thereof shall be deemed to own both royalty interest in such lease
and the interest of the lessee thereunder.
B. Interests
of Parties in Costs and Production:
Unless
changed by other provisions, all costs and liabilities incurred in operations
under this agreement shall be borne and paid, and all equipment and materials
acquired in operations on the Contract Area shall be owned, by the parties as
their interests are set forth in Exhibit “A.” In the same manner, the parties
shall also own all production of Oil and Gas from the Contract Area subject,
however, to the payment of royalties and other burdens on production as
described hereafter.
Regardless
of which party has contributed any Oil and Gas Lease or Oil and Gas Interest on
which royalty or other burdens may be payable and except as otherwise expressly
provided in this agreement, each party shall pay or deliver, or cause to be paid
or delivered, all burdens on its share of the production from the Contract Area
up to, but not in excess of, 24%
and shall indemnify, defend and hold the other parties free from any liability
therefor. Except as otherwise expressly provided in this agreement, if any party
has contributed hereto any Lease or Interest which is burdened with any royalty,
overriding royalty, production payment or other burden on production in excess
of the amounts stipulated above, such party so burdened shall assume and alone
bear all such excess obligations and shall indemnify, defend and hold the other
parties hereto harmless from any and all claims attributable to such excess
burden. However, so long as the Drilling Unit for the productive Zone(s) is
identical with the Contract Area, each party shall pay or deliver, or cause to
be paid or delivered, all burdens on production from the Contract Area due under
the terms of the Oil and Gas Lease(s) which such party has contributed to this
agreement, and shall indemnify, defend and hold the other parties free from any
liability therefor.
No party
shall ever be responsible, on a price basis higher than the price received by
such party, to any other party’s lessor or royalty owner, and if such other
party’s lessor or royalty owner should demand and receive settlement on a higher
price basis, the party contributing the affected Lease shall bear the additional
royalty burden attributable to such higher price.
Nothing
contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties’
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C.
Subsequently Created Interests:
If any
party has contributed hereto a Lease or Interest that is burdened with an
assignment of production given as security for the payment of money, or if,
after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, assignment of production or other
burden payable out of production attributable to its working interest hereunder,
such burden shall be deemed a “Subsequently Created Interest.” Further, if any
party has contributed hereto a Lease or Interest burdened with an overriding
royalty, production payment, net profits interests, or other burden payable out
of production created prior to the date of this agreement, and such burden is
not shown on Exhibit “A,” such burden also shall be deemed a Subsequently
Created Interest to the extent such burden causes the burdens on such party’s
Lease or Interest to exceed the amount stipulated in Article III.B.
above.
3
The party
whose interest is burdened with the Subsequently Created Interest (the “Burdened
Party”) shall assume and alone bear, pay and discharge the Subsequently Created
Interest and shall indemnify, defend and hold harmless the other parties from
and against any liability therefor. Further, if the Burdened Party fails to pay,
when due, its share of expenses chargeable hereunder, all provisions of Article
VII.B. shall be enforceable against the Subsequently Created Interest in the
same manner as they are enforceable against the working interest of the Burdened
Party. If the Burdened Party is required under this agreement to assign or
relinquish to any other party, or parties, all or a portion of its working
interest and/or the production attributable thereto, said other party, or
parties, shall receive said assignment and/or production free and clear of said
Subsequently Created Interest, and the Burdened Party shall indemnify, defend
and hold harmless said other party, or parties, from any and all claims and
demands for payment asserted by owners of the Subsequently Created
Interest.
ARTICLE
IV.
TITLES
A.
Title Examination:
Title
examination shall be made on the Drillsite of any proposed well prior to
commencement of drilling operations and, if a majority in interest of the
Drilling Parties so request or Operator so elects, title examination shall be
made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of the
well. The opinion will include the ownership of the working interest, minerals,
royalty, overriding royalty and production payments under the applicable Leases.
Each party contributing Leases and/or Oil and Gas Interests to be included in
the Drillsite or Drilling Unit, if appropriate, shall furnish to Operator all
abstracts (including federal lease status reports), title opinions, title papers
and curative material in its possession free of charge. All such information not
in the possession of or made available to Operator by the parties, but necessary
for the examination of the title, shall be obtained by Operator. Operator shall
cause title to be examined by attorneys on its staff or by outside attorneys.
Copies of all title opinions shall be furnished to each Drilling Party. Costs
incurred by Operator in procuring abstracts, fees paid outside attorneys for
title examination (including preliminary, supplemental, shut-in royalty opinions
and division order title opinions) and other direct charges as provided in
Exhibit “C” shall be borne by the Drilling Parties in the proportion that the
interest of each Drilling Party bears to the total interest of all Drilling
Parties as such interests appear in Exhibit “A.” Operator shall make no charge
for services rendered by its staff attorneys or other personnel in the
performance of the above functions.
Each
party shall be responsible for securing curative matter and pooling amendments
or agreements required in connection with Leases or Oil and Gas Interests
contributed by such party. Operator shall be responsible for the preparation and
recording of pooling designations or declarations and communitization agreements
as well as the conduct of hearings before governmental agencies for the securing
of spacing or pooling orders or any other orders necessary or appropriate to the
conduct of operations hereunder. This shall not prevent any party from appearing
on its own behalf at such hearings. Costs incurred by Operator, including fees
paid to outside attorneys, which are associated with hearings before
governmental agencies, and which costs are necessary and proper for the
activities contemplated under this agreement, shall be direct charges to the
joint account and shall not be covered by the administrative overhead charges as
provided in Exhibit “C.”
Operator
shall make no charge for services rendered by its staff attorneys or other
personnel in the performance of the above functions.
No well
shall be drilled on the Contract Area until after (1) the title to the Drillsite
or Drilling Unit, if appropriate, has been examined as above provided, and (2)
the title has been approved by the examining attorney or title has been accepted
by all of the Drilling Parties in such well.
B.
Loss or Failure of Title:
1. Failure of Title:
Should any Oil and Gas Interest or Oil and Gas Lease be lost through failure of
title, which results in a reduction of interest from that shown on Exhibit “A,”
the party credited with contributing the affected Lease or Interest (including,
if applicable, a successor in interest to such party) shall have ninety (90)
days from final determination of title failure to acquire a new lease or other
instrument curing the entirety of the title failure, which acquisition will not
be subject to Article VIII.B., and failing to do so, this agreement,
nevertheless, shall continue in force as to all remaining Oil and Gas Leases and
Interests; and,
4
(a) The
party credited with contributing the Oil and Gas Lease or Interest affected by
the title failure (including, if applicable, a successor in interest to such
party) shall bear alone the entire loss and it shall not be entitled to recover
from Operator or the other parties any development or operating costs which it
may have previously paid or incurred, but there shall be no additional liability
on its part to the other parties hereto by reason of such title
failure;
(b) There
shall be no retroactive adjustment of expenses incurred or revenues received
from the operation of the Lease or Interest which has failed, but the interests
of the parties contained on Exhibit “A” shall be revised on an acreage basis, as
of the time it is determined finally that title failure has occurred, so that
the interest of the party whose Lease or Interest is affected by the title
failure will thereafter be reduced in the Contract Area by the amount of the
Lease or Interest failed;
(c) If
the proportionate interest of the other parties hereto in any producing well
previously drilled on the Contract Area is increased by reason of the title
failure, the party who bore the costs incurred in connection with such well
attributable to the Lease or Interest which has failed shall receive the
proceeds attributable to the increase in such interest (less costs and burdens
attributable thereto) until it has been reimbursed for unrecovered costs paid by
it in connection with such well attributable to such failed Lease or
Interest;
(d)
Should any person not a party to this agreement, who is determined to be the
owner of any Lease or Interest which has failed, pay in any manner any part of
the cost of operation, development, or equipment, such amount shall be paid to
the party or parties who bore the costs which are so refunded;
(e) Any
liability to account to a person not a party to this agreement for prior
production of Oil and Gas which arises by reason of title failure shall be borne
severally by each party (including a predecessor to a current party) who
received production for which such accounting is required based on the amount of
such production received, and each such party shall severally indemnify, defend
and hold harmless all other parties hereto for any such liability to
account;
(f) No
charge shall be made to the joint account for legal expenses, fees or salaries
in connection with the defense of the Lease or Interest claimed to have failed,
but if the party contributing such Lease or Interest hereto elects to defend its
title it shall bear all expenses in connection therewith; and
(g) If
any party is given credit on Exhibit “A” to a Lease or Interest which is limited
solely to ownership of an interest in the wellbore of any well or wells and the
production therefrom, such party’s absence of interest in the remainder of the
Contract Area shall be considered a Failure of Title as to such remaining
Contract Area unless that absence of interest is reflected on Exhibit
“A.”
2. Loss by Non-Payment or
Erroneous Payment of Amount Due: If, through mistake or oversight, any
rental, shut-in well payment, minimum royalty or royalty payment, or other
payment necessary to maintain all or a portion of an Oil and Gas Lease or
interest is not paid or is erroneously paid, and as a result a Lease or Interest
terminates, there shall be no monetary liability against the party who failed to
make such payment. Unless the party who failed to make the required payment
secures a new Lease or Interest covering the same interest within ninety (90)
days from the discovery of the failure to make proper payment, which acquisition
will not be subject to Article VIII.B., the interests of the parties reflected
on Exhibit “A” shall be revised on an acreage basis, effective as of the date of
termination of the Lease or Interest involved, and the party who failed to make
proper payment will no longer be credited with an interest in the Contract Area
on account of ownership of the Lease or Interest which has terminated. If the
party who failed to make the required payment shall not have been fully
reimbursed, at the time of the loss, from the proceeds of the sale of Oil and
Gas attributable to the lost Lease or Interest, calculated on an acreage basis,
for the development and operating costs previously paid on account of such Lease
or Interest, it shall be reimbursed for unrecovered actual costs previously paid
by it (but not for its share of the cost of any dry hole previously drilled or
wells previously abandoned) from so much of the following as is necessary to
effect reimbursement:
(a)
Proceeds of Oil and Gas produced prior to termination of the Lease or Interest,
less operating expenses and lease burdens chargeable hereunder to the person who
failed to make payment, previously accrued to the credit of the lost Lease or
Interest, on an acreage basis, up to the amount of unrecovered
costs;
5
(b)
Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable
hereunder to the person who failed to make payment, up to the amount of
unrecovered costs attributable to that portion of Oil and Gas thereafter
produced and marketed (excluding production from any wells thereafter drilled)
which, in the absence of such Lease or Interest termination, would be
attributable to the lost Lease or Interest on an acreage basis and which as a
result of such Lease or Interest termination is credited to other parties, the
proceeds of said portion of the Oil and Gas to be contributed by the other
parties in proportion to their respective interests reflected on Exhibit “A”;
and,
(c) Any
monies, up to the amount of unrecovered costs, that may be paid by any party who
is, or becomes, the owner of the Lease or Interest lost, for the privilege of
participating in the Contract Area or becoming a party to this
agreement.
3. Other Losses: All
losses of Leases or Interests committed to this agreement, other than those set
forth in Articles IV.B.1. and IV.B.2. above, shall be joint losses and shall be
borne by all parties in proportion to their interests shown on Exhibit “A.” This
shall include but not be limited to the loss of any Lease or Interest through
failure to develop or because express or implied covenants have not been
performed (other than performance which requires only the payment of money), and
the loss of any Lease by expiration at the end of its primary term if it is not
renewed or extended. There shall be no readjustment of interests in the
remaining portion of the Contract Area on account of any joint
loss.
4. Curing Title: In the
event of a Failure of Title under Article IV.B.1. or a loss of title under
Article IV.B.2. above, any Lease or Interest acquired by any party hereto (other
than the party whose interest has failed or was lost) during the ninety (90) day
period provided by Article IV.B.1. and Article IV.B.2. above covering all or a
portion of the interest that has failed or was lost shall be offered at cost to
the party whose interest has failed or was lost, and the provisions of Article
VIII.B. shall not apply to such acquisition.
ARTICLE
V.
OPERATOR
A.
Designation and Responsibilities of Operator:
WHITT
OIL & GAS, INC. shall be the Operator of
the Contract Area, and shall conduct and direct and have full control of all
operations on the Contract Area as permitted and required by, and within the
limits of this agreement. In its performance of services hereunder for the
Non-Operators, Operator shall be an independent contractor not subject to the
control or direction of the Non-Operators except as to the type of operation to
be undertaken in accordance with the election procedures contained in this
agreement. Operator shall not be deemed, or hold itself out as, the agent of the
Non-Operators with authority to bind them to any obligation or liability assumed
or incurred by Operator as to any third party. Operator shall conduct its
activities under this agreement as a reasonable prudent operator, in a good and
workmanlike manner, with due diligence and dispatch, in accordance with good
oilfield practice, and in compliance with applicable law and regulation, but in
no event shall it have any liability as Operator to the other parties for losses
sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.
B.
Resignation or Removal of Operator and Selection of Successor:
1. Resignation or Removal of
Operator: Operator may resign at any time by giving written notice
thereof to Non-Operators. If Operator terminates its legal existence, no longer
owns an interest hereunder in the Contract Area, or is no longer capable of
serving as Operator, Operator shall be deemed to have resigned without any
action by Non-Operators, except the selection of a successor. Operator may be
removed only for good cause by the affirmative vote of Non-Operators owning a
majority interest based on ownership as shown on Exhibit “A” remaining after
excluding the voting interest of Operator; such vote shall not be deemed
effective until a written notice has been delivered to the Operator by a
Non-Operator detailing the alleged default and Operator has failed to cure the
default within thirty (30) days from its receipt of the notice or, if the
default concerns an operation then being conducted, within forty-eight (48)
hours of its receipt of the notice. For purposes hereof, “good cause” shall mean
not only gross negligence or willful misconduct but also the material breach of
or inability to meet the standards of operation contained in Article V.A. or
material failure or inability to perform its obligations under this
agreement.
6
Subject
to Article VII.D.1., such resignation or removal shall not become effective
until 7:00 o’clock A.M. on the first day of the calendar month following the
expiration of ninety (90) days after the giving of notice of resignation by
Operator or action by the Non-Operators to remove Operator, unless a successor
Operator has been selected and assumes the duties of Operator at an earlier
date. Operator, after effective date of resignation or removal, shall be bound
by the terms hereof as a Non-Operator. A change of a corporate name or structure
of Operator or transfer of Operator’s interest to any single subsidiary, parent
or successor corporation shall not be the basis for removal of
Operator.
2. Selection of Successor
Operator: Upon the resignation or removal of Operator under any provision
of this agreement, a successor Operator shall be selected by the parties. The
successor Operator shall be selected from the parties owning an interest in the
Contract Area at the time such successor Operator is selected. The successor
Operator shall be selected by the affirmative vote of two (2) or more parties
owning a majority interest based on ownership as shown on Exhibit “A”; provided,
however, if an Operator which has been removed or is deemed to have resigned
fails to vote or votes only to succeed itself, the successor Operator shall be
selected by the affirmative vote of the party or parties owning a majority
interest based on ownership as shown on Exhibit “A” remaining after excluding
the voting interest of the Operator that was removed or resigned. The former
Operator shall promptly deliver to the successor Operator all records and data
relating to the operations conducted by the former Operator to the extent such
records and data are not already in the possession of the successor operator.
Any cost of obtaining or copying the former Operator’s records and data shall be
charged to the joint account.
3. Effect of Bankruptcy:
If Operator becomes insolvent, bankrupt or is placed in receivership, it shall
be deemed to have resigned without any action by Non-Operators, except the
selection of a successor. If a petition for relief under the federal bankruptcy
laws is filed by or against Operator, and the removal of Operator is prevented
by the federal bankruptcy court, all Non-Operators and Operator shall comprise
an interim operating committee to serve until Operator has elected to reject or
assume this agreement pursuant to the Bankruptcy Code, and an election to reject
this agreement by Operator as a debtor in possession, or by a trustee in
bankruptcy, shall be deemed a resignation as Operator without any action by
Non-Operators, except the selection of a successor. During the period of time
the operating committee controls operations, all actions shall require the
approval of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit “A.” In the event there are only two (2) parties
to this agreement, during the period of time the operating committee controls
operations, a third party acceptable to Operator, Non-Operator and the federal
bankruptcy court shall be selected as a member of the operating committee, and
all actions shall require the approval of two (2) members of the operating
committee without regard for their interest in the Contract Area based on
Exhibit “A.”
C.
Employees and Contractors:
The
number of employees or contractors used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees or
contractors shall be the employees or contractors of Operator.
D.
Rights and Duties of Operator:
1. Competitive Rates and Use of
Affiliates: All wells drilled on the Contract Area shall be drilled on a
competitive contract basis at the usual rates prevailing in the area. If it so
desires, Operator may employ its own tools and equipment in the drilling of
wells, but its charges therefor shall not exceed the prevailing rates in the
area and the rate of such charges shall be agreed upon by the parties in writing
before drilling operations are commenced, and such work shall be performed by
Operator under the same terms and conditions as are customary and usual in the
area in contracts of independent contractors who are doing work of a similar
nature. All work performed or materials supplied by affiliates or related
parties of Operator shall be performed or supplied at competitive rates,
pursuant to written agreement, and in accordance with customs and standards
prevailing in the industry.
2. Discharge of Joint Account
Obligations: Except as herein otherwise specifically provided, Operator
shall promptly pay and discharge expenses incurred in the development and
operation of the Contract Area pursuant to this agreement and shall charge each
of the parties hereto with their respective proportionate shares upon the
expense basis provided in Exhibit “C.” Operator shall keep an accurate record of
the joint account hereunder, showing expenses incurred and charges and credits
made and received.
7
3. Protection from
Liens: Operator shall pay, or cause to be paid, as and when they become
due and payable, all accounts of contractors and suppliers and wages and
salaries for services rendered or performed, and for materials supplied on, to
or in respect of the Contract Area or any operations for the joint account
thereof, and shall keep the Contract Area free from liens and encumbrances
resulting therefrom except for those resulting from a bona fide dispute as to
services rendered or materials supplied.
