Participation Agreement - Hay Exploration Inc. and Ivanhoe Energy (USA) Inc.
PARTICIPATION AGREEMENT
This Participation Agreement ("Agreement") is made and entered into as of
this 10th day of March, 2001 by and between HAY EXPLORATION, INC., hereinafter
referred to as "Hay" a Kentucky Corporation, located at 4353 Willard Drive,
Ashland, Kentucky 41102, and IVANHOE ENERGY (USA) INC., hereinafter referred to
as "Ivanhoe", a Nevada Corporation, located at 1200 Discovery Drive, Suite 301,
P.O. Box 9279, Bakersfield, California 93389-9279, sometimes referred to as a
"Party" and collectively as the "Parties".
WITNESSETH:
WHEREAS, Hay represents that it is the owner and holder of certain oil and
gas leases, farmouts and oil and gas rights, covering approximately 15,000 net
mineral acres, hereinafter called the "Area of Interest" or "AOI" in Elliott,
Morgan and Carter Counties, Kentucky as described on Exhibit "A" attached
hereto and made a part hereof; and
WHEREAS, Hay and Ivanhoe are interested in participating jointly to
evaluate, explore and develop the subject leasehold for oil and/or gas
development within the Area of Interest, shown on Exhibit "B", attached hereto
and made a part hereof. An "Area of Mutual Interest" (AMI) will be further
defined, by mutual agreement, upon the completion of the first three (3)
exploration wells, as hereinafter described; and
WHEREAS, Ivanhoe is an experienced oil and gas operator and is interested
in participating with Hay to explore, develop and produce hydrocarbon
substances from the AOI; and,
NOW THEREFORE, in consideration of the premise and covenants set out
hereinafter, the Parties agree as follows:
SECTION ONE
DUE DILIGENCE AND WELL COMMENCEMENT
1.1 Ivanhoe shall have access to any all land records and title information
relative to the leases in the AOI, and Hay agrees to assist Ivanhoe in
accessing said records and all data relating to such leases and the AOI,
including but not limited to oil and gas leases; farmouts, drilling
contracts, gas contracts, land records and maps, title opinions,
geological and geophysical data, well production data, and historical
information relating to such data and the AOI.
1.2 On or before the 25th day of March 2001, Hay will have applied for
drilling permits and have ready a minimum of three (3) drilling
locations, being one each for each prospect area hereinafter described.
Hay shall commence drilling operations as soon as a rig is available.
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SECTION TWO
PROSPECT COST
2.1 Upon execution of this Agreement, Ivanhoe will tender to Hay an advance
payment of Four Hundred Fifty Thousand Dollars ($450,000.00) (said amount
being the equivalent of Thirty dollars ($30.00) per acre, times the total
net mineral acres within the three (3) prospect areas). Said payment is
to cover the costs associated with identifying and acquiring the subject
leaseholds, any proprietary seismic, gravity and aeromagnetic data, and
facilitating the acquisitions of leases for each prospect located within
the AOI and each prospect area. In exchange therefore, Ivanhoe shall have
earned an undivided one half interest (1/2) in each prospect area.
SECTION THREE
PROSPECTS
3.1 This prospects consist of three (3) separate leaseholds, each requiring
one (1) well each to penetrate the Rome Sand horizon, as identified on
the Litho-Density log of the Lawson #1 Well, located in 7-S-78, 114 feet
from the South line and 703 feet from the West line, Carter Coordinates,
Elliott County, Kentucky, at a depth of 6024 feet to 7312 feet below the
surface of the ground. The prospects are known as the Jenkins a/k/a
Dingus, Beetle a/k/a Carter and Burk Prospects. Each prospect requires
that an exploratory well to be drilled to penetrate the Rome formation,
be commenced as soon as a rig is available after the execution of this
Agreement. It is further agreed by the Parties hereto that the drilling
rig will proceed from the Jenkins Prospect test well, to commence
drilling the Beetle Prospect test well, and then the Burk Prospect test
well, in that order. It is also understood and agreed that one (1) well
per year in each of the three (3) prospects thereafter will be required
to maintain the continuous drilling provisions, as provided under the
Farmout Agreements attached hereto as Exhibits "A-1", "A-2" and "A-3".
3.2 UNLEASED INTEREST: In the event that any drill site has an unleased
interest, and after all reasonable efforts have been made to secure a
lease on the unleased interest, that may be located outside the existing
subject leasehold, but directly adjacent thereto, all working interest
owners will participate proportionately by reducing their interest to
cover said unleased interest for any well drilled.
3.3 WORKING INTEREST PARTICIPATION UNDER THIS AGREEMENT: Hay and Ivanhoe
shall each participate for a Fifty Percent (50%) working interest,
subject to the terms and conditions set out hereinafter. This respective
working interest ownerships shall apply to all depths penetrated and all
test wells drilled within the AOI, save and except those wells existing
upon the subject leaseholds as of the date of this Agreement.