4. Custody of Funds:
Operator shall hold for the account of the Non-Operators any funds of the
Non-Operators advanced or paid to the Operator, either for the conduct of
operations hereunder or as a result of the sale of production from the Contract
Area, and such funds shall remain the funds of the Non-Operators on whose
account they are advanced or paid until used for their intended purpose or
otherwise delivered to the Non-Operators or applied toward the payment of debts
as provided in Article VII.B. Nothing in this paragraph shall be construed to
establish a fiduciary relationship between Operator and Non-Operators for any
purpose other than to account for Non-Operator funds as herein specifically
provided. Nothing in this paragraph shall require the maintenance by Operator of
separate accounts for the funds of Non-Operators unless the parties otherwise
specifically agree.
5. Access to Contract Area and
Records: Operator shall, except as otherwise provided herein, permit each
Non-Operator or its duly authorized representative, at the Non-Operator’s sole
risk and cost, full and free access at all reasonable times to all operations of
every kind and character being conducted for the joint account on the Contract
Area and to the records of operations conducted thereon or production therefrom,
including Operator’s books and records relating thereto. Such access rights
shall not be exercised in a manner interfering with Operator’s conduct of an
operation hereunder and shall not obligate Operator to furnish any geologic or
geophysical data of an interpretive nature unless the cost of preparation of
such interpretive data was charged to the joint account. Operator will furnish
to each Non-Operator upon request copies of any and all reports and information
obtained by Operator in connection with production and related items, including,
without limitation, meter and chart reports, production purchaser statements,
run tickets and monthly gauge reports, but excluding purchase contracts and
pricing information to the extent not applicable to the production of the
Non-Operator seeking the information. Any audit of Operator’s records relating
to amounts expended and the appropriateness of such expenditures shall be
conducted in accordance with the audit protocol specified in Exhibit
“C.”
6. Filing and Furnishing
Governmental Reports: Operator will file, and upon written request
promptly furnish copies to each requesting Non-Operator not in default of its
payment obligations, all operational notices, reports or applications required
to be filed by local, State, Federal or Indian agencies or authorities having
jurisdiction over operations hereunder. Each Non-Operator shall provide to
Operator on a timely basis all information necessary to Operator to make such
filings.
7. Drilling and Testing
Operations: The following provisions shall apply to each well drilled
hereunder,
including but not limited to the Initial Well:
(a)
Operator will promptly advise Non-Operators of the date on which the well is
spudded, or the date on which drilling operations are commenced.
(b)
Operator will send to Non-Operators such reports, test results and notices
regarding the progress of operations on the well as the Non-Operators shall
reasonably request, including, but not limited to, daily drilling reports,
completion reports, and well logs.
(c)
Operator shall adequately test all Zones encountered which may reasonably be
expected to be capable of producing Oil and Gas in paying quantities as a result
of examination of the electric log or any other logs or cores or tests conducted
hereunder.
8. Cost Estimates: Upon
request of any Consenting Party, Operator shall furnish estimates of current and
cumulative costs incurred for the joint account at reasonable intervals during
the conduct of any operation pursuant to this agreement. Operator shall not be
held liable for errors in such estimates so long as the estimates are made in
good faith.
8
9. Insurance: At all
times while operations are conducted hereunder, Operator shall comply with the
workers compensation law of the state where the operations are being conducted;
provided, however, that Operator may be a self- insurer for liability under said
compensation laws in which event the only charge that shall be made to the joint
account shall be as provided in Exhibit “C.” Operator shall also carry or
provide insurance for the benefit of the joint account of the parties as
outlined in Exhibit “D” attached hereto and made a part hereof. Operator shall
require all contractors engaged in work on or for the Contract Area to comply
with the workers compensation law of the state where the operations are being
conducted and to maintain such other insurance as Operator may
require.
In the
event automobile liability insurance is specified in said Exhibit “D,” or
subsequently receives the approval of the parties, no direct charge shall be
made by Operator for premiums paid for such insurance for Operator’s automotive
equipment.
ARTICLE
VI.
DRILLING
AND DEVELOPMENT
A.
Initial Well:
THERE
IS NO INITIAL WELL. THERE WILL BE AN INITIAL WORK PROGRAM CONSISTING OF THE
REPAIR OF IDENTIFIED PROBLEMS AND RETURN TO PRODUCTION OF THREE (3) WELLS
LOCATED, RESPECTIVELY, ON THE MCWHORTER LEASE (CALLAHAN COUNTY, TEXAS), THE
YOUNG LEASE (CALLAHAN COUNTY, TEXAS) AND THE BOYETT LEASE (SHACKELFORD COUNTY,
TEXAS).
OPERATOR
ACKNOWLEDGES RECEIPT OF $225,000 COVERING NON-OPERATOR’S ACQUISITION OF A 50%
WORKING INTEREST (A 32% NET REVENUE INTEREST) IN THE LEASES DESCRIBED IN EXHIBIT
“A” AND NON-OPERATOR’S SHARE OF COSTS ASSOCIATED WITH THE ABOVE-DESCRIBED
INITIAL WORK PROGRAM. OPERATING COSTS OF WELLS ARE NOT INCLUDED IN THE
ACQUISITION COST PAID BY NON-OPERATOR, AND NON-OPERATOR MUST PAY ITS PRO-RATA
SHARE OF OPERATING COSTS IN ACCORDANCE WITH THIS AGREEMENT INCLUDING THE
ATTACHED ACCOUNTING PROCEDURE.
THE
BOYETT LEASE HAS UP TO FOUR POTENTIAL BARNETT LOCATIONS THAT CAN BE DRILLED.
NON-OPERATOR HAS THE RIGHT, BUT NOT THE OBLIGATION, TO PARTICIPATE IN EACH OF
THESE WELLS WHEN PROPOSED BY OPERATOR. IF NON-OPERATOR ELECTS TO PARTICIPATE IN
THE DRILLING OF ANY ONE OR MORE OF SUCH NEW WELLS, NON-OPERATOR MUST PAY ITS
SHARE OF ACTUAL COSTS ASSOCIATED WITH NON-OPERATOR’S 50% WORKING INTEREST
INCLUDING COMPLETION COSTS (IF COMPLETED) AND PLUGGING COSTS (IF PLUGGED). THE
COSTS OF DRILLING AND COMPLETING OR PLUGGING SUCH WELLS IS NOT INCLUDED IN THE
ACQUISITION COSTS PAID BY NON-OPERATOR. IF NON-OPERATOR DOES NOT ELECT TO
PARTICIPATE IN ANY OF SUCH WELLS, BY WRITTEN NOTICE GIVEN TO OPERATOR WITHIN
SIXTY (60) DAYS AFTER RECEIPT OF THE WRITTEN PROPOSAL NOTICE FROM OPERATOR
(CONTAINING DETAILED INFORMATION REGARDING THE PROPOSED WELL AND AFE COVERING
ESTIMATED COSTS), THEN OPERATOR SHALL BE FREE TO OFFER SUCH WORKING INTEREST IN
SUCH WELL TO ANOTHER PARTY WITHOUT FURTHER OBLIGATION TO NON-OPERATOR. THE
FOREGOING TAKES PRECEDENCE OVER OTHER PROVISIONS OF THIS AGREEMENT.
On or before the day of
______________________, _______, Operator shall commence the drilling of the
Initial Well at the following location:
and shall thereafter
continue the drilling of the well with due diligence to
The drilling of the
Initial Well and the participation therein by all parties is obligatory, subject
to Article VI.C.1. as to participation in Completion operations and Article
VI.F. as to termination of operations and Article XI as to occurrence of force
majeure.
9
B.
Subsequent Operations:
1. Proposed Operations:
If any party hereto should desire to drill any well on the Contract Area other than the Initial
Well, or if any party should desire to Rework, Sidetrack, Deepen,
Recomplete or Plug Back a dry hole or a well no longer capable of producing in
paying quantities in which such party has not otherwise relinquished its
interest in the proposed objective Zone under this agreement, the party desiring
to drill, Rework, Sidetrack, Deepen, Recomplete or Plug Back such a well shall
give written notice of the proposed operation to the parties who have not
otherwise relinquished their interest in such objective Zone under this
agreement and to all other parties in the case of a proposal for Sidetracking or
Deepening, specifying the work to be performed, the location, proposed depth,
objective Zone and the estimated cost of the operation. The parties to whom such
a notice is delivered shall have thirty (30) days after receipt of the notice
within which to notify the party proposing to do the work whether they elect to
participate in the cost of the proposed operation. If a drilling rig is on
location, notice of a proposal to Rework, Sidetrack, Recomplete, Plug Back or
Deepen may be given by telephone and the response period shall be limited to
forty- eight (48) hours, exclusive of Saturday, Sunday and legal holidays.
Failure of a party to whom such notice is delivered to reply within the period
above fixed shall constitute an election by that party not to participate in the
cost of the proposed operation. Any proposal by a party to conduct an operation
conflicting with the operation initially proposed shall be delivered to all
parties within the time and in the manner provided in Article
VI.B.6.
If all
parties to whom such notice is delivered elect to participate in such a proposed
operation, the parties shall be contractually committed to participate therein
provided such operations are commenced within the time period hereafter set
forth, and Operator shall, no later than ninety (90) days after expiration of
the notice period of thirty (30) days (or as promptly as practicable after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
thereafter complete it with due diligence at the risk and expense of the parties
participating therein; provided, however, said commencement date may be extended
upon written notice of same by Operator to the other parties, for a period of up
to thirty (30) additional days if, in the sole opinion of Operator, such
additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of- way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval or acceptance. If the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein or in the force majeure provisions of Article XI) and if any
party hereto still desires to conduct said operation, written notice proposing
same must be resubmitted to the other parties in accordance herewith as if no
prior proposal had been made. Those parties that did not participate in the
drilling of a well for which a proposal to Deepen or Sidetrack is made hereunder
shall, if such parties desire to participate in the proposed Deepening or
Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.
2. Operations by Less Than All
Parties:
(a) Determination of
Participation. If any party to whom such notice is delivered as provided
in Article VI.B.1. or VI.C.1. (Option No. 2) elects not to participate in the
proposed operation, then, in order to be entitled to the benefits of this
Article, the party or parties giving the notice and such other parties as shall
elect to participate in the operation shall, no later than ninety (90) days
after the expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be) actually commence the proposed
operation and complete it with due diligence. Operator shall perform all work
for the account of the Consenting Parties; provided, however, if no drilling rig
or other equipment is on location, and if Operator is a Non-Consenting Party,
the Consenting Parties shall either: (i) request Operator to perform the work
required by such proposed operation for the account of the Consenting Parties,
or (ii) designate one of the Consenting Parties as Operator to perform such
work. The rights and duties granted to and imposed upon the Operator under this
agreement are granted to and imposed upon the party designated as Operator for
an operation in which the original Operator is a Non-Consenting Party.
Consenting Parties, when conducting operations on the Contract Area pursuant to
this Article VI.B.2., shall comply with all terms and conditions of this
agreement.
10
If less
than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the applicable notice period, shall advise
all Parties of the total interest of the parties approving such operation and
its recommendation as to whether the Consenting Parties should proceed with the
operation as proposed. Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday, and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party’s interest as shown on Exhibit “A” or (ii) carry
only its proportionate part (determined by dividing such party’s interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties’ interests, or (iii) carry its proportionate part
(determined as provided in (ii)) of Non-Consenting Parties’ interests together
with all or a portion of its proportionate part of any Non-Consenting Parties’
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10) days, or within twenty-four (24)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained, the
proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator shall
commence such operation within the period provided in Article VI.B.1., subject
to the same extension right as provided therein.
(b) Relinquishment of Interest
for Non-Participation. The entire cost and risk of conducting such
operations shall be borne by the Consenting Parties in the proportions they have
elected to bear same under the terms of the preceding paragraph. Consenting
Parties shall keep the leasehold estates involved in such operations free and
clear of all liens and encumbrances of every kind created by or arising from the
operations of the Consenting Parties. If such an operation results in a dry
hole, then subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall
plug and abandon the well and restore the surface location at their sole cost,
risk and expense; provided, however, that those Non-Consenting Parties that
participated in the drilling, Deepening or Sidetracking of the well shall remain
liable for, and shall pay, their proportionate shares of the cost of plugging
and abandoning the well and restoring the surface location insofar only as those
costs were not increased by the subsequent operations of the Consenting Parties.
If any well drilled, Reworked, Sidetracked, Deepened, Recompleted or Plugged
Back under the provisions of this Article results in a well capable of producing
Oil and/or Gas in paying quantities, the Consenting Parties shall Complete and
equip the well to produce at their sole cost and risk, and the well shall then
be turned over to Operator (if the Operator did not conduct the operation) and
shall be operated by it at the expense and for the account of the Consenting
Parties. Upon commencement of operations for the drilling, Reworking,
Sidetracking, Recompleting, Deepening or Plugging Back of any such well by
Consenting Parties in accordance with the provisions of this Article, each
Non-Consenting Party shall be deemed to have relinquished to Consenting Parties,
and the Consenting Parties shall own and be entitled to receive, in proportion
to their respective interests, all of such Non- Consenting Party’s interest in
the well and share of production therefrom or, in the case of a Reworking,
Sidetracking, Deepening, Recompleting or Plugging Back, or a Completion pursuant
to Article VI.C.1. Option No. 2, all of such Non-Consenting Party’s interest in
the production obtained from the operation in which the Non-Consenting Party did
not elect to participate. Such relinquishment shall be effective until the
proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold (after deducting applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.C. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts), shall equal the total of the following:
(i) 150
%
of each such Non-Consenting Party’s share of the cost of any newly acquired
surface equipment beyond the wellhead connections (including but not limited to
stock tanks, separators, treaters, pumping equipment and piping), plus 100% of
each such Non-Consenting Party’s share of the cost of operation of the well
commencing with first production and continuing until each such Non-Consenting
Party’s relinquished interest shall revert to it under other provisions of this
Article, it being agreed that each Non-Consenting Party’s share of such costs
and equipment will be that interest which would have been chargeable to such
Non-Consenting Party had it participated in the well from the beginning of the
operations; and
(ii) 150 % of (a) that
portion of the costs and expenses of drilling, Reworking, Sidetracking,
Deepening, Plugging Back, testing, Completing, and Recompleting, after deducting
any cash contributions received under Article VIII.C., and of (b) that portion
of the cost of newly acquired equipment in the well (to and including the
wellhead connections), which would have been chargeable to such Non-Consenting
Party if it had participated therein.
11
Notwithstanding
anything to the contrary in this Article VI.B., if the well does not reach the
deepest objective Zone described in the notice proposing the well for reasons
other than the encountering of granite or practically impenetrable substance or
other condition in the hole rendering further operations impracticable, Operator
shall give notice thereof to each Non-Consenting Party who submitted or voted
for an alternative proposal under Article VI.B.6. to drill the well to a
shallower Zone than the deepest objective Zone proposed in the notice under
which the well was drilled, and each such Non-Consenting Party shall have the
option to participate in the initial proposed Completion of the well by paying
its share of the cost of drilling the well to its actual depth, calculated in
the manner provided in Article VI.B.4. (a). If any such Non-Consenting Party
does not elect to participate in the first Completion proposed for such well,
the relinquishment provisions of this Article VI.B.2. (b) shall apply to such
party’s interest.
(c) Reworking, Recompleting or
Plugging Back. An election not to participate in the drilling,
Sidetracking or Deepening of a well shall be deemed an election not to
participate in any Reworking or Plugging Back operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party’s recoupment amount. Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election not to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party’s recoupment amount. Any such Reworking, Recompleting or
Plugging Back operation conducted during the recoupment period shall be deemed
part of the cost of operation of said well and there shall be added to the sums
to be recouped by the Consenting Parties
150
%
of that portion of the costs of the Reworking, Recompleting or Plugging Back
operation which would have been chargeable to such Non-Consenting Party had it
participated therein. If such a Reworking, Recompleting or Plugging Back
operation is proposed during such recoupment period, the provisions of this
Article VI.B. shall be applicable as between said Consenting Parties in said
well.
(d) Recoupment Matters.
During the period of time Consenting Parties are entitled to receive
Non-Consenting Party’s share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all ad valorem,
production, severance, excise, gathering and other taxes, and all royalty,
overriding royalty and other burdens applicable to Non-Consenting Party’s share
of production not excepted by Article III.C.
In the
case of any Reworking, Sidetracking, Plugging Back, Recompleting or Deepening
operation, the Consenting Parties shall be permitted to use, free of cost, all
casing, tubing and other equipment in the well, but the ownership of all such
equipment shall remain unchanged; and upon abandonment of a well after such
Reworking, Sidetracking, Plugging Back, Recompleting or Deepening, the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in value, less cost
of salvage.
Within
ninety (90) days after the completion of any operation under this Article, the
party conducting the operations for the Consenting Parties shall furnish each
Non-Consenting Party with an inventory of the equipment in and connected to the
well, and an itemized statement of the cost of drilling, Sidetracking,
Deepening, Plugging Back, testing, Completing, Recompleting, and equipping the
well for production; or, at its option, the operating party, in lieu of an
itemized statement of such costs of operation, may submit a detailed statement
of monthly billings. Each month thereafter, during the time the Consenting
Parties are being reimbursed as provided above, the party conducting the
operations for the Consenting Parties shall furnish the Non-Consenting Parties
with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well’s
working interest production during the preceding month. In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests. Any amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such Non-
Consenting Party.
12
If and
when the Consenting Parties recover from a Non-Consenting Party’s relinquished
interest the amounts provided for above, the relinquished interests of such
Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on the day
following the day on which such recoupment occurs, and, from and after such
reversion, such Non-Consenting Party shall own the same interest in such well,
the material and equipment in or pertaining thereto, and the production
therefrom as such Non-Consenting Party would have been entitled to had it
participated in the drilling, Sidetracking, Reworking, Deepening, Recompleting
or Plugging Back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and
Exhibit “C” attached hereto.
3. Stand-By Costs: When
a well which has been drilled or Deepened has reached its authorized depth and
all tests have been completed and the results thereof furnished to the parties,
or when operations on the well have been otherwise terminated pursuant to
Article VI.F., stand-by costs incurred pending response to a party’s notice
proposing a Reworking, Sidetracking, Deepening, Recompleting, Plugging Back or
Completing operation in such a well (including the period required under Article
VI.B.6. to resolve competing proposals) shall be charged and borne as part of
the drilling or Deepening operation just completed. Stand-by costs subsequent to
all parties responding, or expiration of the response time permitted, whichever
first occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party’s interest as shown on Exhibit
“A” bears to the total interest as shown on Exhibit “A” of all Consenting
Parties.
In the
event that notice for a Sidetracking operation is given while the drilling rig
to be utilized is on location, any party may request and receive up to five (5)
additional days after expiration of the forty-eight hour response period
specified in Article VI.B.1. within which to respond by paying for all stand-by
costs and other costs incurred during such extended response period; Operator
may require such party to pay the estimated stand-by time in advance as a
condition to extending the response period. If more than one party elects to
take such additional time to respond to the notice, standby costs shall be
allocated between the parties taking additional time to respond on a day-to-day
basis in the proportion each electing party’s interest as shown on Exhibit “A”
bears to the total interest as shown on Exhibit “A” of all the electing
parties.
4. Deepening: If less
than all parties elect to participate in a drilling, Sidetracking, or Deepening
operation proposed pursuant to Article VI.B.1., the interest relinquished by the
Non-Consenting Parties to the Consenting Parties under Article VI.B.2. shall
relate only and be limited to the lesser of (i) the total depth actually drilled
or (ii) the objective depth or Zone of which the parties were given notice under
Article VI.B.1. (“Initial Objective”). Such well shall not be Deepened beyond
the Initial Objective without first complying with this Article to afford the
Non-Consenting Parties the opportunity to participate in the Deepening
operation.
In the
event any Consenting Party desires to drill or Deepen a Non-Consent Well to a
depth below the Initial Objective, such party shall give notice thereof,
complying with the requirements of Article VI.B.1., to all parties (including
Non- Consenting Parties). Thereupon, Articles VI.B.1. and 2. shall apply and all
parties receiving such notice shall have the right to participate or not
participate in the Deepening of such well pursuant to said Articles VI.B.1. and
2. If a Deepening operation is approved pursuant to such provisions, and if any
Non-Consenting Party elects to participate in the Deepening operation, such
Non-Consenting party shall pay or make reimbursement (as the case may be) of the
following costs and expenses.
(a) If
the proposal to Deepen is made prior to the Completion of such well as a well
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) that share of costs
and expenses incurred in connection with the drilling of said well from the
surface to the Initial Objective which Non- Consenting Party would have paid had
such Non-Consenting Party agreed to participate therein, plus the Non-Consenting
Party’s share of the cost of Deepening and of participating in any further
operations on the well in accordance with the other provisions of this
Agreement; provided, however, all costs for testing and Completion or attempted
Completion of the well incurred by Consenting Parties prior to the point of
actual operations to Deepen beyond the Initial Objective shall be for the sole
account of Consenting Parties.
13
(b) If
the proposal is made for a Non-Consent Well that has been previously Completed
as a well capable of producing in paying quantities, but is no longer capable of
producing in paying quantities, such Non-Consenting Party shall pay (or
reimburse Consenting Parties for, as the case may be) its proportionate share of
all costs of drilling, Completing, and equipping said well from the surface to
the Initial Objective, calculated in the manner provided in paragraph (a) above,
less those costs recouped by the Consenting Parties from the sale of production
from the well. The Non-Consenting Party shall also pay its proportionate share
of all costs of re-entering said well. The Non-Consenting Parties’ proportionate
part (based on the percentage of such well Non-Consenting Party would have owned
had it previously participated in such Non-Consent Well) of the costs of
salvable materials and equipment remaining in the hole and salvable surface
equipment used in connection with such well shall be determined in accordance
with Exhibit “C.” If the Consenting Parties have recouped the cost of drilling,
Completing, and equipping the well at the time such Deepening operation is
conducted, then a Non- Consenting Party may participate in the Deepening of the
well with no payment for costs incurred prior to re-entering the well for
Deepening
The
foregoing shall not imply a right of any Consenting Party to propose any
Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.
5. Sidetracking: Any
party having the right to participate in a proposed Sidetracking operation that
does not own an interest in the affected wellbore at the time of the notice
shall, upon electing to participate, tender to the wellbore owners its
proportionate share (equal to its interest in the Sidetracking operation) of the
value of that portion of the existing wellbore to be utilized as
follows:
(a) If
the proposal is for Sidetracking an existing dry hole, reimbursement shall be on
the basis of the actual costs incurred in the initial drilling of the well down
to the depth at which the Sidetracking operation is initiated.
(b) If
the proposal is for Sidetracking a well which has previously produced,
reimbursement shall be on the basis of such party’s proportionate share of
drilling and equipping costs incurred in the initial drilling of the well down
to the depth at which the Sidetracking operation is conducted, calculated in the
manner described in Article VI.B.4(b) above. Such party’s proportionate share of
the cost of the well’s salvable materials and equipment down to the depth at
which the Sidetracking operation is initiated shall be determined in accordance
with the provisions of Exhibit “C.”
6. Order of Preference of
Operations. Except as otherwise specifically provided in this agreement,
if any party desires to propose the conduct of an operation that conflicts with
a proposal that has been made by a party under this Article VI, such party shall
have fifteen (15) days from delivery of the initial proposal, in the case of a
proposal to drill a well or to perform an operation on a well where no drilling
rig is on location, or twenty-four (24) hours, exclusive of Saturday, Sunday and
legal holidays, from delivery of the initial proposal, if a drilling rig is on
location for the well on which such operation is to be conducted, to deliver to
all parties entitled to participate in the proposed operation such party’s
alternative proposal, such alternate proposal to contain the same information
required to be included in the initial proposal. Each party receiving such
proposals shall elect by delivery of notice to Operator within five (5) days
after expiration of the proposal period, or within twenty-four (24) hours
(exclusive of Saturday, Sunday and legal holidays) if a drilling rig is on
location for the well that is the subject of the proposals, to participate in
one of the competing proposals. Any party not electing within the time required
shall be deemed not to have voted. The proposal receiving the vote of parties
owning the largest aggregate percentage interest of the parties voting shall
have priority over all other competing proposals; in the case of a tie vote, the
initial proposal shall prevail. Operator shall deliver notice of such result to
all parties entitled to participate in the operation within five (5) days after
expiration of the election period (or within twenty-four (24) hours, exclusive
of Saturday, Sunday and legal holidays, if a drilling rig is on location). Each
party shall then have two (2) days (or twenty-four (24) hours if a rig is on
location) from receipt of such notice to elect by delivery of notice to Operator
to participate in such operation or to relinquish interest in the affected well
pursuant to the provisions of Article VI.B.2.; failure by a party to deliver
notice within such period shall be deemed an election not to participate in
the prevailing proposal.
7. Conformity to Spacing
Pattern. Notwithstanding the provisions of this Article VI.B.2., it is
agreed that no wells shall be proposed to be drilled to or Completed in or
produced from a Zone from which a well located elsewhere on the Contract Area is
producing, unless such well conforms to the then-existing well spacing pattern
for such Zone.
8. Paying Wells. No
party shall conduct any Reworking, Deepening, Plugging Back, Completion,
Recompletion, or Sidetracking operation under this agreement with respect to any
well then capable of producing in paying quantities except with the consent of
all parties that have not relinquished interests in the well at the time of such
operation.
14
C.
Completion of Wells; Reworking and Plugging Back:
1. Completion: Without
the consent of all parties, no well shall be drilled, Deepened or Sidetracked,
except any well drilled, Deepened or Sidetracked pursuant to the provisions of
Article VI.B.2. of this agreement. Consent to the drilling, Deepening or
Sidetracking shall include:
x
|
Option No. 1:
All necessary expenditures for the drilling, Deepening or Sidetracking,
testing, Completing and equipping of the well, including necessary tankage
and/or surface facilities.
|
o
|
Option No. 2:
All necessary expenditures for the drilling, Deepening or Sidetracking and
testing of the well. When such well has reached its authorized depth, and
all logs, cores and other tests have been completed, and the results
thereof furnished to the parties, Operator shall give immediate notice to
the Non-Operators having the right to participate in a Completion attempt
whether or not Operator recommends attempting to Complete the well,
together with Operator’s AFE for Completion costs if not previously
provided. The parties receiving such notice shall have forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) in which to elect
by delivery of notice to Operator to participate in a recommended
Completion attempt or to make a Completion proposal with an accompanying
AFE. Operator shall deliver any such Completion proposal, or any
Completion proposal conflicting with Operator’s proposal, to the other
parties entitled to participate in such Completion in accordance with the
procedures specified in Article VI.B.6. Election to participate in a
Completion attempt shall include consent to all necessary expenditures for
the Completing and equipping of such well, including necessary tankage
and/or surface facilities but excluding any stimulation operation not
contained on the Completion AFE. Failure of any party receiving such
notice to reply within the period above fixed shall constitute an election
by that party not to
participate in the cost of the Completion attempt; provided, that Article
VI.B.6. shall control in the case of conflicting Completion proposals. If
one or more, but less than all of the parties, elect to attempt a
Completion, the provision of Article VI.B.2. hereof (the phrase
“Reworking, Sidetracking, Deepening, Recompleting or Plugging Back” as
contained in Article VI.B.2. shall be deemed to include “Completing”)
shall apply to the operations thereafter conducted by less than all
parties; provided, however, that Article VI.B.2. shall apply separately to
each separate Completion or Recompletion attempt undertaken hereunder, and
an election to become a Non-Consenting Party as to one Completion or
Recompletion attempt shall not prevent a party from becoming a Consenting
Party in subsequent Completion or Recompletion attempts regardless whether
the Consenting Parties as to earlier Completions or Recompletion have
recouped their costs pursuant to Article VI.B.2.; provided further, that
any recoupment of costs by a Consenting Party shall be made solely from
the production attributable to the Zone in which the Completion attempt is
made. Election by a previous Non-Consenting party to participate in a
subsequent Completion or Recompletion attempt shall require such party to
pay its proportionate share of the cost of salvable materials and
equipment installed in the well pursuant to the previous Completion or
Recompletion attempt, insofar and only insofar as such materials and
equipment benefit the Zone in which such party participates in a
Completion attempt.
|
2. Rework, Recomplete or Plug
Back: No well shall be Reworked, Recompleted or Plugged Back except a
well Reworked, Recompleted, or Plugged Back pursuant to the provisions of
Article VI.B.2. of this agreement. Consent to the Reworking, Recompleting or
Plugging Back of a well shall include all necessary expenditures in conducting
such operations and Completing and equipping of said well, including necessary
tankage and/or surface facilities.
15
D.
Other Operations:
Operator
shall not undertake any single project reasonably estimated to require an
expenditure in excess of FIFTEEN
THOUSAND Dollars
($ 15,000.00 ) except in
connection with the drilling, Sidetracking, Reworking, Deepening, Completing,
Recompleting or Plugging Back of a well that has been previously authorized by
or pursuant to this agreement; provided, however, that, in case of explosion,
fire, flood or other sudden emergency, whether of the same or different nature,
Operator may take such steps and incur such expenses as in its opinion are
required to deal with the emergency to safeguard life and property but Operator,
as promptly as possible, shall report the emergency to the other parties. If
Operator prepares an AFE for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project
costing in excess of FIFTEEN
THOUSAND Dollars
($ 15,000.00 ). Any party
who has not relinquished its interest in a well shall have the right to propose
that Operator perform repair work or undertake the installation of artificial
lift equipment or ancillary production facilities such as salt water disposal
wells or to conduct additional work with respect to a well drilled hereunder or
other similar project (but not including the installation of gathering lines or
other transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed
exclusively be those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within thirty (30) days thereof
Operator secures the written consent of any party or parties owning at least
66-2/3% of the
interests of the parties entitled to participate in such operation, each party
having the right to participate in such project shall be bound by the terms of
such proposal and shall be obligated to pay its proportionate share of the costs
of the proposed project as if it had consented to such project pursuant to the
terms of the proposal.
E.
Abandonment of Wells:
1. Abandonment of Dry
Holes: Except for any well drilled or Deepened pursuant to Article
VI.B.2., any well which has been drilled or Deepened under the terms of this
agreement and is proposed to be completed as a dry hole shall not be plugged and
abandoned without the consent of all parties. Should Operator, after diligent
effort, be unable to contact any party, or should any party fail to reply within
forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after
delivery of notice of the proposal to plug and abandon such well, such party
shall be deemed to have consented to the proposed abandonment. All such wells
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of the parties who participated in the cost of
drilling or Deepening such well. Any party who objects to plugging and
abandoning such well by notice delivered to Operator within forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) after delivery of
notice of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party
to provide proof reasonably satisfactory to Operator of its financial capability
to conduct such operations or to take over the well within such period or
thereafter to conduct operations on such well or plug and abandon such well
shall entitle Operator to retain or take possession of the well and plug and
abandon the well. The party taking over the well shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.
2. Abandonment of Wells That
Have Produced: Except for any well in which a Non-Consent operation has
been conducted hereunder for which the Consenting Parties have not been fully
reimbursed as herein provided, any well which has been completed as a producer
shall not be plugged and abandoned without the consent of all parties. If all
parties consent to such abandonment, the well shall be plugged and abandoned in
accordance with applicable regulations and at the cost, risk and expense of all
the parties hereto. Failure of a party to reply within sixty (60) days of
delivery of notice of proposed abandonment shall be deemed an election to
consent to the proposal. If, within sixty (60) days after delivery of notice of
the proposed abandonment of any well, all parties do not agree to the
abandonment of such well, those wishing to continue its operation from the Zone
then open to production shall be obligated to take over the well as of the
expiration of the applicable notice period and shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations on the well conducted by such parties.
Failure of such party or parties to provide proof reasonably satisfactory to
Operator of their financial capability to conduct such operations or to take
over the well within the required period or thereafter to conduct operations on
such well shall entitle operator to retain or take possession of such well and
plug and abandon the well.
16
Parties
taking over a well as provided herein shall tender to each of the other parties
its proportionate share of the value of the well’s salvable material and
equipment, determined in accordance with the provisions of Exhibit “C,” less the
estimated cost of salvaging and the estimated cost of plugging and abandoning
and restoring the surface; provided, however, that in the event the estimated
plugging and abandoning and surface restoration costs and the estimated cost of
salvaging are higher than the value of the well’s salvable material and
equipment, each of the abandoning parties shall tender to the parties continuing
operations their proportionate shares of the estimated excess cost. Each
abandoning party shall assign to the non-abandoning parties, without warranty,
express or implied, as to title or as to quantity, or fitness for use of the
equipment and material, all of its interest in the wellbore of the well and
related equipment, together with its interest in the Leasehold insofar and only
insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes and Oil and Gas Interest, such party shall execute and
deliver to the non- abandoning party or parties an oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit “B.” The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract
Area.
Thereafter,
abandoning parties shall have no further responsibility, liability, or interest
in the operation of or production from the well in the Zone then open other than
the royalties retained in any lease made under the terms of this Article. Upon
request, Operator shall continue to operate the assigned well for the account of
the non-abandoning parties at the rates and charges contemplated by this
agreement, plus any additional cost and charges which may arise as the result of
the separate ownership of the assigned well. Upon proposed abandonment of the
producing Zone assigned or leased, the assignor or lessor shall then have the
option to repurchase its prior interest in the well (using the same valuation
formula) and participate in further operations therein subject to the provisions
hereof.
3. Abandonment of Non-Consent
Operations: The provisions of Article VI.E.1. or VI.E.2. above shall be
applicable as between Consenting Parties in the event of the proposed
abandonment of any well excepted from said Articles; provided, however, no well
shall be permanently plugged and abandoned unless and until all parties having
the right to conduct further operations therein have been notified of the
proposed abandonment and afforded the opportunity to elect to take over the well
in accordance with the provisions of this Article VI.E.; and provided further,
that Non-Consenting Parties who own an interest in a portion of the well shall
pay their proportionate shares of abandonment and surface restoration cost for
such well as provided in Article VI.B.2.(b).
F.
Termination of Operations:
Upon the
commencement of an operation for the drilling, Reworking, Sidetracking, Plugging
Back, Deepening, testing, Completion or plugging of a well, including but not limited
to the Initial Well, such operation shall not be terminated without
consent of parties bearing 100 %
of the costs of such operation; provided, however, that in the event granite or
other practically impenetrable substance or condition in the hole is encountered
which renders further operations impractical, Operator may discontinue
operations and give notice of such condition in the manner provided in Article
VI.B.1, and the provisions of Article VI.B. or VI.E. shall thereafter apply to
such operation, as appropriate.
G.
Taking Production in Kind:
THE PARTIES SHALL HAVE NO
RIGHT TO TAKE ANY PRODUCTION IN KIND.
o Option No. 1: Gas
Balancing Agreement Attached
17
Each
party shall take in kind or separately dispose of its proportionate share of all
Oil and Gas produced from the Contract Area, exclusive of production which may
be used in development and producing operations and in preparing and treating
Oil and Gas for marketing purposes and production unavoidably lost. Any extra
expenditure incurred in the taking in kind or separate disposition by any party
of its proportionate share of the production shall be borne by such party. Any
party taking its share of production in kind shall be required to pay for only
its proportionate share of such part of Operator’s surface facilities which it
uses.
Each
party shall execute such division orders and contracts as may be necessary for
the sale of its interest in production from the Contract Area, and, except as
provided in Article VII.B., shall be entitled to receive payment directly from
the purchaser thereof for its share of all production.
If any
party fails to make the arrangements necessary to take in kind or separately
dispose of its proportionate share of the Oil produced from the Contract Area,
Operator shall have the right, subject to the revocation at will by the party
owning it, but not the obligation, to purchase such Oil or sell it to others at
any time and from time to time, for the account of the non-taking party. Any
such purchase or sale by Operator may be terminated by Operator upon at least
ten (10) days written notice to the owner of said production and shall be
subject always to the right of the owner of the production upon at least ten
(10) days written notice to Operator to exercise at any time its right to take
in kind, or separately dispose of, its share of all Oil not previously delivered
to a purchaser. Any purchase or sale by Operator of any other party’s share of
Oil shall be only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1) year.
Any such
sale by Operator shall be in a manner commercially reasonable under the
circumstances but Operator shall have no duty to share any existing market or to
obtain a price equal to that received under any existing market. The sale or
delivery by Operator of a non-taking party’s share of Oil under the terms of any
existing contract of Operator shall not give the non-taking party any interest
in or make the non-taking party a party to said contract. No purchase shall be
made by Operator without first giving the non-taking party at least ten (10)
days written notice of such intended purchase and the price to be paid or the
pricing basis to be used.