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3.4 Should Equitable Production-Eastern States, Inc., "Equitable" exercise
its option to become a Thirty Percent (30%) working interest owner in
future wells, pursuant to the terms of the Farmout Agreements attached
hereto, such Thirty Percent shall be deducted from Hay's interest only.
Ivanhoe's Fifty Percent (50%) interest will not be affected thereby.
SECTION FOUR
ASSIGNMENT
4.1 ASSIGNMENT OF SUBJECT LEASES AND FARMOUT AGREEMENT: In the event Hay and
Ivanhoe drill the test wells pursuant to this Agreement, Hay agrees to and
shall execute an assignment to Ivanhoe (the "Assignment") of a Fifty
Percent (50%) working interest, in and to all of the one hundred and sixty
(160) acres, embraced within the unit as designated by the governing
agency having jurisdiction, or as mandated by state spacing requirements,
down to and including One Hundred Feet (100') below the base of the
deepest horizon penetrated. The net revenue interest for all leaseholds
are subject to landowner royalty and Farmout Agreement overriding royalty,
and Hay agrees to deliver a net revenue interest to Ivanhoe of Eighty and
One-Half percent (80.5%) on all three prospects identified within each
AOI.
SECTION FIVE
OPERATING AGREEMENT
5.1 FORM OF AGREEMENT: Except as otherwise provided, all operations conducted
under this Agreement shall be governed by the AAPL Form 610-1989 Operating
Agreement (JOA), attached hereto as Exhibit "C", including the COPAS
Accounting Procedures. Hay shall be designated Operator under the
Operating Agreement, and shall manage and oversee lease acquisitions and
all drilling programs, on behalf of the Parties. In the event any
provisions of the JOA conflict with or are inconsistent with provisions of
this Agreement, the terms of this Agreement shall control. Notwithstanding
anything to the contrary, in the event wells are drilled and completed on
any land subject to any Farmout Agreement and the JOA under such Farmout
Agreement becomes effective, all future operations shall be conducted
under such other Farmout JOA.
SECTION SIX
TERM OF AGREEMENT
6.1 This Agreement shall remain in effect until the latter of April 18, 2002,
or as provided in Article XIII, Option #1 of the JOA.
SECTION SEVEN
NOTICES
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7.1 All notices under this Agreement between the Parties, unless otherwise
specifically provided, shall be in writing and delivered by the United
States mail, courier service, telegram, telex, telecopier facsimile, or
any other form of electronic written communication, postage prepaid, and
addressed to such Party at the addresses shown below:
Hay Exploration, Inc. Ivanhoe Energy (USA) Inc.
4353 Willard Drive P.O. Box 9279
Ashland, Kentucky 41102 Bakersfield, California 93389-9279
Attention Monte Hay Attention Roger Narinian
Telephone: (606) 324-7971 Telephone: (661) 869-8344
Fax: (606) 324-6340 Fax: (661) 325-2961
The Keeton Group, LLC
3012 Merideth Circle
Lexington, Kentucky 40513
Attention Chester Keeton
Telephone: (859) 224-0962
Fax: (859) 223-2199
SECTION EIGHT
GEOLOGICAL AND GEOPHYSICAL ACTIVITY
8.1 For the benefit of this Agreement, Hay shall manage the acquisition and
interpretation of all Geological and Geophysical (G&G) work, including
but not limited to all seismic acquisition, processing and
interpretation. Either Party may propose the acquisition of G&G data by
submitting a proposal to the other Party. In the event a Party proposes
acquisitions of seismic data, and the other Party elects not to
participate in such acquisition, the proposing Party shall have the right
to proceed with the acquisition of the data; the cost of such acquisition
shall not be an expense under this Agreement, and shall be borne solely
by the proposing Party, and the data shall be owned or controlled solely
by the proposing Party. If a test well is drilled within one mile of any
such seismic line, the purchasing Party shall have the right to recover
One Hundred Percent (100%) of the cost of such seismic out of non-owners
share of production of hydrocarbon substances.
SECTION NINE
WELL COST(S)
9.1 The three (3) initial test wells contemplated by this Agreement shall be
drilled pursuant to the estimated cost on the attached Authority For
Expenditure (AFE), attached as Exhibits "D-1", "D-2" and "D-3". The
completion cost shall be born equally by each working interest owner in
direct proportion to their interest owned. Any completion attempt shall be
made under the terms of the JOA, Article VI.(b).2. Estimated completion
costs are included in the AFEs attached, and the actual cost will be born
by each working interest owner in
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direct proportion to its interest owned. All costs are subject to the
attached AAPL Joint Operating Agreement and COPAS.
9.2 The initial three (3) Rome Sand test wells contemplated by this agreement
shall be drilled to a depth of approximately Eight Thousand Feet (8000')
or sufficient to test the Rome Sand formation, whatever is the lesser
depth. Any and all pipeline expenses shall be born equally by Hay and
Ivanhoe.