All
parties shall give timely written notice to Operator of their Gas marketing
arrangements for the following month, excluding price, and shall notify Operator
immediately in the event of a change in such arrangements. Operator shall
maintain records of all marketing arrangements, and of volumes actually sold or
transported, which records shall be made available to Non-Operators upon
reasonable request.
In the
event one or more parties’ separate disposition of its share of the Gas causes
split-stream deliveries to separate pipelines and/or deliveries which on a
day-to-day basis for any reason are not exactly equal to a party’s respective
proportion- ate share of total Gas sales to be allocated to it, the balancing or
accounting between the parties shall be in accordance with any Gas balancing
agreement between the parties hereto, whether such an agreement is attached as
Exhibit “E” or is a separate agreement. Operator shall give notice to all
parties of the first sales of Gas from any well under this
agreement.
x Option No. 2: No Gas
Balancing Agreement:
Each
party shall take in kind or separately dispose of its proportionate share of all
Oil and Gas produced from the Contract Area, exclusive of production which may
be used in development and producing operations and in preparing and treating
Oil and Gas for marketing purposes and production unavoidably lost. Any extra
expenditures incurred in the taking in kind or separate disposition by any party
of its proportionate share of the production shall be borne by such party. Any
party taking its share of production in kind shall be required to pay for only
its proportionate share of such part of Operator’s surface facilities which it
uses.
18
Each
party shall execute such division orders and contracts as may be necessary for
the sale of its interest in production from the Contract Area, and, except as
provided in Article VII.B., shall be entitled to receive payment directly from
the purchaser thereof for its share of all production.
If any
party fails to make the arrangements necessary to take in kind or separately
dispose of its proportionate share of the Oil and/or Gas produced from the
Contract Area, Operator shall have the right, subject to the revocation at will
by the party owning it, but not the obligation, to purchase such Oil and/or Gas
or sell it to others at any time and from time to time, for the account of the
non-taking party. Any such purchase or sale by Operator may be terminated by
Operator upon at least ten (10) days written notice to the owner of said
production and shall be subject always to the right of the owner of the
production upon at least ten (10) days written notice to Operator to exercise
its right to take in kind, or separately dispose of, its share of all Oil and/or
Gas not previously delivered to a purchaser; provided, however, that the
effective date of any such revocation may be deferred at Operator’s election for
a period not to exceed ninety (90) days if Operator has committed such
production to a purchase contract having a term extending beyond such ten (10)
-day period. Any purchase or sale by Operator of any other party’s share of Oil
and/or Gas shall be only for such reasonable periods of time as are consistent
with the minimum needs of the industry under the particular circumstances, but
in no event for a period in excess of one (1) year.
Any such
sale by Operator shall be in a manner commercially reasonable under the
circumstances, but Operator shall have no duty to share any existing market or
transportation arrangement or to obtain a price or transportation fee equal to
that received under any existing market or transportation arrangement. The sale
or delivery by Operator of a non-taking party’s share of production under the
terms of any existing contract of Operator shall not give the non-taking party
any interest in or make the non-taking party a party to said contract. No
purchase of Oil and Gas and no sale of Gas shall be made by Operator without
first giving the non-taking party ten days written notice of such intended
purchase or sale and the price to be paid or the pricing basis to be used.
Operator shall give notice to all parties of the first sale of Gas from any well
under this Agreement.
All
parties shall give timely written notice to Operator of their Gas marketing
arrangements for the following month, excluding price, and shall notify Operator
immediately in the event of a change in such arrangements. Operator shall
maintain records of all marketing arrangements, and of volumes actually sold or
transported, which records shall be made available to Non-Operators upon
reasonable request.
ARTICLE
VII.
EXPENDITURES
AND LIABILITY OF PARTIES
A.
Liability of Parties:
The
liability of the parties shall be several, not joint or collective. Each party
shall be responsible only for its obligations, and shall be liable only for its
proportionate share of the costs of developing and operating the Contract Area.
Accordingly, the liens granted among the parties in Article VII.B. are given to
secure only the debts of each severally, and no party shall have any liability
to third parties hereunder to satisfy the default of any other party in the
payment of any expense or obligation hereunder. It is not the intention of the
parties to create, nor shall this agreement be construed as creating, a mining
or other partnership, joint venture, agency relationship or association, or to
render the parties liable as partners, co-venturers, or principals. In their
relations with each other under this agreement, the parties shall not be
considered fiduciaries or to have established a confidential relationship but
rather shall be free to act on an arm’s-length basis in accordance with their
own respective self-interest, subject, however, to the obligation of the parties
to act in good faith in their dealings with each other with respect to
activities hereunder.
19
B.
Liens and Security Interests:
Each
party grants to the other parties hereto a lien upon any interest it now owns or
hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in the
Contract Area, and a security interest and/or purchase money security interest
in any interest it now owns or hereafter acquires in the personal property and
fixtures on or used or obtained for use in connection therewith, to secure
performance of all of its obligations under this agreement including but not
limited to payment of expense, interest and fees, the proper disbursement of all
monies paid hereunder, the assignment or relinquishment of interest in Oil and
Gas Leases as required hereunder, and the proper performance of operations
hereunder. Such lien and security interest granted by each party hereto shall
include such party’s leasehold interests, working interests, operating rights,
and royalty and overriding royalty interests in the Contract Area now owned or
hereafter acquired and in lands pooled or unitized therewith or otherwise
becoming subject to this agreement, the Oil and Gas when extracted therefrom and
equipment situated thereon or used or obtained for use in connection therewith
(including, without limitation, all wells, tools, and tubular goods), and
accounts (including, without limitation, accounts arising from gas imbalances or
from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating thereto or arising therefrom, and all proceeds and
products of the foregoing.
To
perfect the lien and security agreement provided herein, each party hereto shall
execute and acknowledge the recording supplement and/or any financing statement
prepared and submitted by any party hereto in conjunction herewith or at any
time following execution hereof, and Operator is authorized to file this
agreement or the recording supplement executed herewith as a lien or mortgage in
the applicable real estate records and as a financing statement with the proper
officer under the Uniform Commercial Code in the state in which the Contract
Area is situated and such other states as Operator shall deem appropriate to
perfect the security interest granted hereunder. Any party may file this
agreement, the recording supplement executed herewith, or such other documents
as it deems necessary as a lien or mortgage in the applicable real estate
records and/or a financing statement with the proper officer under the Uniform
Commercial Code.
Each
party represents and warrants to the other parties hereto that the lien and
security interest granted by such party to the other parties shall be a first
and prior lien, and each party hereby agrees to maintain the priority of said
lien and security interest against all persons acquiring an interest in Oil and
Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.
To the
extent that parties have a security interest under the Uniform Commercial Code
of the state in which the Contract Area is situated, they shall be entitled to
exercise the rights and remedies of a secured party under the Code. The bringing
of a suit and the obtaining of judgment by a party for the secured indebtedness
shall not be deemed an election of remedies or otherwise affect the lien rights
or security interest as security for the payment thereof. In addition, upon
default by any party in the payment of its share of expenses, interests or fees,
or upon the improper use of funds by the Operator, the other parties shall have
the right, without prejudice to other rights or remedies, to collect from the
purchaser the proceeds from the sale of such defaulting party’s share of Oil and
Gas until the amount owed by such party, plus interest as provided in “Exhibit
C,” has been received, and shall have the right to offset the amount owed
against the proceeds from the sale of such defaulting party’s share of Oil and
Gas. All purchasers of production may rely on a notification of default from the
non-defaulting party or parties stating the amount due as a result of the
default, and all parties waive any recourse available against purchasers for
releasing production proceeds as provided in this paragraph.
If any
party fails to pay its share of cost within one hundred twenty (120) days after
rendition of a statement therefor by Operator, the non-defaulting parties,
including Operator, shall upon request by Operator, pay the unpaid amount in the
proportion that the interest of each such party bears to the interest of all
such parties. The amount paid by each party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in Article
VII.B., and each paying party may independently pursue any remedy available
hereunder or otherwise.
If any
party does not perform all of its obligations hereunder, and the failure to
perform subjects such party to foreclosure or execution proceedings pursuant to
the provisions of this agreement, to the extent allowed by governing law, the
defaulting party waives any available right of redemption from and after the
date of judgment, any required valuation or appraisement of the mortgaged or
secured property prior to sale, any available right to stay execution or to
require a marshaling of assets and any required bond in the event a receiver is
appointed. In addition, to the extent permitted by applicable law, each party
hereby grants to the other parties a power of sale as to any property that is
subject to the lien and security rights granted hereunder, such power to be
exercised in the manner provided by applicable law or otherwise in a
commercially reasonable manner and upon reasonable notice.
20
Each
party agrees that the other parties shall be entitled to utilize the provisions
of Oil and Gas lien law or other lien law of any state in which the Contract
Area is situated to enforce the obligations of each party hereunder. Without
limiting the generality of the foregoing, to the extent permitted by applicable
law, Non-Operators agree that Operator may invoke or utilize the mechanics’ or
materialmen’s lien law of the state in which the Contract Area is situated in
order to secure the payment to Operator of any sum due hereunder for services
performed or materials supplied by Operator.
C.
Advances:
Operator,
at its election, shall have the right from time to time to demand and receive
from one or more of the other parties payment in advance of their respective
shares of the estimated amount of the expense to be incurred in operations
hereunder during the next succeeding month, which right may be exercised only by
submission to each such party of an itemized statement of such estimated
expense, together with an invoice for its share thereof. Each such statement and
invoice for the payment in advance of estimated expense shall be submitted on or
before the 20th day of the next preceding month. Each party shall pay to
Operator its proportionate share of such estimate within fifteen (15) days after
such estimate and invoice is received. If any party fails to pay its share of
said estimate within said time, the amount due shall bear interest as provided
in Exhibit “C” until paid. Proper adjustment shall be made monthly between
advances and actual expense to the end that each party shall bear and pay its
proportionate share of actual expenses incurred, and no more.
D.
Defaults and Remedies:
If any
party fails to discharge any financial obligation under this agreement,
including without limitation the failure to make any advance under the preceding
Article VII.C. or any other provision of this agreement, within the period
required for such payment hereunder, then in addition to the remedies provided
in Article VII.B. or elsewhere in this agreement, the remedies specified below
shall be applicable. For purposes of this Article VII.D., all notices and
elections shall be delivered only by Operator, except that Operator shall
deliver any such notice and election requested by a non-defaulting Non-Operator,
and when Operator is the party in default, the applicable notices and elections
can be delivered by any Non-Operator. Election of any one or more of the
following remedies shall not preclude the subsequent use of any other remedy
specified below or otherwise available to a non-defaulting party.
1. Suspension of Rights:
Any party may deliver to the party in default a Notice of Default, which shall
specify the default, specify the action to be taken to cure the default, and
specify that failure to take such action will result in the exercise of one or
more of the remedies provided in this Article. If the default is not cured
within thirty (30) days of the delivery of such Notice of Default, all of the
rights of the defaulting party granted by this agreement may upon notice be
suspended until the default is cured, without prejudice to the right of the
non-defaulting party or parties to continue to enforce the obligations of the
defaulting party previously accrued or thereafter accruing under this agreement.
If Operator is the party in default, the Non-Operators shall have in addition
the right, by vote of Non-Operators owning a majority in interest in the
Contract Area after excluding the voting interest of Operator, to appoint a new
Operator effective immediately. The rights of a defaulting party that may be
suspended hereunder at the election of the non-defaulting parties shall include,
without limitation, the right to receive information as to any operation
conducted hereunder during the period of such default, the right to elect to
participate in an operation proposed under Article VI.B. of this agreement, the
right to participate in an operation being conducted under this agreement even
if the party has previously elected to participate in such operation, and the
right to receive proceeds of production from any well subject to this
agreement.
2. Suit for Damages:
Non-defaulting parties or Operator for the benefit of non-defaulting parties may
sue (at joint account expense) to collect the amounts in default, plus interest
accruing on the amounts recovered from the date of default until the date of
collection at the rate specified in Exhibit “C” attached hereto. Nothing herein
shall prevent any party from suing any defaulting party to collect consequential
damages accruing to such party as a result of the default.
21
3. Deemed Non-Consent:
The non-defaulting party may deliver a written Notice of Non-Consent Election to
the defaulting party at any time after the expiration of the thirty-day cure
period following delivery of the Notice of Default, in which event if the
billing is for the drilling a new well or the Plugging Back, Sidetracking,
Reworking or Deepening of a well which is to be or has been plugged as a dry
hole, or for the Completion or Recompletion of any well, the defaulting party
will be conclusively deemed to have elected not to participate in the operation
and to be a Non-Consenting Party with respect thereto under Article VI.B. or
VI.C., as the case may be, to the extent of the costs unpaid by such party,
notwithstanding any election to participate theretofore made. If election is
made to proceed under this provision, then the non-defaulting parties may not
elect to sue for the unpaid amount pursuant to Article VII.D.2.
Until the
delivery of such Notice of Non-Consent Election to the defaulting party, such
party shall have the right to cure its default by paying its unpaid share of
costs plus interest at the rate set forth in Exhibit “C,” provided, however,
such payment shall not prejudice the rights of the non-defaulting parties to
pursue remedies for damages incurred by the non- defaulting parties as a result
of the default. Any interest relinquished pursuant to this Article VII.D.3.
shall be offered to the non-defaulting parties in proportion to their interests,
and the non-defaulting parties electing to participate in the ownership of such
interest shall be required to contribute their shares of the defaulted amount
upon their election to participate therein.
4. Advance Payment: If a
default is not cured within thirty (30) days of the delivery of a Notice of
Default, Operator, or Non-Operators if Operator is the defaulting party, may
thereafter require advance payment from the defaulting party of such defaulting
party’s anticipated share of any item of expense for which Operator, or
Non-Operators, as the case may be, would be entitled to reimbursement under any
provision of this agreement, whether or not such expense was the subject of the
previous default. Such right includes, but is not limited to, the right to
require advance payment for the estimated costs of drilling a well or Completion
of a well as to which an election to participate in drilling or Completion has
been made. If the defaulting party fails to pay the required advance payment,
the non-defaulting parties may pursue any of the remedies provided in the
Article VII.D. or any other default remedy provided elsewhere in this agreement.
Any excess of funds advanced remaining when the operation is completed and all
costs have been paid shall be promptly returned to the advancing
party.
5. Costs and Attorneys’
Fees: In the event any party is required to bring legal proceedings to
enforce any financial obligation of a party hereunder, the prevailing party in
such action shall be entitled to recover all court costs, costs of collection,
and a reasonable attorney’s fee, which the lien provided for herein shall also
secure.
E.
Rentals, Shut-in Well Payments and Minimum Royalties:
Rentals,
shut-in well payments and minimum royalties which may be required under the
terms of any lease shall be paid by the party or parties who subjected such
lease to this agreement at its or their expense. In the event two or more
parties own and have contributed interests in the same lease to this agreement,
such parties may designate one of such parties to make said payments for and on
behalf of all such parties. Any party may request, and shall be entitled to
receive, proper evidence of all such payments. In the event of failure to make
proper payment of any rental, shut-in well payment or minimum royalty through
mistake or oversight where such payment is required to continue the lease in
force, any loss which results from such non-payment shall be borne in accordance
with the provisions of Article IV.B.2.
Operator
shall notify Non-Operators of the anticipated completion of a shut-in well, or
the shutting in or return to production of a producing well, at least five (5)
days (excluding Saturday, Sunday, and legal holidays) prior to taking such
action, or at the earliest opportunity permitted by circumstances, but assumes
no liability for failure to do so. In the event of failure by Operator to so
notify Non-Operators, the loss of any lease contributed hereto by Non-Operators
for failure to make timely payments of any shut-in well payment shall be borne
jointly by the parties hereto under the provisions of Article
IV.B.3.
22
F.
Taxes:
Beginning
with the first calendar year after the effective date hereof, Operator shall
render for ad valorem taxation all property subject to this agreement which by
law should be rendered for such taxes, and it shall pay all such taxes assessed
thereon before they become delinquent. Prior to the rendition date, each
Non-Operator shall furnish Operator information as to burdens (to include, but
not be limited to, royalties, overriding royalties and production payments) on
Leases and Oil and Gas Interests contributed by such Non-Operator. If the
assessed valuation of any Lease is reduced by reason of its being subject to
outstanding excess royalties, overriding royalties or production payments, the
reduction in ad valorem taxes resulting therefrom shall inure to the benefit of
the owner or owners of such Lease, and Operator shall adjust the charge to such
owner or owners so as to reflect the benefit of such reduction. If the ad
valorem taxes are based in whole or in part upon separate valuations of each
party’s working interest, then notwithstanding anything to the contrary herein,
charges to the joint account shall be made and paid by the parties hereto in
accordance with the tax value generated by each party’s working interest.
Operator shall bill the other parties for their proportionate shares of all tax
payments in the manner provided in Exhibit “C.”
If
Operator considers any tax assessment improper, Operator may, at its discretion,
protest within the time and manner prescribed by law, and prosecute the protest
to a final determination, unless all parties agree to abandon the protest prior
to final determination. During the pendency of administrative or judicial
proceedings, Operator may elect to pay, under protest, all such taxes and any
interest and penalty. When any such protested assessment shall have been finally
determined, Operator shall pay the tax for the joint account, together with any
interest and penalty accrued, and the total cost shall then be assessed against
the parties, and be paid by them, as provided in Exhibit “C.”
Each
party shall pay or cause to be paid all production, severance, excise, gathering
and other taxes imposed upon or with respect to the production or handling of
such party’s share of Oil and Gas produced under the terms of this
agreement.
ARTICLE
VIII.
ACQUISITION,
MAINTENANCE OR TRANSFER OF INTEREST
A.
Surrender of Leases:
The
Leases covered by this agreement, insofar as they embrace acreage in the
Contract Area, shall not be surrendered in whole or in part unless all parties
consent thereto.