SECTION TEN
MISCELLANEOUS
10.1 ACQUISITION OF ACREAGE: Either party may separately acquire any oil and
gas interest within the AOI. The term "oil and gas interest" shall mean
any oil and gas lease or unleased fee and mineral interest and any
agreement, option or other right to acquire such lease or interest,
pertaining to lands contained within the AOI. Within thirty (30) days of
such acquisition, the acquiring Party shall promptly make a written offer
to assign to the other Party an undivided Fifty Percent (50%) of its
interest in any such separately acquired oil and gas interest. The Party
receiving such an offer shall respond in writing within Fifteen (15) days
of receipt electing to accept or refuse the offer. Failure to respond
within said Fifteen (15) days shall be deemed an election to refuse the
offer. The Party acquiring the interest and making the offer shall
provide the other Party with copies of all title information in its
possession relating to the interest to be acquired. If the offer is
accepted the offering Party shall, within Thirty (30) days of acceptance,
make an assignment of an undivided Fifty Percent (50%) of its interest in
the oil and gas interest acquired to the other Party. Upon receipt of the
assignment and invoice, the receiving Party shall reimburse the offering
Party for Fifty Percent (50%) of the acquisition cost of the oil and gas
interest assigned. Said assignment shall be without warranty of title
either express or implied and subject to each Party paying its
proportionate share of all delay rentals and all royalties, overriding
royalties, production payments and other lease burdens in existence as of
the effective date of the initial acquisition of the oil and gas interest
and shall be proportionately reduced in relation to the interest of the
assigning Party in the entire oil and gas interest. If a Party refuses or
is deemed to have refused an offer as described above, the oil and gas
interest offered shall no longer be subject to this Agreement.
10.2 SUCCESSOR AND ASSIGNS: The terms, covenants and conditions hereof shall
extend to and be binding upon and shall inure to the benefit of the
Parties hereto, and their respective heirs, legal representatives,
successors and assigns. Any assignment of interest in and to this
Agreement shall be made expressly subject to this Agreement.
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10.3 ARBITRATION: Any dispute arising out of or relating to this Agreement,
including any question regarding its existence, validity or termination,
which cannot be amicably resolved by the Parties, shall be settled by
arbitration before three arbitrators, one to be appointed by each Party,
and the two so appointed shall appoint the third arbitrator, in
accordance with the Arbitration Rules of the American Arbitration
Association, as amended from time to time. The laws of the State of
Kentucky shall be applied in any such arbitration proceedings, without
regard to principles of conflict of laws that would refer the matter to
the laws of another jurisdiction. Arbitration shall be held in Lexington,
Kentucky, and judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. A dispute shall be
deemed to have arisen when either Party notifies the other Party in
writing to that effect. Each Party shall share equally in the costs of
any arbitration, however, each Party shall pay its own costs and attorney
fees irrespective of which Party prevails in the arbitration.
10.4 Schedule of Exhibits: For convenient use, the following is a schedule of
exhibits included with this Agreement":
Exhibit "A": Oil and Gas Leases
Exhibit "A-1": Equitable Farmout Agreement dated 8/22/2000
(Jenkins aka Dingus)
Exhibit "A-2": Equitable Farmout Agreement dated 8/22/2000
(Beetle a/k/a Carter)
Exhibit "A-3": Equitable Farmout Agreement dated 8/22/2000
(Burk)
Exhibit "B": Area of Interest (AOI)
Exhibit "C": AAPL Form 610-1989 Joint Operating Agreement with
1984 COPAS Accounting Procedure
Exhibit "D": Authority For Expenditure -- Test well for
___Jenkins_(Dingus)_Prospect
Exhibit "D-1": Authority For Expenditure -- Test well for
___Beetle (aka Carter) Prospect
Exhibit "D-2": Authority For Expenditure -- Test well for
___Burke Prospect
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IN WITNESS WHEREOF, this Agreement is executed and shall be effective as of the
date first above written.
Hay Exploration, Inc. Ivanhoe Energy (USA), Inc.
By: /s/ Monte Hay By: /s/ Joseph M. McKniff
----------------------------- ------------------------------
Monte Hay Joseph M. McKniff
Its President Its Vice President
ACKNOWLEDGEMENTS
[IVANHOE LEGAL SEAL]
State of Kentucky
County of Boyd
The foregoing instrument was acknowledged before me this 10th day of March
2001, by Monte Hay, President of Hay Exploration, Inc., on behalf of said
corporation as its duly authorized officer.
My Commission Expires: 11-12-2003 /s/ Sheliah S. Hay
------------------------------
Notary Public
State of California )
) SS
County of Kern )
On this 21st day of March, 2001, before me, Leigh Gulley, a Notary Public,
personally appeared Joseph M. McKniff personally known to me to be the person
whose name is subscribed to the within instrument and acknowledged to me that
he executed the same in his authorized capacity, and that by his signature on
the instrument the person or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal
/s/ Leigh Gulley
------------------------------
Notary Public in and for said State
[LEIGH GULLEY SEAL]
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EXHIBIT A
JENKINS/AKS DINGUS LEASES PAGE 1
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90092201 EVANS, LYNN S. ACTIVE 12/31/99 5/21/01 100 28.67
90092202 SCHMITT, MARY D. AND EDWARD A., W/H ACTIVE 12/31/99 5/23/01 100 28.67
90092203 MCCARTNEY, GLADYS EVANS ACTIVE 12/31/99 2/12/02 100 21.33
90092204 HINTON, THOMAS EVANS, SR., BY TRUSTEES ACTIVE 12/31/99 3/5/02 100 7.11
90092205 LANE, DREW E. SR. ACTIVE 12/31/99 3/5/02 100 7.11
90092206 LANE, W.C., III, AND GAIL W. ACTIVE 12/31/99 3/5/02 100 7.11
90093000 JOHNSON, FRANKIE & AUDREY ACTIVE 12/31/99 6/26/01 50 50
90093100 HOWARD, CAROL A. ACTIVE 7/19/99 7/19/04 100 100
90093200 HOWARD, JIMMY WALTER & BARBARA JEAN ACTIVE 12/31/99 6/26/99 100 100
90094100 WILLIAMS, WOODROW & ARLENE W. ACTIVE 12/31/99 6/24/01 57 57
90094601 PORTER, NORMA JEAN ACTIVE 12/31/99 6/26/01 110 92.5
90094602 WILLIAMS, ARNOLD C. AND LUCY STEWARD, H/W ACTIVE 12/31/99 5/7/02 110 17.5
90094701 PATTERSON, ELIZABETH SEIFER & JOHN PAUL ACTIVE 12/31/99 6/26/01 672 224
90094702 SOLLEY, BARBARA SEIFER & ROBERT H. ACTIVE 12/31/99 6/26/01 672 224
90094703 LANE, DIANA SEIFER ACTIVE 12/31/99 6/26/01 672 224
90095701 PERKINS, GARY ACTIVE 12/31/99 7/16/01 105 89.69
90095800 GILLIAM, DONNIE & ESTHER ACTIVE 12/31/99 7/14/01 150 150
90096000 JENKINS, RALEIGH & ELVA ACTIVE 12/31/99 7/17/01 350 350
90096100 CANTRELL, CLYDE & DIANA ACTIVE 12/31/99 7/17/01 80 80
90096400 SMITH, ROBERT, INDIVIDUALLY & AS ATTORNEY-IN-FACT ACTIVE 12/31/99 7/5/01 82.5 82.5
90096500 CRAMER, JAMES & PEGGY ACTIVE 12/31/99 6/25/01 107 107
90097500 WRIGHT, BEN & OEDITH ACTIVE 12/31/99 7/23/99 336 336
90097502 MULLINS, REBECCA ACTIVE 7/5/99 7/23/02 96 96
90097800 ISON, MARY JANE ACTIVE 12/31/99 7/29/01 75 75
90098900 HAMILTON, ELLIS B. AND THELMA J., H/W ACTIVE 12/31/99 8/6/01 100 100
90099200 SMITH, DARRIS & SANDY ACTIVE 8/25/96 8/25/01 80 80
90099801 MCCLAIN, JESSIE ACTIVE 12/31/99 8/26/01 80 17.78
90099802 BECULHIMER, IVAN & REVA ACTIVE 12/31/99 3/31/02 80 17.78
90099803 BRADLEY, THELMA ACTIVE 12/31/99 5/14/02 80 17.8
90099804 NICKELL, BEULAH ACTIVE 12/31/99 5/27/02 80 13.3
90099805 BRADLEY, POLLY ACTIVE 12/31/99 5/27/02 80 13.33
90100600 BECULHIMER, DWIGHT D. ET AL ACTIVE 12/31/99 9/24/01 150 150
90100701 BECULHIMER, ORVILLE II AND NINA, H/W ACTIVE 12/31/99 9/22/01 125 62.5
90100702 BECULHIMER, IVAN AND REVA, H/W ACTIVE 12/31/99 9/10/01 125 62.5
</Table>
<PAGE>
EXHIBIT A CONT.