However,
should any party desire to surrender its interest in any Lease or in any portion
thereof, such party shall give written notice of the proposed surrender to all
parties, and the parties to whom such notice is delivered shall have thirty (30)
days after delivery of the notice within which to notify the party proposing the
surrender whether they elect to consent thereto. Failure of a party to whom such
notice is delivered to reply within said 30-day period shall constitute a
consent to the surrender of the Leases described in the notice. If all parties
do not agree or consent thereto, the party desiring to surrender shall assign,
without express or implied warranty of title, all of its interest in such Lease,
or portion thereof, and any well, material and equipment which may be located
thereon and any rights in production thereafter secured, to the parties not
consenting to such surrender. If the interest of the assigning party is or
includes an Oil and Gas Interest, the assigning party shall execute and deliver
to the party or parties not consenting to such surrender an oil and gas lease
covering such Oil and Gas Interest for a term of one (1) year and so long
thereafter as Oil and/or Gas is produced from the land covered thereby, such
lease to be on the form attached hereto as Exhibit “B.” Upon such assignment or
lease, the assigning party shall be relieved from all obligations thereafter
accruing, but not theretofore accrued, with respect to the interest assigned or
leased and the operation of any well attributable thereto, and the assigning
party shall have no further interest in the assigned or leased premises and its
equipment and production other than the royalties retained in any lease made
under the terms of this Article. The party assignee or lessee shall pay to the
party assignor or lessor the reasonable salvage value of the latter’s interest
in any well’s salvable materials and equipment attributable to the assigned or
leased acreage. The value of all salvable materials and equipment shall be
determined in accordance with the provisions of Exhibit “C,” less the estimated
cost of salvaging and the estimated cost of plugging and abandoning and
restoring the surface. If such value is less than such costs, then the party
assignor or lessor shall pay to the party assignee or lessee the amount of such
deficit. If the assignment or lease is in favor of more than one party, the
interest shall be shared by such parties in the proportions that the interest of
each bears to the total interest of all such parties. If the interest of the
parties to whom the assignment is to be made varies according to depth, then the
interest assigned shall similarly reflect such variances.
23
Any
assignment, lease or surrender made under this provision shall not reduce or
change the assignor’s, lessor’s or surrendering party’s interest as it was
immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.
B.
Renewal or Extension of Leases:
If any
party secures a renewal or replacement of an Oil and Gas Lease or Interest
subject to this agreement, then all other parties shall be notified promptly
upon such acquisition or, in the case of a replacement Lease taken before
expiration of an existing Lease, promptly upon expiration of the existing Lease.
The parties notified shall have the right for a period of thirty (30) days
following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interest
held at that time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring
party.
If some,
but less than all, of the parties elect to participate in the purchase of a
renewal or replacement Lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal or replacement Lease. The acquisition of a
renewal or replacement Lease by any or all of the parties hereto shall not cause
a readjustment of the interests of the parties stated in Exhibit “A,” but any
renewal or replacement Lease in which less than all parties elect to participate
shall not be subject to this agreement but shall be deemed subject to a separate
Operating Agreement in the form of this agreement.
If the
interests of the parties in the Contract Area vary according to depth, then
their right to participate proportionately in renewal or replacement Leases and
their right to receive an assignment of interest shall also reflect such depth
variances.
The
provisions of this Article shall apply to renewal or replacement Leases whether
they are for the entire interest covered by the expiring Lease or cover only a
portion of its area or an interest therein. Any renewal or replacement Lease
taken before the expiration of its predecessor Lease, or taken or contracted for
or becoming effective within six (6) months after the expiration of the existing
Lease, shall be subject to this provision so long as this agreement is in effect
at the time of such acquisition or at the time the renewal or replacement Lease
becomes effective; but any Lease taken or contracted for more than six (6)
months after the expiration of an existing Lease shall not be deemed a renewal
or replacement Lease and shall not be subject to the provisions of this
agreement.
The
provisions in this Article shall also be applicable to extensions of Oil and Gas
Leases.
C.
Acreage or Cash Contributions:
While
this agreement is in force, if any party contracts for a contribution of cash
towards the drilling of a well or any other operation on the Contract Area, such
contribution shall be paid to the party who conducted the drilling or other
operation and shall be applied by it against the cost of such drilling or other
operation. If the contribution be in the form of acreage, the party to whom the
contribution is made shall promptly tender an assignment of the acreage, without
warranty of title, to the Drilling Parties in the proportions said Drilling
Parties shared the cost of drilling the well. Such acreage shall become a
separate Contract Area and, to the extent possible, be governed by provisions
identical to this agreement. Each party shall promptly notify all other parties
of any acreage or cash contributions it may obtain in support of any well or any
other operation on the Contract Area. The above provisions shall also be
applicable to optional rights to earn acreage outside the Contract Area which
are in support of well drilled inside Contract Area.
If any
party contracts for any consideration relating to disposition of such party’s
share of substances produced hereunder, such consideration shall not be deemed a
contribution as contemplated in this Article VIII.C.
24
D.
Assignment; Maintenance of Uniform Interest:
For the
purpose of maintaining uniformity of ownership in the Contract Area in the Oil
and Gas Leases, Oil and Gas Interests, wells, equipment and production covered
by this agreement no party shall sell, encumber, transfer or make other
disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests
embraced within the Contract Area or in wells, equipment and production unless
such disposition covers either:
1. the
entire interest of the party in all Oil and Gas Leases, Oil and Gas Interests,
wells, equipment and production; or
2. an
equal undivided percent of the party’s present interest in all Oil and Gas
Leases, Oil and Gas Interests, wells, equipment and production in the Contract
Area.
Every
sale, encumbrance, transfer or other disposition made by any party shall be made
expressly subject to this agreement and shall be made without prejudice to the
right of the other parties, and any transferee of an ownership interest in any
Oil and Gas Lease or Interest shall be deemed a party to this agreement as to
the interest conveyed from and after the effective date of the transfer of
ownership; provided, however, that the other parties shall not be required to
recognize any such sale, encumbrance, transfer or other disposition for any
purpose hereunder until thirty (30) days after they have received a copy of the
instrument of transfer or other satisfactory evidence thereof in writing from
the transferor or transferee. No assignment or other disposition of interest by
a party shall relieve such party of obligations previously incurred by such
party hereunder with respect to the interest transferred, including without
limitation the obligation of a party to pay all costs attributable to an
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.
If, at
any time the interest of any party is divided among and owned by four or more
co-owners, Operator, at its discretion, may require such co-owners to appoint a
single trustee or agent with full authority to receive notices, approve
expenditures, receive billings for and approve and pay such party’s share of the
joint expenses, and to deal generally with, and with power to bind, the
co-owners of such party’s interest within the scope of the operations embraced
in this agreement; however, all such co- owners shall have the right to enter
into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E.
Waiver of Rights to Partition:
If
permitted by the laws of the state or states in which the property covered
hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.
F.
Preferential Right to Purchase:
x (Optional;
Check if applicable.)
Should
any party desire to sell all or any part of its interests under this agreement,
or its rights and interests in the Contract Area, it shall promptly give written
notice to the other parties, with full information concerning its proposed
disposition, which shall include the name and address of the prospective
transferee (who must be ready, willing and able to purchase), the purchase
price, a legal description sufficient to identify the property, and all other
terms of the offer. The other parties shall then have an optional prior right,
for a period of ten (10) days after the notice is delivered, to purchase for the
stated consideration on the same terms and conditions the interest which the
other party proposes to sell; and, if this optional right is exercised, the
purchasing parties shall share the purchased interest in the proportions that
the interest of each bears to the total interest of all purchasing parties.
However, there shall be no preferential right to purchase in those cases where
any party wishes to mortgage its interests, or to transfer title to its
interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage
of its interests, or to dispose of its interests by merger, reorganization,
consolidation, or by sale of all or substantially all of its Oil and Gas assets
to any party, or by transfer of its interests to a subsidiary or parent company
or to a subsidiary of a parent company, or to any company in which such party
owns a majority of the stock.
25
ARTICLE
IX.
INTERNAL
REVENUE CODE ELECTION
If, for
federal income tax purposes, this agreement and the operations hereunder are
regarded as a partnership, and if the parties have not otherwise agreed to form
a tax partnership pursuant to Exhibit “G” or other agreement between them, each
party thereby affected elects to be excluded from the application of all of the
provisions of Subchapter “K,” Chapter 1, Subtitle “A,” of the Internal Revenue
Code of 1986, as amended (“Code”), as permitted and authorized by Section 761 of
the Code and the regulations promulgated thereunder. Operator is authorized and
directed to execute on behalf of each party hereby affected such evidence of
this election as may be required by the Secretary of the Treasury of the United
States or the Federal Internal Revenue Service, including specifically, but not
by way of limitation, all of the returns, statements, and the data required by
Treasury Regulation §1.761. Should there be any requirement that each party
hereby affected give further evidence of this election, each such party shall
execute such documents and furnish such other evidence as may be required by the
Federal Internal Revenue Service or as may be necessary to evidence this
election. No such party shall give any notices or take any other action
inconsistent with the election made hereby. If any present or future income tax
laws of the state or states in which the Contract Area is located or any future
income tax laws of the United States contain provisions similar to those in
Subchapter “K,” Chapter 1, Subtitle “A,” of the Code, under which an election
similar to that provided by Section 761 of the Code is permitted, each party
hereby affected shall make such election as may be permitted or required by such
laws. In making the foregoing election, each such party states that the income
derived by such party from operations hereunder can be adequately determined
without the computation of partnership taxable income.
ARTICLE
X.
CLAIMS
AND LAWSUITS
Operator
may settle any single uninsured third party damage claim or suit arising from
operations hereunder if the expenditure does not exceed TEN
THOUSAND Dollars
($ 10,000.00 ) and if the
payment is in complete settlement of such claim or suit. If the amount required
for settlement exceeds the above amount, the parties hereto shall assume and
take over the further handling of the claim or suit, unless such authority is
delegated to Operator. All costs and expenses of handling settling, or otherwise
discharging such claim or suit shall be a the joint expense of the parties
participating in the operation from which the claim or suit arises. If a claim
is made against any party or if any party is sued on account of any matter
arising from operations hereunder over which such individual has no control
because of the rights given Operator by this agreement, such party shall
immediately notify all other parties, and the claim or suit shall be treated as
any other claim or suit involving operations hereunder.
ARTICLE
XI.
FORCE
MAJEURE
If any
party is rendered unable, wholly or in part, by force majeure to carry out its
obligations under this agreement, other than the obligation to indemnify or make
money payments or furnish security, that party shall give to all other parties
prompt written notice of the force majeure with reasonably full particulars
concerning it; thereupon, the obligations of the party giving the notice, so far
as they are affected by the force majeure, shall be suspended during, but no
longer than, the continuance of the force majeure. The term “force majeure,” as
here employed, shall mean an act of God, strike, lockout, or other industrial
disturbance, act of the public enemy, war, blockade, public riot, lightening,
fire, storm, flood or other act of nature, explosion, governmental action,
governmental delay, restraint or inaction, unavailability of equipment, and any
other cause, whether of the kind specifically enumerated above or otherwise,
which is not reasonably within the control of the party claiming
suspension.
The
affected party shall use all reasonable diligence to remove the force majeure
situation as quickly as practicable. The requirement that any force majeure
shall be remedied with all reasonable dispatch shall not require the settlement
of strikes, lockouts, or other labor difficulty by the party involved, contrary
to its wishes; how all such difficulties shall be handled shall be entirely
within the discretion of the party concerned.
26
ARTICLE
XII.
NOTICES
All
notices authorized or required between the parties by any of the provisions of
this agreement, unless otherwise specifically provided, shall be in writing and
delivered in person or by United States mail, courier service, telegram, telex,
telecopier or any other form of facsimile, postage or charges prepaid, and
addressed to such parties at the addresses listed on Exhibit “A.” All telephone
or oral notices permitted by this agreement shall be confirmed immediately
thereafter by written notice. The originating notice given under any provision
hereof shall be deemed delivered only when received by the party to whom such
notice is directed, and the time for such party to deliver any notice in
response thereto shall run from the date the originating notice is received.
“Receipt” for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex,
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.
ARTICLE
XIII.
TERM
OF AGREEMENT
This
agreement shall remain in full force and effect as to the Oil and Gas Leases
and/or Oil and Gas Interests subject hereto for the period of time selected
below; provided, however, no party hereto shall ever be construed as having any
right, title or interest in or to any Lease or Oil and Gas Interest contributed
by any other party beyond the term of this agreement.
x
|
Option No. 1:
So long as any of the Oil and Gas Leases subject to this agreement remain
or are continued in force as to any part of the Contract Area, whether by
production, extension, renewal or
otherwise.
|
¨
|
Option No. 2:
In the event the well described in Article VI.A., or any subsequent well
drilled under any provision of this agreement, results in the Completion
of a well as a well capable of production of Oil and/or Gas in paying
quantities, this agreement shall continue in force so long as any such
well is capable of production, and for an additional period of days
thereafter; provided, however, if, prior to the expiration of such
additional period, one or more of the parties hereto are engaged in
drilling, Reworking, Deepening, Sidetracking, Plugging Back, testing or
attempting to Complete or Re-complete a well or wells hereunder, this
agreement shall continue in force until such operations have been
completed and if production results therefrom, this agreement shall
continue in force as provided herein. In the event the well described in
Article VI.A., or any subsequent well drilled hereunder, results in a dry
hole, and no other well is capable of producing Oil and/or Gas from the
Contract Area, this agreement shall terminate unless drilling, Deepening,
Sidetracking, Completing, Re- completing, Plugging Back or Reworking
operations are commenced within days from the date of abandonment of said
well. “Abandonment” for such purposes shall mean either (i) a decision by
all parties not to conduct any further operations on the well or (ii) the
elapse of 180 days from the conduct of any operations on the well,
whichever first occurs.
|
The
termination of this agreement shall not relieve any party hereto from any
expense, liability or other obligation or any remedy therefor which has accrued
or attached prior to the date of such termination.
Upon
termination of this agreement and the satisfaction of all obligations hereunder,
in the event a memorandum of this Operating Agreement has been filed of record,
Operator is authorized to file of record in all necessary recording offices a
notice of termination, and each party hereto agrees to execute such a notice of
termination as to Operator’s interest, upon request of Operator, if Operator has
satisfied all its financial obligations.
27
ARTICLE
XIV.
COMPLIANCE
WITH LAWS AND REGULATIONS
A.
Laws, Regulations and Orders:
This
agreement shall be subject to the applicable laws of the state in which the
Contract Area is located, to the valid rules, regulations, and orders of any
duly constituted regulatory body of said state; and to all other applicable
federal, state, and local laws, ordinances, rules, regulations and
orders.
B.
Governing Law:
This
agreement and all matters pertaining hereto, including but not limited to
matters of performance, non- performance, breach, remedies, procedures, rights,
duties, and interpretation or construction, shall be governed and determined by
the law of the state in which the Contract Area is located. If the Contract Area
is in two or more states, the law of the state of TEXAS
shall govern.
C.
Regulatory Agencies:
Nothing
herein contained shall grant, or be construed to grant, Operator the right or
authority to waive or release any rights, privileges, or obligations which
Non-Operators may have under federal or state laws or under rules, regulations
or orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on tracts
offsetting or adjacent to the Contract Area.
With
respect to the operations hereunder, Non-Operators agree to release Operator
from any and all losses, damages, injuries, claims and causes of action arising
out of, incident to or resulting directly or indirectly from Operator’s
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in
good faith and does not constitute gross negligence. Each Non-Operator further
agrees to reimburse Operator for such Non-Operator’s share of production or any
refund, fine, levy or other governmental sanction that Operator may be required
to pay as a result of such an incorrect interpretation or application, together
with interest and penalties thereon owing by Operator as a result of such
incorrect interpretation or application.
ARTICLE
XV.
MISCELLANEOUS
A.
Execution:
This
agreement shall be binding upon each Non-Operator when this agreement or a
counterpart thereof has been executed by such Non-Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit “A” as owning
an interest in the Contract Area or which own, in fact, an interest in the
Contract Area. Operator may, however, by
written notice to all Non-Operators who have become bound by this agreement as
aforesaid, given at any time prior to the actual spud date of the Initial Well
but in no event later than five days prior to the date specified in Article
VI.A. for commencement of the Initial Well, terminate this agreement if Operator
in its sole discretion determines that there is insufficient participation to
justify commencement of drilling operations. In the event of such a termination
by Operator, all further obligations of the parties hereunder shall cease as of
such termination. In the event any Non-Operator has advanced or prepaid any
share of drilling or other costs hereunder, all sums so advanced shall be
returned to such Non-Operator without interest. In the event Operator proceeds
with drilling operations for the Initial Well without the execution hereof by
all persons listed on Exhibit “A” as having a current working interest in such
well, Operator shall indemnify Non-Operators with respect to all costs incurred
for the Initial Well which would have been charged to such person under this
agreement if such person had executed the same and Operator shall receive all
revenues which would have been received by such person under this agreement if
such person had executed the same.
28
B.
Successors and Assigns:
This
agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, devisees, legal representatives, successors
and assigns, and the terms hereof shall be deemed to run with the Leases or
Interests included within the Contract Area.
C.
Counterparts:
This
instrument may be executed in any number of counterparts, each of which shall be
considered an original for all purposes.
D.
Severability:
For the
purposes of assuming or rejecting this agreement as an executory contract
pursuant to federal bankruptcy laws, this agreement shall not be severable, but
rather must be assumed or rejected in its entirety, and the failure of any party
to this agreement to comply with all of its financial obligations provided
herein shall be a material default.
ARTICLE
XVI.
OTHER
PROVISIONS
ANTICIPATED
RECOMPLETION PROCEDURES
THE
WHITT 3-WELL PROJECT IS A TURN-KEY PROJECT UNDER WHICH WHITT OIL & GAS, INC.
AS THE OPERATOR WILL PERFORM CERTAIN PROCEDURES TO PLACE THREE WELLS ON THE
MCWHORTER, YOUNG AND BOYETT LEASES BACK ON-LINE. THE PROCEDURES ARE DESCRIBED IN
MORE DETAIL BELOW.
MCWHORTER
LEASE, CALLAHAN COUNTY, TEXAS
A
HOLE IN THE CASING HAS CREATED A BRIDGE OR BLOCKAGE WHICH PROHIBITS RUNNING
TUBING BELOW 3,700 FEET. THE OPERATOR WILL DRILL OUT THE BRIDGE AT 3,700 FEET AS
NEEDED AND THEN CEMENT SQUEEZE OFF THE HOLE IN THE CASING. THEN THE OPERATOR
WILL DRILL OUT THE RESIDUE SQUEEZE CEMENT STILL IN HOLE. THE OPERATOR WILL THEN
RUN A CURSORY CHECK OF THE CASING FOR ABNORMALITIES. THE OPERATOR WILL THEN
PERFORM A SAND FRAC TREATMENT ON THE EXISTING BEND CONGLOMERATE FORMATION. THE
WELL WILL BE COMPLETED, TESTED AND PUT ON PRODUCTION.
YOUNG
LEASE, CALLAHAN COUNTY, TEXAS
THE
YOUNG LEASE IS A GRAY SAND PRODUCER THAT HAS A CASING PROBLEM REQUIRING A CEMENT
SQUEEZE, SIMILAR TO THAT REQUIRED FOR THE MCWHORTER LEASE. THE HOLE WILL BE
REPAIRED WITH CEMENT AND THE CASING INTEGRITY WILL BE CHECKED AFTER THE RESIDUAL
SQUEEZE CEMENT IS DRILLED OUT. THE GRAY SAND WILL BE SAND FRAC’D AND THE WELL
COMPLETED, TESTED AND PUT ON PRODUCTION.
BOYETT
LEASE, SHACKELFORD, COUNTY, TEXAS
THE
OPERATOR WILL DEEPEN THIS WELL SLIGHTLY TO PRODUCE OUT OF THE CADDO LIME AT
3,400 FEET. THE OPERATOR WILL CLEAN OUT FORMATION DEBRIS DOWN TO THE TOP OF THE
CADDO AND RUN A CURSORY CHECK OF THE CASING INTEGRITY AND CONDITION. THE
OPERATOR WILL THEN ACIDIZE THE CADDO FORMATION AND PUT THE WELL ON
PRODUCTION.
29
IN
WITNESS WHEREOF, this agreement shall be effective as of the 1st day of
December, 2009.
OPERATOR
|
||
WHITT OIL & GAS,
INC.
|
||
By:
|
||
W.
J. WHITT
|
||
Type
or print
name
|
Title
|
PRESIDENT/CEO
|
||
Date
|
|||
Tax
ID or
S.S.
No.
|
NON-OPERATORS
ENERGY
PRODUCERS, INC., a wholly owned
subsidiary
of EGPI FIRECREEK, INC.
|
||
By:
|
||
DENNIS
ALEXANDER
|
||
Type
or print
name
|
Title |
CEO
|
||
Date
|
|||
Tax
ID or
S.S.
No.
|
30
Note: The
following forms of acknowledgment are the short forms approved by the Uniform
Law on Notarial Acts. The validity and effect of these forms in any state will
depend upon the statutes of that state.
Individual
acknowledgment:
State
of
)
)
ss.
County
of
)
This
instrument was acknowledged before me on
by
|
(Seal,
if any)
|
Title (and Rank)
|
My commission expires:
|
Acknowledgment
in representative capacity:
State
of
)
)
ss.
County
of
)
This
instrument was acknowledged before me on
by
|
as
|
of
|
.
|
Title (and Rank)
|
(Seal,
if any)
|
My commission expires:
|
31
EXHIBIT
“A”
Part
1 Description of Lands Subject to
Agreement
Part
2 Restrictions, if any, as to Depths,
Formations, or Substances
Part
3 Parties to Agreement with Addresses and
Telephone Numbers for Notice Purposes
Part
4 Percentages or Fractional Interests of
Parties to Agreement
Part
5 Oil and Gas Leases and/or Oil and Gas
Interests Subject to Agreement
Part
6 Burdens on Production
EXHIBIT
“A” - Part 1
Description of Lands Subject
to Agreement
1.
|
The
lands described in and subject to that certain Oil, Gas and Mineral Lease
dated September 17, 2007, by and between Eugene Bell, Lessor, and E &
D Bell, LLC, Lessee, recorded in Volume 194, Page 360, Real Property
Records of Callahan County, Texas, being the following two (2) parcels of
land in Callahan County, Texas,
to-wit:
|
|
Tract
I: Being 40 acres as near as is practicable in the form of a square around
the LCS Production of McWhorter #1 well, 2306’ FNL and 330’ FEL, Section
142, Block 2, GH&H RR Co. Survey, Abstract 1651, Callahan County,
Texas.
|
|
Tract
II: Being 40 acres as near as is practicable in the form of a square
around the Ratex Energy, Inc. No. 3 Young well, 330’ FSL and 330’ FEL,
Section 142, Block 2, GH&H RR Co. Survey, Abstract 1651, Callahan
County, Texas.
|
2.
|
The
lands described in and subject to that certain Oil, Gas and Mineral Lease
dated September 17, 2007, by and between Harold Elledge, Lessor, and E
& D Bell, LLC, Lessee, recorded in Volume 194, Page 363, Real Property
Records of Callahan County, Texas, being the following two (2) parcels of
land in Callahan County, Texas,
to-wit:
|
|
Tract
I: Being 40 acres as near as is practicable in the form of a square around
the LCS Production of McWhorter #1 well, 2306’ FNL and 330’ FEL, Section
142, Block 2, GH&H RR Co. Survey, Abstract 1651, Callahan County,
Texas.
|
|
Tract
II: Being 40 acres as near as is practicable in the form of a square
around the Ratex Energy, Inc. No. 3 Young well, 330’ FSL and 330’ FEL,
Section 142, Block 2, GH&H RR Co. Survey, Abstract 1651, Callahan
County, Texas.
|
3.
|
That
certain Oil and Gas Lease dated ________________________, by and between
Sharon White Stewart, Lessor, and Whitt Oil & Gas, Inc., Lessee,
recorded in Volume _______, Page _______, Real Property Records of
Stephens County, Texas, and recorded in Volume ________, Page ________,
Real Property Records of Shackelford County, to the extent, and to the
extent only, that said lease covers the following parcel of land,
to-wit:
|
|
Tract
III: All of the Southeast One-fourth (SE/4) of Section 55, B.A.L., A-2746,
Stephens and Shackelford Counties,
Texas.
|
EXHIBIT
“A” - Part 2
Restrictions, if any, as to
Depths, Formations, or Substances
[TO
BE ADDED PRIOR TO SIGNING]
EXHIBIT
“A” - Part 3
Parties to Agreement with
Addresses and Telephone Numbers for Notice Purposes
WHITT
OIL & GAS, INC.
PO
BOX 3129
ALBANY,
TX 76430-8055
TELEPHONE
NUMBER:____________________________
ENERGY
PRODUCERS, INC.,
A
Wholly Owned Subsidiary Of
EGPI
FIRECREEK, INC.
6564
SMOKE TREE LANE
SCOTTSDALE,
ARIZONA 85253
TELEPHONE
NUMBER:(602) 326-7371
EXHIBIT
“A” - Part 4
Percentages or Fractional
Interests of Parties to Agreement
PARTY
|
FRACTIONAL INTEREST (WORKING
INTEREST)
|
|||
WHITT
OIL & GAS, INC.
|
50 | % | ||
ENERGY
PRODUCERS, INC.
|
50 | % |
EXHIBIT
“A” - Part 5
Oil and Gas Leases and/or
Oil and Gas Interests Subject to Agreement
See
Exhibit “A” – Part 1 for a description of the leases
EXHIBIT
“A” - Part 6
Burdens on
Production
[TO
BE ADDED PRIOR TO SIGNING]
EXHIBIT
“B”
Form of
Lease
AAPL
FORM 658-85
OIL,
GAS AND MINERAL LEASE
TEXAS
THIS
AGREEMENT made this day
of
, 20 ,
between
___________________________________________________________________________________________________
_________________________________________________________,
Lessor (whether one or more), whose address
is______________________________________________________________________________________________,
and
_____________________________________________________________________________________________,
Lessee,
whose
address is:______________________________________________________________________________________,
1. GRANT.
Lessor, in consideration of a cash payment and other good and valuable
consideration in hand paid, of the royalties herein provided for, and of
the agreements of Lessee herein contained, hereby grant, leases and lets
exclusively unto Lessee the land described in paragraph 2 below, hereinafter
referred to as leased premises, for the purposes of investigating, exploring,
prospecting, drilling and mining for and producing oil, gas (the term “gas” as
used herein includes helium, carbon dioxide and other commercial gases, as well
as hydrocarbon gases), sulphur, fissionable materials, and all other minerals,
conducting exploration, geological and geophysical surveys, core tests, gravity
and magnetic surveys, for introducing or injecting fire, air, gas, steam, water,
salt water, chemicals, and fluids or substances into any subsurface stratum or
strata which is not productive of fresh water for primary, secondary and other
enhanced recovery operations.
2. LEASED
PREMISES. (Description)
in the
County of
, State of Texas, containing gross
acres, more or less, including all riparian rights and any interests therein
which Lessor may hereafter acquire by reversion, accretion, prescription or
otherwise. In consideration of the aforementioned cash payment, Lessor agrees to
execute at Lessee's request any additional or supplemental instruments to effect
a more complete or accurate description of the land so covered. For the purpose
of determining the amount of any rentals or shut-in payments hereunder, the
number of gross acres above specified shall be deemed correct, whether actually
more or less.
3. TERM.
Subject to the other provisions herein contained, this Lease shall be for a term
of years
from the date hereof (called “primary term”) and as long thereafter as oil, gas,
sulphur, fissionable materials or other mineral is produced in paying quantities
from the leased premises or land pooled therewith, or this lease is otherwise
maintained in force and effect pursuant to other provisions herein
contained.
4. RENTAL
PAYMENT. Subject to the other provisions herein contained, if operations for
drilling or mining are not commenced on said land, or on acreage pooled
therewith as hereinafter provided for, on or before one year from the date
hereof, this Lease shall terminate as to both parties, unless on or before
such date Lessee shall pay or tender, or make a bona fide attempt to pay or tender, to Lessor, or to the credit of Lessor in
__________________________________________________________________________________________________
_________________________________________________________________________________________________at
_______________________________________________________________________________,
which depository and its
successors
shall be Lessor’s
agents and shall continue as the depository for all rentals payable hereunder
regardless of changes in ownership of said land or rentals,
the sum of
Dollars
($ ),
hereinafter called rentals, which
shall cover the privilege of deferring commencement of drilling or mining
operations for a period of twelve (12) months. In like manner and upon like
payment or tenders annually the commencement of drilling or mining operations
may be further deferred for successive periods of twelve (12) months each during
the primary term hereof. All payments or tenders may be made in currency,
or by check or by draft, and such payments or tenders to Lessor or to the
depository by deposit in the U.S. Mails on or before the rental due date in a
stamped envelope addressed to the depository or to the Lessor at the last
address known to Lessee shall constitute proper payment. If such depository, or
any successor depository, shall fail, liquidate or be succeeded by another
depository, or for any other reasons fail or refuse to accept rentals or any
other payments, Lessee shall not be held in default for failure to make such
payments or tenders until 60 days after Lessee has received from Lessor a proper
recordable instrument naming another depository as agent to receive such
payments or tenders. If Lessee, in good faith and with reasonable diligence,
timely attempts to pay a rental but fails to pay, or incorrectly pays, any
portion thereof this lease shall not terminate if Lessee properly pays such
rental within thirty (30) days after written notice from Lessor of Lessee's
error or failure. Failure to make proper payment shall not affect any other
interest under this lease for which proper payment was made. The cash payment is
consideration for this Lease according to its terms and shall not be allocated
as mere rental for a period. Lessee may at any time or times execute and deliver
to Lessor, or to the depository above named, or place of record a release or
releases of this lease as to all or any part of the leased premises, or as to
any minerals or horizons under all or any part thereof, and thereby be relieved
of all obligations as to the land or interest released. If this lease is
released as to all minerals and horizons under only a portion of the leased
premises, Lessee's obligation to pay or tender rentals and other payments shall
be proportionately reduced in accordance with the net acreage interest
retained.
5. ROYALTY
PAYMENT. The royalties to be paid to the Lessor are: (a) On oil, 1/8th of that
produced and saved from said land, the same to be delivered at the wells or to
the Lessor's credit into the pipelines to which the wells may be connected.
Lessee shall have the continuing right to purchase such production at the
wellhead market price then prevailing in the same field (or if there is no such
price then prevailing in the same field, then the nearest field in which there
is such a prevailing price) for production of similar grade and gravity. Lessee
may sell any royalty oil in its possession and pay Lessor the price received by
Lessee for such oil computed at the well: (b) For gas (including casinghead gas)
and all other substances covered hereby (i) if used off the leased premises or
used in the manufacture of gasoline or other products, the market value at the
well of one-eighth (1/8) of the gas so used, or (ii) if sold on or off the
leased premises, one-eighth (1/8) of the amount realized from such sale,
provided the amount realized from the sale of gas on or off the leased premises
shall be the price established by the Gas Sales Contract entered into in good
faith by Lessee and gas purchaser, provided that on gas sold by Lessee the
market value shall not exceed the amount received by Lessee for such gas
computed at the mouth of the well; (c) If a well on the leased premises or lands
pooled therewith is capable of producing oil or gas or any other substance
covered hereby but such well is either shut-in or production therefrom is not
being sold or purchased by Lessee or royalties on production therefrom are not
otherwise being paid to Lessor, and if this lease is not otherwise maintained in
effect, such well shall nevertheless be considered as though it were producing
for the purpose of maintaining this lease, whether during or after the primary
term, and Lessee shall tender a shut-in payment of One Dollar per acre then
covered by this lease, such payment to be made to Lessor or to Lessor's credit
in the depository designated above, on or before 90 days after the next ensuing
anniversary date of this lease, and Thereafter on or before each anniversary
date hereof while the well is shut-in or production therefrom is not being sold
or purchased by Lessee or royalties on production therefrom are not otherwise
being paid to Lessor. This lease shall remain in force so long as such well is
capable of producing and Lessee's failure to properly pay shut-in payment shall
render Lessee liable for the amount due but shall not operate to terminate this
lease. The intermittent production from any well during such year shall not
render necessary any new or additional shut-in payments with respect to such
well or the acreage ascribed thereto.
6. POOLING.
Lessee shall have the right but not the obligation during or after the primary
term while this lease is in effect to pool all or any part of the leased
premises or interest therein with any other lands or interests, as to any or all
depths or horizons, and as to any or all substances covered by this lease,
either before or after the commencement of production, whenever Lessee deems it
necessary or proper to do so in order to prudently develop or operate the leased
premises, whether or not similar pooling authority exists with respect to such
other lands or interests. The unit formed by such pooling for an oil well shall
not exceed 80 acres plus a maximum acreage tolerance of 10%, and for a gas
well shall not exceed 640 acres plus a maximum acreage tolerance of 10%, except
that larger units maybe formed for oil wells or gas wells to conform to any well
spacing or density pattern that may be prescribed or permitted by any
governmental authority having jurisdiction. In exercising its pooling rights
hereunder. Lessee shall file of record a written declaration describing the unit
and stating the effective date of pooling. Production, drilling or reworking
operations anywhere on a unit which includes all or any part of the leased
premises shall be treated as if it were production, drilling or reworking
operations on the leased premises, except that the production on which
Lessor's
royalty is calculated shall be that proportion of the total unit production
produced and saved which the net acreage covered by this lease and included in
the unit bears to the total gross acreage in the unit Pooling in one or more
instances shall not exhaust Lessee's pooling rights hereunder, and Lessee shall
have the recurring right but not the obligation to revise any unit formed
hereunder by expansion or contraction, or both, either before or after
commencement of production, in order to conform to the well spacing or densitv
pattern prescribed or permitted by the governmental authority having
jurisdiction, or to conform to any productive acreage determination made by such
governmental authority. In making such a revision, Lessee shall file of record a
written declaration describing the revised unit and stating the effective date
of revision. To the extent any portion of the leased premises is included in or
excluded from the unit by virtue of such revision, the proportion of unit
production on which royalties are payable hereunder shall thereafter be adjusted
accordingly. In the absence of production from a unit, or upon permanent
cessation thereof. Lessee may terminate the unit by filing of record a written
declaration describing the unit and stating the date of
termination.
7. OPERATIONS.
If Lessee drills a well which is incapable of producing in paying quantities
(hereinafter called “dry hole”)
on the leased premises or lands pooled therewith, or if all production (whether
or not in paying quantities) ceases from any cause, including a revision of unit
boundaries pursuant to the provisions of Paragraph 6 or the action of any
governmental authority, then in the event this lease is not otherwise being
maintained in force it shall nevertheless remain in force if Lessee commences
operations for reworking an existing well or for drilling an additional well on
the leased premises or lands pooled therewith within 90 days after completion of
operations on such dry hole or within 90 days after such cessation of all
production, or, should the lease be within the primary term, if Lessee tenders
rentals on or before the next rental payment date (if any) next ensuing after
the expiration of said 90-day period; provided that should completion of
operations on the dry hole or cessation of all production occur less than 90
days before the last rental payment date, no rental payments or further
operations shall be required to maintain this lease for the remainder of the
primary term. If at the end of the primary term or any tune thereafter, oil, gas
or other substances covered hereby are not being produced in paying quantities
from the leased premises or lands pooled therewith, but Lessee is then engaged
in drilling, reworking or any other operations reasonably calculated to obtain
or restore production therefrom, this lease shall remain in force so long as
such operations are prosecuted with no cessation of more than 90 consecutive
days, and if any such operations result in the production of oil or gas or other
substances covered hereby, as long thereafter as there is production in paying
quantities from the leased premises or lands pooled therewith. After completion
of a well capable of producing in paying quantities hereunder. Lessee shall
drill such additional wells on the leased premises or lands pooled therewith as
a reasonably prudent operator would drill under the same or similar
circumstances to (a) develop the leased premises as to formations then capable
of producing in paying quantities on the leased premises or lands pooled
therewith, or (b) protect the leased premises from uncompensated drainage by any
well or wells located on other lands not pooled therewith. There shall be no
covenant to drill exploratory wells or any additional wells except as expressly
provided herein.
8. LESSER
INTEREST. Should Lessor own less than the full mineral estate in all or any part
of the leased premises, the royalty and shut-in payments, payable hereunder for
any well on any part of the leased premises or lands pooled therewith shall be
reduced to the proportion that Lessor's mineral interest in such part of the
leased premises bears to the full mineral estate in such part of the leased
premises.
9.