JENKINS/AKS DINGUS LEASES PAGE 2
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90100801 MCCLAIN, JESSIE ACTIVE 12/31/99 9/25/01 20 4.36
90100802 BECULHIMER, REVA AND IVAN, W/H ACTIVE 12/31/99 9/10/01 20 4.37
90100803 BRADLEY, THELMA ACTIVE 12/31/99 5/14/02 20 4.37
90100804 BRADLEY, POLLY ACTIVE 12/31/99 5/27/02 20 3.45
90100805 NICKELL, BEULAH ACTIVE 12/31/99 5/27/02 20 3.45
90106600 BRADLEY, EARL, WIDOWER, AND TRUSTEE FOR WILLIAMS C ACTIVE 12/31/99 2/13/02 104 104
90106901 HUTCHINSON, REVA, WIDOW ACTIVE 12/31/99 2/19/02 75 15
90106902 CASKEY, RUBY, WIDOW ACTIVE 12/31/99 2/19/02 75 15
90106903 HAMILTON, ARDENE, WIDOW, MITCHELL D., SINGLE AND M ACTIVE 12/31/99 2/26/02 75 15
90106904 FEYFFE, LORENE AND HARRY ACTIVE 12/31/99 3/3/02 75 5
90106905 FERGUSON, PATRICIA AND JEARLD ACTIVE 12/31/99 3/3/02 75 5
90106906 HAMILTON, RICKY L AND TERESA A., H/W ACTIVE 12/31/99 3/10/02 75 5
90106907 LITTERAL, EDRA H. AND RICHARD D., W/H ACTIVE 12/31/99 2/27/02 75 7.5
90107000 WRIGHT ENTERPRISE INC., ACTIVE 12/31/99 2/13/02 125 125
90107300 WRIGHT, WILLIAM E. AND REVA C., H/W ACTIVE 12/31/99 2/21/02 200 200
90107601 SMITH, CLIFFORD AND LOLETA, H/W ACTIVE 12/31/99 2/20/02 115 95
90107602 BRADLEY, OTTIS, SINGLE ACTIVE 3/21/00 3/21/02 40 10
90107801 SMITH EARNEST D. AND VICKI ACTIVE 12/31/99 2/24/02 155 105
90107802 TAYLOR, CLAUDINE AND C. TAYLOR, JR. ACTIVE 12/31/99 2/24/02 155 50
90108201 HILL, GWANA & TOMMY ACTIVE 12/31/99 2/18/02 100 33.33
90108202 CONLEY, MILDRED ACTIVE 12/31/99 2/18/02 100 33.33
90108203 CONLEY, LORAN C. & PAMELA ACTIVE 12/31/99 2/18/02 100 33.33
90109801 WILLIAMS, PAUL E. AND JEWELL, H/W ACTIVE 3/28/97 3/28/00 275 45.83
90109802 WILLIAMS, LOWELL D. AND NANCY, H/W ACTIVE 3/28/97 3/28/00 275 45.84
90109803 WILLIAMS, ARCHIE C. AND SARA KAY, H/W ACTIVE 3/28/97 3/28/00 275 45.83
90109804 YOUNG, ESKIL B. AND MARY, H/W ACTIVE 12/31/99 5/13/02 275 100
90110101 LANE, DIANA SEIFER ACTIVE 12/31/99 6/26/01 221.75 73.91
90110102 PATTERSON, ELIZABETH SEIFER & JOHN PAUL ACTIVE 12/31/99 6/26/01 221.75 73.92
90110103 SOLLEY, BARBARA SEIFER AND ROBERT H., W/H ACTIVE 12/31/99 6/26/01 221.75 73.92
90110201 SMITH, ETHEL MAE, WIDOW ACTIVE 12/31/99 2/26/02 120 65
90110401 FRALEY, ESTA ACTIVE 12/31/99 4/2/02 150 18.75
90110402 SPRADLIN, KATHY AND GARY, W/H ACTIVE 12/31/99 4/2/02 150 0.38
90110403 RAAB, BONNIE & MELVIN ACTIVE 12/31/99 4/2/02 150 2.68
90110404 CONSCHAFSKY, ANITA, SINGLE ACTIVE 12/31/99 4/2/02 150 0.38
90110405 IRICK, CHARLENE CAROLYN & ROGER W. ACTIVE 12/31/99 4/2/02 150 21.43
</Table>
<PAGE>
EXHIBIT A CONT.
JENKINS/AKS DINGUS LEASES PAGE 3
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90110406 TURNER, DELORES & VAUGHN ACTIVE 12/31/99 4/2/02 150 6.25
90110407 RIDDLEBARGER, FLORENCE ACTIVE 12/31/99 4/2/02 150 18.75
90110408 SHERMAN, BERT & AUDREY ACTIVE 12/31/99 4/2/02 150 4.69
90110409 LEESBURG, LAVONDA AND CHARLES A., W/H ACTIVE 12/31/99 4/2/02 150 6.25
90110410 PHILLIPS, KAREN AND GREG, W/H ACTIVE 12/31/99 4/2/02 150 0.89