ANCILLARY RIGHTS. Lessee may use in its operations, free of cost, any oil, gas,
water and/or other substances produced on the leased premises, except water from
Lessor's wells or ponds. The right of ingress and egress granted hereby shall
apply to the entire leased premises described in Paragraph 2 above,
notwithstanding any partial release or other termination of this lease with
respect thereto. If expressly requested in writing by the surface owner, Lessee
agrees to bury pipelines across cultivated land below ordinary plow depth, as
such depth may be determined at the tune of burial. After the pipeline has once
been laid below such depth, Lessee shall not thereafter be required to restore
the ground cover, or to lower, or to remove such pipeline unless the surface
owner first agrees in writing to bear the entire cost thereof and advances to
Lessee the estimated cost thereof. No well shall be located less than 200 feet
from any house or barn now on the leased premises without Lessor's consent, and
Lessee shall pay for damage caused by its operations to buildings and other
improvements now on the leased premises, and to timber and growing crops thereon
Lessee shall have the right at anytime to remove its fixtures, equipment and
materials, including well casing, from the leased premises during the term of
this lease or within a reasonable time thereafter. Lessee may lay pipelines,
build roads, tanks, power stations, erect telephone and power lines, and
construct other facilities deemed necessary by Lessee on and over and across the
leased premises and other lands owned or claimed by Lessor adjacent and
contiguous thereto to produce, save, take care of, treat, transport and own
products granted by this lease.
10.
OWNERSHIP CHANGES. The interest of either Lessor or Lessee hereunder may be
assigned, devised or otherwise transferred in whole or in part, by area and/or
by depth or horizon, and the rights and obligations of the parties hereunder
shall extend to their respective heirs, devisees, executors, administrators,
successors, and assigns. No change in Lessor's ownership shall have the effect
of reducing the rights or enlarging the obligations of Lessee hereunder, and no
change in ownership shall be binding on Lessee until 60 days after Lessee has
been furnished the original or certified or duly authenticated copies of the
documents establishing such change of ownership to the satisfaction of Lessee or
until Lessor has satisfied the notification requirements contained in
Lessee's
usual form of division order. In the event the death of any person entitled to
shut-in payments hereunder, Lessee may pay or tender such shut-in payments to
the credit of decedent or decedent's estate in the depository designated above.
If at any time two or more persons are entitled to shut-in payments hereunder,
Lessee may pay or tender such shut-in payments to such persons or to the credit
in the depository, either jointly or separately in proportion to the interest
which each owns. If Lessee transfers its interest hereunder in whole or in part
Lessee shall be relieved of all obligations thereafter arising with respect to
the transferred interest, and failure of the transferee to satisfy such
obligations with respect to the transferred interest shall not affect the rights
of Lessee with respect to any interest not so transferred. If Lessee transfers a
full or undivided interest in all or any portion of the area covered by this
lease, the obligation to pay or tender shut-in payments hereunder shall be
divided between Lessee and the transferee in proportion to the net acreage
interest in this lease then held by each.
11. BREACH
OR DEFAULT. No litigation shall be initiated by Lessor with respect to any
breach or default by Lessee hereunder, for a period of at least 90 days after
Lessor has given Lessee written notice fully describing the breach or default,
and then only if Lessee fails to remedy the breach or default within such
period. In the event the matter is litigated and there is a final judicial
determination that a breach or default has occurred, this lease shall not be
forfeited or cancelled in whole or in part unless Lessee is given a reasonable
time after such judicial determination to remedy the breach or default and
Lessee fails to do so. This Paragraph 11 shall not apply to erroneous payment of
rental.
12. WARRANTY
OF TITLE. Lessor hereby warrants and agrees to defend title conveyed to Lessee
hereunder, and agrees that Lessee at Lessee's option may pay and discharge any
taxes, mortgages or liens existing, levied or assessed on or against the leased
premises. If Lessee exercises such option. Lessee shall be subrogated to the
rights of the party to whom payment is made, and in addition to its other
rights, may reimburse itself out of any royalties, or shut-in payments otherwise
payable to Lessor hereunder. In the event Lessee is made aware of any claim
inconsistent with Lessor’s title, Lessee may suspend the payment of royalties
and shut-in payments hereunder, without interest, until Lessee has been
furnished satisfactory evidence that such claim has been resolved. Lessee shall
have the right to accept leases or conveyances from others owning or claiming to
own interests in the leased premises or minerals covered hereby adverse to the
rights of Lessor herein. Should Lessee become involved in any dispute or
litigation arising out of any claim adverse to the title of Lessor to said
leased premises, Lessee may recover from Lessor its reasonable and necessary
expenses and attorney fees incurred in such dispute or litigation, with the
right to apply royalties accruing hereunder toward satisfying said expenses and
attorney fees.
13. REGULATION
AND DELAY. Lessee’s obligations under this lease, whether express or implied,
shall be subject to all applicable laws, rules, regulations and orders of any
governmental authority having jurisdiction including restrictions on the
drilling and production of wells, and the price of oil, gas and other substances
covered hereby. When drilling, reworking, production or other operations are
prevented or delayed or interrupted by such laws, rules, regulations or orders,
or by inability to obtain necessary permits, equipment, services, material,
water, electricity, fuel, access or easements, or by fire, flood, adverse
weather conditions, war, sabotage, rebellion, insurrection, riot, strike, or
labor disputes, or by inability to obtain a satisfactory market for production
or failure of purchasers or carriers to take or transport such production, or by
any other cause not reasonably within Lessees control, this lease shall not
terminate because of such prevention, delay or interruption, and shall be
maintained in force and effect for so long as such force majeure continues, and
for 60 days thereafter, or so long as this lease is maintained in force by some
other provisions thereof, whichever is the later date. Lessee shall not be
liable for breach of any express or implied covenants of this lease when
drilling, production or other operations are so prevented, delayed or
interrupted.
14. EXECUTION.
This lease may be signed in any number of counterparts, each of which shall be
binding upon all who execute same, whether or not all parties named in the
caption hereof execute this lease. Should any one or more of the parties named
herein as Lessor fail to execute this lease, it shall nevertheless be binding on
the party or parties who execute the same, and additional parties may execute
this lease as Lessor, and this lease shall be binding on each party executing
the same notwithstanding that such party is named herein as Lessor, and all of
the provisions of this lease shall inure to the benefit of and be binding on the
parties hereto and their respective heirs, legal representatives, successors and
assigns.
IN
WITNESS WHEREOF, this lease is executed to be effective as of the date first
mitten above, but upon execution shall be binding on the signatory’ and the
signatory’s heirs, devisees, executors, administrators, successors and assigns,
whether or not tins lease has been executed by all parties hereof named as
Lessor.
LESSOR
(WHETHER ONE OR MORE}
|
SS
NO. OR TAX ID
|
|
|
|
|
|
|
|
|
|
CLZ/dam
LR991/A
STATE
OF ____________
|
}
|
|
SS.
|
||
COUNTY
OF ___________
|
The
foregoing instrument was acknowledged before me this ______________,
20_____________, by____________________.
|
||
My
Commission Expires:
|
Notary
Public in and for
|
|
|
____________________________County,_____________
|
STATE
OF ____________
|
}
|
|
SS.
|
||
COUNTY
OF ___________
|
The
foregoing instrument was acknowledged before me this ______________,
20_____________, by____________________.
|
||
My
Commission Expires:
|
Notary
Public in and for
|
|
|
____________________________County,_____________
|
STATE
OF ____________
|
}
|
|
SS.
|
||
COUNTY
OF ___________
|
The
foregoing instrument was acknowledged before me this ______________,
20_____________, by_______________,
_______________________________________,
of _______________________________________
a corporation,
on behalf of the corporation.
|
||
My
Commission Expires:
|
Notary
Public in and for
|
|
|
____________________________County,_____________
|
EXHIBIT
“C”
Accounting
Procedure
ACCOUNTING
PROCEDURE
JOINT
OPERATIONS
I.
GENERAL PROVISIONS
1. DEFINITIONS
“Joint
Property” shall mean the real and personal property subject to the agreement to
which this Accounting Procedure is attached.
“Joint
Operations” shall mean all operations necessary or proper for the development,
operation, protection and maintenance of the Joint Property.
“Joint
Account” shall mean the account showing the charges paid and credits received in
the conduct of the Joint Operations and which are to be shared by the
Parties.
“Operator”
shall mean the party designated to conduct the Joint Operations.
“Non-Operators”
shall mean the Parties to this agreement other than the Operator.
“Parties”
shall mean Operator and Non-Operators.
“First
Level Supervisors” shall mean those employees whose primary function in Joint
Operations is the direct supervision of other employees and/or contract labor
directly employed on the Joint Property in a field operating
capacity.
“Technical
Employees” shall mean those employees having special and specific engineering,
geological or other professional skills, and whose primary function in Joint
Operations is the handling of specific operating conditions and problems for the
benefit of the Joint Property.
“Personal
Expenses” shall mean travel and other reasonable reimbursable expenses of
Operator’s employees.
“Material”
shall mean personal property, equipment or supplies acquired or held for use on
the Joint Property.
“Controllable
Material” shall mean Material which at the time is so classified in the Material
Classification Manual as most recently recommended by the Council of Petroleum
Accountants Societies.
2. STATEMENT
AND BILLINGS
Operator
shall bill Non-Operators on or before the last day of each month for their
proportionate share of the Joint Account for the preceding month. Such bills
will be accompanied by statements which identify the authority for expenditure,
lease or facility, and all charges and credits summarized by appropriate
classifications of investment and expense except that items of Controllable
Material and unusual charges and credits shall be separately identified and
fully described in detail.
Accounting
Procedure - Page 1
3. ADVANCES
AND PAYMENTS BY NON-OPERATORS
|
A.
|
Unless
otherwise provided for in the agreement, the Operator may require the
Non-Operators to advance their share of estimated cash outlay for the
succeeding month’s operation within fifteen (15) days after receipt of the
billing or by the first day of the month for which the advance is
required, whichever is later. Operator shall adjust each monthly billing
to reflect advances received from the
Non-Operators.
|
|
B.
|
Each
Non-Operator shall pay its proportion of all bills within fifteen (15)
days after receipt. If payment is not made within such time, the unpaid
balance shall bear interest monthly at an annual rate of ten percent on
the first day of the month in which delinquency occurs, or the maximum
contract rate permitted by the applicable usury laws in the state in which
the Joint Property is located, whichever is the lesser, plus attorney’s
fees, court costs, and other costs in connection with the collection of
unpaid amounts.
|
4. ADJUSTMENTS
Payment
of any such bills shall not prejudice the right of any Non-Operator to protest
or question the correctness thereof; provided, however, all bills and statements
rendered to Non-Operators by Operator during any calendar year shall
conclusively be presumed to be true and correct after twenty-four (24) months
following the end of any such calendar year, unless within the said twenty-four
(24) month period a Non-Operator takes written exception thereto and makes claim
on Operator for adjustment. No adjustment favorable to Operator shall be made
unless it is made within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical inventory of
Controllable Material as provided for in Section V.
5. AUDITS
|
A.
|
A
Non-Operator, upon notice in writing to Operator and all other
Non-Operators, shall have the right to audit Operator’s accounts and
records relating to the Joint Account for any calendar year within the
twenty-four (24) month period following the end of such calendar year;
provided, however, the making of an audit shall not extend the time for
the taking of written exception to and the adjustments of accounts as
provided for in Paragraph 4 of this Section I. Where there are two or more
Non-Operators, the Non-Operators shall make every reasonable effort to
conduct a joint audit in a manner which will result in a minimum of
inconvenience to the Operator. Operator shall bear no portion of the
Non-Operators’ audit cost incurred under this paragraph unless agreed to
by the Operator. The audits shall not be conducted more than once each
year without prior approval of Operator, except upon the resignation or
removal of the Operator, and shall be made at the expense of those
Non-Operators approving such audit.
|
|
B.
|
The
Operator shall reply in writing to an audit report within 180 days after
receipt of such report.
|
6. APPROVAL
BY NON-OPERATORS
Where an
approval or other agreement of the Parties or Non-Operators is expressly
required under other sections of this Accounting Procedure and if the agreement
to which this Accounting Procedure is attached contains no contrary provisions
in regard thereto, Operator shall notify all Non-Operators of the Operator’s
proposal, and the agreement or approval of a majority in interest of the
Non-Operators shall be controlling on all Non-Operators.
II.
DIRECT CHARGES
Operator
shall charge the Joint Account with the following items:
1. ECOLOGICAL
AND ENVIRONMENTAL
Costs
incurred for the benefit of the Joint Property as a result of governmental or
regulatory requirements to satisfy environmental considerations applicable to
the Joint Operations. Such costs may include surveys of an ecological or
archaeological nature and pollution control procedures as required by applicable
laws and regulations.
Accounting
Procedure - Page 2
2. RENTALS
AND ROYAL TIES
Lease
rentals and royalties paid by Operator for the Joint Operations.
3. LABOR
|
A.
|
(1)
Salaries and wages of Operator’s field employees directly employed on the
Joint Property in the conduct of Joint
Operations.
|
|
(2)
Salaries of First Level Supervisors in the
field.
|
|
(3)
Salaries and wages of Technical Employees directly employed on the Joint
Property if such charges are excluded from the overhead
rates.
|
|
(4)
Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation or the
Joint Property if such charges are excluded from the overhead
rates.
|
|
B.
|
Operator's
cost of holiday, vacation, sickness, and disability benefits and other
customary allowances paid to employees whose salaries and wages are
chargeable to a Joint Account under Paragraph 3.A. of this Section II. The
costs under this Paragraph 3.B. may be charged on a “when and as paid
basis” or by “percentage assessment” on the amount of salaries and wages
chargeable to the Joint Account under Paragraph 3.A. of this Section II.
If percentage assessment is used, the rate shall be based on the
Operator's cost experience.
|
|
C.
|
Expenditures
or contributions made pursuant to assessments imposed by governmental
authority which are applicable to Operator’s costs chargeable to the Joint
Account under Paragraphs 3A and 3B of this Section
II.
|
|
D.
|
Personal
Expenses of those employees whose salaries and wages are chargeable to the
Joint Account under Paragraphs 3A and 3B of this Section
II.
|
4. EMPLOYEE
BENEFITS
Operator’s
current costs of established plans for employee's group life insurance,
hospitalization, pension, retirement, stock purchase, thrift, bonus, and other
benefit plans of a like nature, applicable to Operator's labor cost chargeable
to the Joint Account under Paragraphs 3.A. and 3.B. of this Section II shall be
Operator’s actual cost not to exceed the percent most recently recommended by
the Council of Petroleum Accountants Societies.
5. MATERIAL
Material
purchased or furnished by Operator for use on the Joint Property as provided
under Section IV. Only such Material shall be purchased for or transferred to
the Joint Property as may be required for immediate use and is reasonably
practical and consistent with efficient and economical operations. The
accumulation of surplus stocks shall be avoided.
6. TRANSPORTATION
Transportation
of employees and Material necessary for the Joint Operations but subject to the
following limitations:
Accounting
Procedure - Page 3
|
A.
|
If
Material is moved to the Joint Property from the Operator’s warehouse or
other properties, no charge shall be made to the Joint Account for a
distance greater than the distance from the nearest reliable supply store
where like material is normally available or railway receiving point
nearest the Joint Property unless agreed to by the
Parties.
|
|
B.
|
If
surplus Material is moved to Operator’s warehouse or other storage point,
no charge shall be made to the Joint Account for a distance greater than
the distance to the nearest reliable supply store where like material is
normally available, or railway receiving point nearest the Joint Property
unless agreed to by the Parties. No charge shall be made to the Joint
Account for moving Material to other properties belonging to Operator,
unless agreed to by the Parties.
|
|
C.
|
In
the application of subparagraphs A and B above, the option to equalize or
charge actual trucking cost is available when the actual charge is $400 or
less excluding accessorial charges. The $400 will be adjusted to the
amount most recently recommended by the Council of Petroleum Accountants
Societies.
|
7. SERVICES
The cost
of contract services, equipment and utilities provided by outside sources,
except services excluded by Paragraph 10 of Section II and Paragraph i, ii, and
iii, of Section III. The cost of professional consultant services and contract
services of technical personnel directly engaged on the Joint Property if such
charges are excluded from the overhead rates. The cost of professional
consultant services or contract services of technical personnel not directly
engaged on the Joint Property shall not be charged to the Joint Account unless
previously agreed to by the Parties. NO COSTS
OF ANY PROFESSIONAL CONSULTANT SERVICES OR CONTRACT SERVICES ARE COVERED IN THE
OVERHEAD RATES.
8. EQUIPMENT
AND FACILITIES FURNISHED BY OPERATOR
|
A.
|
Operator
shall charge the Joint Account for use of Operator owned equipment and
facilities at rates commensurate with costs of ownership and operation.
Such rates shall include costs of maintenance, repairs, other operating
expense, insurance, taxes, depreciation, and interest on gross investment
less accumulated depreciation not to exceed TWELVE percent
( 12 %) per
annum. Such rates shall not exceed average commercial rates currently
prevailing in the immediate area of the Joint
Property.
|
|
B.
|
In
lieu of charges in Paragraph 8A above, Operator may elect to use average
commercial rates prevailing in the immediate area of the Joint Property
less 20%. For automotive equipment, Operator may elect to use rates
published by the Petroleum Motor Transport
Association.
|
9. DAMAGES
AND LOSSES TO JOINT PROPERTY
All costs
or expenses necessary for the repair or replacement of Joint Property made
necessary because of damages or losses incurred by fire, flood, storm, theft,
accident, or other cause, except those resulting from Operator’s gross
negligence or willful misconduct. Operator shall furnish Non-Operator written
notice of damages or losses incurred as soon as practicable after a report
thereof has been received by Operator.
10. LEGAL
EXPENSE
ALL
LEGAL EXPENSE SHALL BE CHARGED TO THE JOINT ACCOUNT Expense of handling,
investigating and settling litigation or claims, discharging of liens, payment
of judgments and amounts paid for settlement of claims incurred in or resulting
from operations under the agreement or necessary to protect or recover the Joint
Property, except that no charge for services of Operator's legal staff or fees
or expense of outside attorneys shall be made unless previously agreed to by the
Parties. All other legal expense is considered to be covered by the overhead
provisions of Section III unless otherwise agreed to by the Parties, except as
provided in Section I, Paragraph 3.
Accounting
Procedure - Page 4
11. TAXES
All taxes
of every kind and nature assessed or levied upon or in connection with the Joint
Property, the operation thereof, or the production therefrom, and which taxes
have been paid by the Operator for the benefit of the Parties, If the ad valorem
taxes are based in whole or in part upon separate valuations of each party’s
working interest, then notwithstanding anything to the contrary herein, charges
to the Joint Account shall be made and paid by the Parties hereto in accordance
with the tax value generated by each party’s working interest.
12. INSURANCE
Net
premiums paid for insurance required to be carried for the Joint Operations for
the protection of the Parties. In the event Joint Operations are conducted in a
state in which Operator may act as self-insurer for Worker’s Compensation and/or
Employers Liability under the respective state’s laws, Operator may, at its
election, include the risk under its self-insurance program and in that event,
Operator shall include a charge at Operator’s cost not to exceed manual
rates.
13. ABANDONMENT
and RECLAMATION
Costs
incurred for abandonment of the Joint Property, including costs required by
governmental or other regulatory authority.
14. COMMUNICATIONS
Cost of
acquiring, leasing, installing, operating, repairing and maintaining
communication systems, including radio and microwave facilities directly serving
the Joint Property. In the event communication facilities/systems serving the
Joint Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section II.
15. OTHER
EXPENDITURES
Any other
expenditure not covered or dealt with in the foregoing provisions of this
Section II, or in Section III and which is of direct benefit to the Joint
Property and is incurred by the Operator in the necessary and proper conduct of
the Joint Operations.
III.
OVERHEAD
1. OVERHEAD
- DRILLING AND PRODUCING OPERATIONS
|
i.
|
As
compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing operations
on either:
|
|
x
|
Fixed
Rate Basis, Paragraph 1A, or
|
|
¨
|
Percentage
Basis, Paragraph 1B
|
Unless
otherwise agreed to by the Parties, such charge shall be in lieu of costs and
expenses of all offices and salaries or wages plus applicable burdens and
expenses of all personnel, except those directly chargeable under Paragraph 3A,
Section II. The cost and expense of services from outside sources in connection
with matters of taxation, traffic, accounting or matters before or involving
governmental agencies shall be considered as included in
the overhead rates provided for in the above selected Paragraph of this Section
III unless such cost and expense are agreed to by the Parties as a direct
charge to the Joint Account.
Accounting
Procedure - Page 5
|
ii.
|
The
salaries, wages and Personal Expenses of Technical Employees and/or the
cost of professional consultant services and contract services of
technical personnel directly employed on the Joint
Property:
|
|
¨
|
shall
be covered by the overhead rates,
or
|
|
x
|
shall
not be covered by the overhead
rates.
|
|
iii.
|
The
salaries, wages and Personal Expenses of Technical Employees and/or costs
of professional consultant services and contract services of technical
personnel either temporarily or permanently assigned to and directly
employed in the operation of the Joint
Property:
|
|
¨
|
shall
be covered by the overhead rates,
or
|
|
x
|
shall
not be covered by the overhead
rates.
|
A. Overhead
- Fixed Rate Basis
|
(1)
|
Operator
shall charge the Joint Account at the following rates per well per
month:
|
Drilling
Well Rate (Prorated for less than a full month)
|
$TBD
(well by well)
|
Producing
Well Rate
|
$
350.00
|
|
(2)
|
Application
of Overhead - Fixed Rate Basis shall be as
follows:
|
|
(a)
|
Drilling
Well Rate
|
|
(1)
|
Charges
for drilling wells shall begin on the date the well is spudded and
terminate on the date the drilling rig, completion rig, or other units
used in completion of the well is released, whichever is later, except
that no charge shall be made during suspension of drilling or completion
operations for fifteen (15) or more consecutive calendar
days.
|
|
(2)
|
Charges
for wells undergoing any type of workover or recompletion for a period of
five (5) consecutive work days or more shall be made at the drilling well
rate. Such charges shall be applied for the period from date workover
operations, with rig or other units used in workover, commence through
date of rig or other unit release, except that no charge shall be made
during suspension of operations for fifteen (15) or more consecutive
calendar days.
|
|
(b)
|
Producing
Well Rates
|
|
(1)
|
An
active well either produced or injected into for any portion of the month
shall be considered as a one-well charge for the entire
month.
|
|
(2)
|
Each
active completion in a multi-completed well in which production is not
commingled down hole shall be considered as a one-well charge providing
each completion is considered a separate well by the governing regulatory
authority.
|
|
(3)
|
An
inactive gas well shut in because of overproduction or failure of
purchaser to take the production shall be considered as a one-well charge
providing the gas well is directly connected to a permanent sales
outlet.
|
Accounting
Procedure - Page 6
|
(4)
|
A
one-well charge shall be made for the month in which plugging and
abandonment operations are completed on any well. This one-well charge
shall be made whether or not the well has produced except when drilling
well rate applies.
|
|
(5)
|
All
other inactive wells (including but not limited to inactive wells covered
by unit allowable, lease allowable, transferred allowable, etc.) shall not
qualify for an overhead charge.
|
|
(3)
|
The
well rates shall be adjusted as of the first day of April each year
following the effective date of the agreement to which this Accounting
Procedure is attached. The adjustment shall be computed by multiplying the
rate currently in use by the percentage increase or decrease in the
average weekly earnings of Crude Petroleum and Gas Production Workers for
the last calendar year compared to the calendar year preceding as shown by
the index of average weekly earnings of Crude Petroleum and Gas Production
Workers as published by the United States Department of Labor, Bureau of
Labor Statistics, or the equivalent Canadian index as published by
Statistics Canada, as applicable. The adjusted rates shall be the rates
currently in use, plus or minus the computed
adjustment.
|
2. OVERHEAD
- MAJOR CONSTRUCTION
To
compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset required for the development and
operation of the Joint Property, Operator shall either negotiate a rate prior to
the beginning of construction, or shall charge the Joint Account for overhead
based on the following rates for any Major Construction project in excess of
$25,000 :
|
A.
|
5
% of
first $100,000 or total cost if less,
plus
|
|
B.
|
3
% of
costs in excess of $100,000 but less than $1,000,000,
plus
|
|
C.
|
2
% of
costs in excess of $1,000,000.
|
Total
cost shall mean the gross cost of any one project. For the purpose of this
paragraph, the component parts of a single project shall not be treated
separately and the cost of drilling and workover wells and artificial lift
equipment shall be excluded.
3. CATASTROPHE
OVERHEAD
To
compensate Operator for overhead costs incurred in the event of expenditures
resulting from a single occurrence due to oil spill, blowout, explosion, fire,
storm, hurricane, or other catastrophes as agreed to by the Parties, which are
necessary to restore the Joint Property to the equivalent condition that existed
prior to the event causing the expenditures. Operator shall either negotiate a
rate prior to charging the Joint Account or shall charge the Joint Account for
overhead based on the following rates:
|
A.
|
5
% of
total costs through $100,000; plus
|
|
B.
|
3
% of
total costs in excess of $100,000 but less than $1,000,000;
plus
|
|
C.
|
2
% of
total costs in excess of
$l,000,000.
|
Expenditures
subject to the overheads above will not be reduced by insurance recoveries, and
no other overhead provisions of this Section III shall apply.
Accounting
Procedure - Page 7
4. AMENDMENT
OF RATES
The
overhead rates provided for in this Section III may be amended from time to time
only by mutual agreement between the Parties hereto if, in practice, the rates
are found to be insufficient or excessive.
IV.
PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND
DISPOSITIONS
Operator
is responsible for Joint Account Material and shall make proper and timely
charges and credits for all Material movements affecting the Joint Property.
Operator shall provide all Material for use on the Joint Property; however, at
Operator’s option, such Material may be supplied by the Non-Operators. Operator
shall make timely disposition of idle and/or surplus Material, such disposal
being made either through sale to Operator or Non-Operators, division in kind,
or sale to outsiders. Operator may purchase, but shall be under no obligation to
purchase, interest of Non-Operators in surplus condition A or B Material. The
disposal of surplus Controllable Material not purchased by the Operator shall be
agreed to by the Parties.
1. PURCHASES
Material
purchased shall be charged at the price paid by Operator after deduction of all
discounts received. In case of Material found to be defective or returned to
vendor for any other reasons, credit shall be passed to the Joint Account when
adjustment has been received by the Operator.
2. TRANSFERS
AND DISPOSITIONS
Material
furnished to the Joint Property and Material transferred from the Joint Property
or disposed of by the Operator, unless otherwise agreed to by the Parties, shall
be priced on the following basis exclusive of cash discounts:
|
A.
|
New
Material (Condition A)
|
|
(1)
|
Tubular
Goods Other than Line Pipe
|
|
(a)
|
Tubular
goods, sized 2-3/8 inches OD and larger, except line pipe, shall be priced
at Eastern mill published carload base prices effective as of date of
movement plus transportation cost using the 80,000 pound carload weight
basis to the railway receiving point nearest the Joint Property for which
published rail rates for tubular goods exist. If the 80,000 pound rail
rate is not offered, the 70,000 pound or 90,000 pound rail rate may be
used. Freight charges for tubing will be calculated from Lorain, Ohio and
casing from Youngstown, Ohio.
|
|
(b)
|
For
grades which are special to one mill only, prices shall be computed at the
mill base of that mill plus transportation cost from that mill to the
railway receiving point nearest the Joint Property as provided above in
Paragraph 2.A.(l)(a). For transportation cost from points other than
Eastern mills, the 30,000 pound Oil Field Haulers Association interstate
truck rate shall be used.
|
|
(c)
|
Special
end finish tubular goods shall be priced at the lowest published
out-of-stock price, f.o.b. Houston, Texas, plus transportation cost, using
Oil Field Haulers Association interstate 30,000 pound truck rate, to the
railway receiving point nearest the Joint
Property.
|
|
(d)
|
Macaroni
tubing (size less than 2-3/8 inch OD) shall be priced at the lowest
published out-of-stock prices f.o.b. the supplier plus transportation
costs, using the Oil Field Haulers Association interstate truck rate per
weight of tubing transferred, to the railway receiving point nearest the
Joint Property.
|
Accounting
Procedure - Page 8
|
(2)
|
Line
Pipe
|
|
(a)
|
Line
pipe movements (except size 24 inch OD and larger with walls 3/4 inch and
over) 30,000 pounds or more shall be priced under provisions of tubular
goods pricing in Paragraph A.(l)(a) as provided above. Freight charges
shall be calculated from Lorain,
Ohio.
|
|
(b)
|
Line
Pipe movements (except size 24 inch OD) and larger with walls 3/4 inch and
over) less than 30,000 pounds shall be priced at Eastern mill published
carload base prices effective as of date of shipment, plus 20 percent,
plus transportation costs based on freight rates as set forth under
provisions of tubular goods pricing in Paragraph A.(l)(a) as provided
above. Freight charges shall be calculated from Lorain,
Ohio.
|
|
(c)
|
Line
pipe 24 inch OD and over and 3/4 inch wall and larger shall be priced
f.o.b. the point of manufacture at current new published prices plus
transportation cost to the railway receiving point nearest the Joint
Property.
|
|
(d)
|
Line
pipe, including fabricated line pipe, drive pipe and conduit not listed on
published price lists shall be priced at quoted prices plus freight to the
railway receiving point nearest the Joint Property or at prices agreed to
by the Parties.
|
|
(3)
|
Other
Material shall be priced at the current new price, in effect at date of
movement, as listed by a reliable supply store nearest the Joint Property,
or point of manufacture, plus transportation costs, if applicable, to the
railway receiving point nearest the Joint
Property.
|
|
(4)
|
Unused
new Material, except tubular goods, moved from the Joint Property shall be
priced at the current new price, in effect on date of movement, as listed
by a reliable supply store nearest the Joint Property, or point of
manufacture, plus transportation costs, if applicable, to the railway
receiving point nearest the Joint Property. Unused new tubulars will be
priced as provided above in Paragraph 2.A.(1) and
(2).
|
|
B.
|
Good
Used Material (Condition B)
|
Material
in sound and serviceable condition and suitable for reuse without
reconditioning:
|
(1)
|
Material
moved to the Joint Property
|
At
seventy-five percent (75%) of current new price, as determined by Paragraph
A.
|
(2)
|
Material
used on and moved from the Joint
Property
|
|
(a)
|
At
seventy-five percent (75%) of current new price, as determined by
Paragraph A, if Material was originally charged to the Joint Account as
new Material or
|
|
(b)
|
At
sixty-five percent (65%) of current new price, as determined by Paragraph
A, if Material was originally charged to the Joint Account as used
Material
|
|
(3)
|
Material
not used on and moved from the Joint
Property
|
At
seventy-five percent (75%) of current new price as determined by Paragraph
A.
The cost
of reconditioning, if any, shall be absorbed by the transferring
property.
Accounting
Procedure - Page 9
C. Other
Used Material
(1) Condition
C
Material
which is not in sound and serviceable condition and not suitable for its
original function until after reconditioning shall be priced at fifty percent
(50%) of current new price as determined by Paragraph A. The cost of
reconditioning shall be charged to the receiving property, provided Condition C
value plus cost of reconditioning does not exceed Condition B
value.
(2) Condition
D
Material,
excluding junk, no longer suitable for its original purpose, but usable for some
other purpose shall be priced on a basis commensurate with its use. Operator may
dispose of Condition D Material under procedures normally used by Operator
without prior approval of Non-Operators.
|
(a)
|
Casing,
tubing, or drill pipe used as line pipe shall be priced as Grade A and B
seamless line pipe of comparable size and weight. Used casing. tubing or
drill pipe utilized as line pipe shall be priced at used line pipe
prices.
|
|
(b)
|
Casing,
tubing or drill pipe used as higher pressure service lines than standard
line pipe, e.g. power oil lines, shall be priced under normal pricing
procedures for casing, tubing, or drill pipe. Upset tubular goods shall be
priced on a non upset basis.
|
|
(3)
|
Condition
E
|
Junk
shall be priced at prevailing prices. Operator may dispose of Condition E
Material under procedures normally utilized by Operator without prior approval
of Non-Operators.
|
D.
|
Obsolete
Material
|
Material
which is serviceable and usable for its original function but condition and/or
value of such Material is not equivalent to that which would justify a price as
provided above may be specially priced as agreed to by the Parties. Such price
should result in the Joint Account being charged with the value of the service
rendered by such Material.
|
E.
|
Pricing
Conditions
|
|
(1)
|
Loading
or unloading costs may be charged to the Joint Account at the rate of
twenty-five cents (25c) per hundred weight on all tubular goods movements,
in lieu of actual loading or unloading costs sustained at the stocking
point. The above rate shall be adjusted as of the first day of April each
year following January 1, 1985 by the same percentage increase or decrease
used to adjust overhead rates in Section III, Paragraph l-A.(3). Each
year, the rate calculated shall be rounded to the nearest cent and shall
be the rate in effect until the first day of April next year. Such rate
shall be published each year by the Council of Petroleum Accountants
Societies.
|
|
(2)
|
Material
involving erection costs shall be charged at applicable percentage of the
current knocked-down price of new
Material.
|
3. PREMIUM
PRICES
Whenever
Material is not readily obtainable at published or listed prices because of
national emergencies. strikes or other unusual causes over which the Operator
has no control, the Operator may charge the Joint Account for the required
Material at the Operator’s actual cost incurred in providing such Material, in
making it suitable for use, and in moving it to the Joint Property; provided
notice in writing is furnished to Non-Operators of the proposed charge prior to
billing Non-Operators for such Material. Each Non-Operator shall have the right,
by so electing and notifying Operator within ten days after receiving notice
from Operator, to furnish in kind all or part of his share of such Material
suitable for use and acceptable to Operator.
Accounting
Procedure - Page 10
4. WARRANTY
OF MATERIAL FURNISHED BY OPERATOR
Operator
does not warrant the Material furnished. In case of defective Material, credit
shall not be passed to the Joint Account until adjustment has been received by
Operator from the manufacturers or their agents.
V.
INVENTORIES
The
Operator shall maintain detailed records of Controllable Material.
1. PERIODIC
INVENTORIES, NOTICE AND REPRESENTATION
At
reasonable intervals, inventories shall be taken by Operator of the Joint
Account Controllable Material. Written notice of intention to take inventory
shall be given by Operator at least thirty (30) days before any inventory is to
begin so that Non-Operators may be represented when any inventory is taken.
Failure of Non-Operators to be represented at an inventory shall bind
Non-Operators to accept the inventory taken by Operator.
2. RECONCILIATION
AND ADJUSTMENT OF INVENTORIES
Adjustments
to the Joint Account resulting from the reconciliation of a physical inventory
shall be made within six months following the taking of the inventory. Inventory
adjustments shall be made by Operator to the Joint Account for overages and
shortages, but, Operator shall be held accountable only
for shortages due to lack of reasonable
diligence.
3. SPECIAL
INVENTORIES
Special
inventories may be taken whenever there is any sale, change of interest, or
change of Operator in the Joint Property. It shall be the duty of the party
selling to notify all other Parties as quickly as possible after the transfer of
interest takes place. In such cases, both the seller and the purchaser shall be
governed by such inventory. In cases involving a change of Operator, all Parties
shall be governed by such inventory.
4. EXPENSE
OF CONDUCTING INVENTORIES
|
A.
|
The
expense of conducting periodic inventories shall not be charged to the
Joint Account unless agreed to by the
Parties.
|
|
B.
|
The
expense of conducting special inventories shall be charged to the Parties
requesting such inventories, except inventories required due to change of
Operator shall be charged to the Joint
Account.
|
Accounting
Procedure - Page 11
EXHIBIT
“D”
INSURANCE
1.
|
AT
ALL TIMES DURING THE CONDUCT OF OPERATIONS HEREUNDER, OPERATOR SHALL
CONTINUE THE INSURANCE CURRENTLY MAINTAINED IN FORCE BY OPERATOR, A COPY
OF WHICH HAS BEEN PROVIDED TO NON-OPERATOR. INSURANCE COSTS SHALL BE AN
EXPENSE OF THE JOINT ACCOUNT.
|
2.
|
ANY
PARTY MAY AT ITS OWN EXPENSE ACQUIRE SUCH OTHER INSURANCE AS IT DEEMS
PROPER TO PROTECT ITSELF AGAINST ANY CLAIMS, LOSSES, DAMAGES OR
DESTRUCTION ARISING OUT OF OPERATIONS OF THE JOINT
PROPERTY.
|