90110410 PHILLIPS, KAREN AND GREG, W/H ACTIVE 12/31/99 4/2/02 150 0.89
90110412 SHERMAN, DONALD, SINGLE ACTIVE 12/31/99 4/2/02 150 4.69
90110413 BAILEY, EUGENE AND IVORY, H/W ACTIVE 12/31/99 4/2/02 150 6.25
90110414 LEFFEL, CANDY AND MARK, W/H ACTIVE 12/31/99 4/2/02 150 0.38
90110415 PACHE, BELLIE AND JOE, W/H ACTIVE 12/31/99 4/2/02 150 2.68
90110416 COLLIER, KENNETH, SINGLE ACTIVE 12/31/99 4/2/02 150 0.38
90110417 WOLCOSKI, DONNA JEAN, SINGLE ACTIVE 12/31/99 4/2/02 150 0.89
90110418 WOOLDRIDGE, JUDY, SINGLE ACTIVE 12/31/99 4/2/02 150 0.89
90110419 LINARES, KATHY ELAINE AND MAURICIO, W/H ACTIVE 12/31/99 4/2/02 150 0.33
90110420 DAY, WANDA, WIDOW ACTIVE 12/31/99 4/2/02 150 1.34
90110421 FLAIG, TAMI LEE, SINGLE ACTIVE 12/31/99 4/2/02 150 0.33
90110422 DAY, MICHAEL RICHARD AND MARTHA, H/W ACTIVE 12/31/99 4/2/02 150 0.33
90110423 DAY, HOMER AND BERNADINE, H/W ACTIVE 12/31/99 4/2/02 150 2.68
90110424 OGILVIE, DARLENE AND PAUL, W/H ACTIVE 12/31/99 4/2/02 150 4.69
90110425 HOWELL, JOSEPH W., GUARDIAN FOR AUDREY HOWELL, INC ACTIVE 12/31/99 4/2/02 150 4.69
90110426 SMITH, LINDA AND BILL, W/H ACTIVE 12/31/99 4/2/02 150 0.38
90110427 ADAMS, PEGGY AND BOBBY, W/H ACTIVE 12/31/99 4/2/02 150 0.38
90110428 PAYTON, BRENDA AND RANDY, W/H ACTIVE 12/31/99 4/2/02 150 0.38
90111201 ABBOTT, DOROTHY AND MICHAEL, SR., W/H ACTIVE 12/31/99 4/16/02 360 22.5
90111202 PRICHARD, HARLAN B. & ELIZABETH ET AL ACTIVE 12/31/99 4/16/02 360 90
90111203 PRICHARD, HERBERT L. AND LOIS ET AL ACTIVE 12/31/99 4/16/02 360 67.5
90111204 MADDIX, JUDITH C. AND LARRY GREGORY, W/H ACTIVE 12/31/99 5/15/02 360 31.88
90111205 STOREY, JOAN C. ACTIVE 12/31/99 5/16/02 360 13.13
90111206 STAPLETON, MARCELLA AND WILLIAM E., W/H ET AL ACTIVE 12/31/99 5/27/02 360 112.5
90111700 BECULHIMER, JAMES AND DELENA G., H/W ACTIVE 12/31/99 3/25/02 17.5 17.5
90111801 THOMPSON, VIOLET BRADLEY, WIDOW ACTIVE 12/31/99 3/19/02 466.25 230
90111802 BRADLEY, THOMAS R, SINGLE. ACTIVE 12/31/99 3/19/02 466.25 115
90111803 BRADLEY, CHARLES A. AND LORETTA, H/W ACTIVE 12/31/99 3/19/02 466.25 115
90112600 WRIGHT, FLOYD ACTIVE 12/31/99 4/29/02 12 12
90113101 SMITH, CLIFFORD AND LOLETA, H/W ACTIVE 12/31/99 5/9/02 60 6.7
</Table>
<PAGE>
EXHIBIT A CONT.
JENKINS/AKS DINGUS LEASES PAGE 4
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90113102 STEVENSON, DESSIE AND GILBERT, W/H ACTIVE 12/31/99 5/12/02 60 6.7
90113103 HANKEY, ESSIE, WIDOW ACTIVE 12/31/99 5/12/02 60 6.7
90113104 RAPTON, CASSIE ANN AND JOHN, W/H ACTIVE 12/31/99 5/12/02 60 6.7
90113105 PRATER, LASSIE, WIDOW ACTIVE 12/31/99 5/12/02 60 6.7
90113500 BRADLEY, THELMA ACTIVE 12/31/99 5/22/02 150 150
90113700 CANTRELL, JOHNNY D. AND BEVERLY ACTIVE 6/15/00 6/15/03 5 5
90114000 HUFF, WAYNE & RUTH ACTIVE 12/31/99 5/16/02 160 160
90114301 O'HAGAN, MARY ALICE BRAND AND JOH P., W/H ACTIVE 12/31/99 4/25/02 1200 37.5
90114302 BRAND, LAWRENCE, JR., AND MARGARET M., H/W ACTIVE 4/25/97 4/25/02 1200 37.5
90115000 HARLOW, CONNIE LYNN (CAUDILL) ACTIVE 12/31/99 6/17/02 67 67
90115501 UTZ, HATTIE ACTIVE 12/31/99 7/2/02 35 22.5
90115502 BAKER, ROBERT, WIDOWER ACTIVE 12/31/99 7/10/02 35 1.6
90115503 RIGSBY, PHYLLIS ND RONALD, W/H ACTIVE 12/31/99 7/10/02 35 1.6
90115504 BRADLEY, DARRELL AND JUDY RENEE, H/W ACTIVE 12/31/99 8/19/02 35 1.6
90115505 BRADLEY, JEAN, WIDOW ACTIVE 12/31/99 8/25/02 35 0.8
90115506 BRADLEY, PAUL E., JR., AND LAURA E., H/W ACTIVE 12/31/99 8/25/02 35 0.2
90115507 FERRELL, MADONNA AND DALE ACTIVE 12/31/99 8/25/02 35 0.2
90115508 BRADLEY, ANTHONY A. AND DIANE, H/W ACTIVE 12/31/99 8/25/02 35 0.2
90115509 FRAZIER, MESCHELLE AND CHARLES ACTIVE 12/31/99 8/25/02 35 0.2
90115601 MCCOMBS, NITA J. AND ROGER E., W/H ACTIVE 12/31/99 7/8/02 395 33
90115602 THOMPSON, LOIS M. AND PHILIP D., W/H ACTIVE 12/31/99 7/8/02 395 33
90115603 SCRAGG, SALLY AND ALVA B., W/H ACTIVE 12/31/99 7/15/02 395 99
90115604 MORTON, JOYCE E. AND GEORGE S., W/H ACTIVE 12/31/99 7/8/02 395 33
90115605 HOLBROOK, WILLIAM G. AND PAMELA B., H/W ACTIVE 12/31/99 8/10/02 395 31.25
90115606 HOLBROOK, LENVILLE E., SINGLE ACTIVE 12/31/99 8/10/02 395 33.25
90115607 HOLBROOK, DENNIE AND KATHLEEN, H/W ACTIVE 12/31/99 7/15/02 50 12.5
90117500 HOLBROOK, LENVILLE E. ACTIVE 12/31/99 8/20/02 132 132
90118101 GINGERICH, CLARA C. AND DAVID ACTIVE 12/31/99 8/19/02 150 50
90118102 ROBERTS, MARJORIE C. ACTIVE 12/31/99 8/19/02 150 50
90118103 HILL, BETTIE JEAN AND RICHARD ACTIVE 12/31/99 8/19/02 150 50
90118500 COMMERCIAL BANK ACTIVE 12/31/99 8/26/02 100 100
90118600 COMMERCIAL BANK ACTIVE 12/31/99 8/26/02 90 90
90118800 COMMERCIAL BANK ACTIVE 12/31/99 9/30/02 100 100
90119001 CASKEY, OSHIE WIDOW, AND JAY RICHARD CASKEY, SINGLE ACTIVE 12/31/99 10/2/02 100 8.34
90119002 HAWKINS, JOY SUE AND KENNETH W., W/H ACTIVE 12/31/99 10/2/02 100 0
</Table>
<PAGE>
EXHIBIT A cont.
JENKINS/AKS DINGUS LEASES PAGE 5
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90119003 PATRICK, JAMES B., WIDOWER ACTIVE 12/31/99 9/30/02 100 8.34
90119004 WINGO, GOVER C., JR., MARRIED ACTIVE 12/31/99 9/30/02 100 8.34
90119005 WINGO, PAULINE, MARRIED ACTIVE 12/31/99 10/30/02 100 0
90119006 KEISKER, DIANA AND VICTOR N., W/H ACTIVE 12/31/99 10/8/02 100 8.34
90119701 SMITH, CLYDE R. AND CAROLYN ACTIVE 12/31/99 9/11/02 100 12.5
90119702 STORY, DIANA GAIL ACTIVE 12/31/99 9/11/02 100 12.5
90119703 SMITH, MARY O., WIDOW ACTIVE 12/31/99 9/11/02 100 25
90119704 SMITH, CARL ACTIVE 12/31/99 9/10/02 100 50
90119901 JENKINS, MINTHA FAY AND DAVID, W/H ACTIVE 12/31/99 10/7/02 50 3.6
90119902 ISON, MONNIE GAY, SINGLE ACTIVE 12/31/99 10/7/02 50 3.6
90119903 ISON, DOUGLAS AND WILMA, H/W ACTIVE 12/31/99 10/7/02 50 3.6
90119904 ISON, DEWIE AND DANA, H/W ACTIVE 12/31/99 10/7/02 50 3.6
90119905 ISON, G. DALE AND JOAN, H/W ACTIVE 12/31/99 10/7/02 50 3.6
90119906 ISON, LESLIE DEE, SINGLE ACTIVE 12/31/99 10/7/02 50 3.6
90119907 ISON, DAVID AND MARY JANE, H/W ACTIVE 12/31/99 10/7/02 50 3.6
90120400 COMMERCIAL BANK ACTIVE 12/31/99 10/28/02 40 40
-------
SUB TOTAL NET ACREAGE 6,995.9
=======
</Table>
<PAGE>
EXHIBIT A CONT.
BEETLE/AKS CARTER LEASES PAGE 7
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90113401 FLAUGHER, BERTIE ET AL ACTIVE 12/31/99 5/14/02 34 25.5
90113402 FLAUGHER, DERON J. ET AL ACTIVE 12/31/99 5/14/02 34 8.5
90113600 KRETZER, JAMES D. AND SHARON, H/W ACTIVE 12/31/99 5/27/02 120 120
90113800 ROBINSON, M. B. ACTIVE 7/13/00 7/13/03 150 150
90114200 JACKSON, RAYMOND AND SUNNY, H/W ACTIVE 12/31/99 6/16/02 86 86
90114401 GEE, RAMONA AND WALTER, W/H ACTIVE 12/31/99 6/11/02 115 23
90114501 CARMICHAEL, KATE MILLER ET AL ACTIVE 12/31/99 6/4/02 176 132
90114502 ROGERS, MADGE M. AND BILLY, W/H ACTIVE 12/31/99 6/4/02 176 22
90114503 SULLIVAN, WANDA ACTIVE 6/4/97 6/4/02 176 22
90114600 MCDAVID, RONALD F. AND GLENNA K., H/W ACTIVE 12/31/99 6/20/02 93 93
90114800 ROGERS, HAROLD V. & MENNIE ACTIVE 12/31/99 6/30/02 94 94
90114900 SAMPSON, JEWELL A. & WARREN ACTIVE 12/31/99 6/17/02 54 54
90115000 HARLOW, CONNIE LYNN (CAUDILL) ACTIVE 12/31/99 6/17/02 67 67
90115100 GEE, ELAINE M, WIDOW. ACTIVE 12/31/99 7/7/02 225 225
90115200 ROGERS, HAROLD V. & MENNIE ACTIVE 12/31/99 6/30/02 80 80
90115300 HOUCK, IRENE ACTIVE 12/31/99 7/9/02 52 52
90115400 HARPER, BILLY G. & RHODA ACTIVE 12/31/99 7/9/02 140 140
90115800 MAGGARD, LINVILLE AND MELANIE ACTIVE 12/31/99 7/20/02 46 46
90115900 WOODS, EVELYN LORRAINE ACTIVE 12/31/99 7/23/02 82 82
90116000 BLEVINS, NANCY ACTIVE 12/31/99 6/30/02 106 106
90116500 RAY, DORA H. AND GEORGE K., W/H ACTIVE 12/31/99 7/30/02 45 45
90117100 KOUNS, GAYLORD AND BERTHA ACTIVE 12/31/99 8/12/02 35 35
90117200 KIRK, JOHN AND RUTH ACTIVE 12/31/99 8/14/02 64 64
90117400 MCDAVID, WESLEY AND VIRGINIA ACTIVE 12/31/99 8/20/00 100 100
90117600 BRADFORD, MAXINE A. AND BILLY ACTIVE 12/31/99 8/20/02 74 74
90117700 BRADFORD, MAXINE A. AND BILLY ACTIVE 12/31/99 8/20/02 40 40
90117800 GOLLIHUE, JOHNNY K. AND SHARRON ACTIVE 12/31/99 8/28/02 10 10
90117900 ISAACS, MICHAEL R. AND VIRGINIA ACTIVE 12/31/99 8/28/02 50 50
---------
SUB-TOTAL NET ACREAGE 5,476.51
=========
</Table>
<PAGE>
EXHIBIT A CONT.
BEETLE/AKS CARTER LEASES PAGE 6
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90090700 PORTER, CARRIE ACTIVE 12/31/99 7/15/02 51 51
90109000 SCOTT, M. ELW00D AND ROBERTA JEANNE, H/W ACTIVE 12/31/99 3/7/02 315 315
90109100 WALKER, LEONDAS E. & HELEN ACTIVE 12/31/99 3/11/02 56 56
90109200 WALKER, LEONDAS E. & HELEN ACTIVE 12/31/99 3/11/02 43 43
90109300 WALKER, LEONDAS E. & HELEN ACTIVE 12/31/99 3/11/02 19 19
90109400 BLEVINS, JAMES T. AND JANIE L., H/W ACTIVE 12/31/99 3/12/02 212 212
90109501 MAGGARD, SHIRLEY ET AL ACTIVE 12/31/99 3/11/02 118 53.11
90109502 WALKER, CALVIN W. AND VIVIAN, H/W ACTIVE 12/31/99 3/11/02 118 21.63
90109503 WALKER, GAINES EDGAR ACTIVE 12/31/99 3/11/02 118 21.63
90109504 CRAWFORD, ARLENE W. ACTIVE 12/31/99 3/11/02 118 21.63
90110500 CORNETT PROPERTIES INC., ACTIVE 12/31/99 3/31/02 763 763
90110600 CORNETT PROPERTIES INC., ACTIVE 12/31/99 3/31/02 203 203
90111100 MCDAVID, EMORY E. & HELEN L. ACTIVE 12/31/99 4/21/02 96 96
90111201 ABBOTT, DOROTHY AND MICHAEL, SR., W/H ACTIVE 12/31/99 4/16/02 360 22.5
90111202 PRICHARD, HARLAN B. & ELIZABETH ET AL ACTIVE 12/31/99 4/16/02 360 90
90111203 PRICHARD, HERBERT L. AND LOIS ET AL ACTIVE 12/31/99 4/16/02 360 67.5
90111204 MADDIX, JUDITH C. AND LARRY GREGORY, W/H ACTIVE 12/31/99 5/15/02 360 31.88
90111205 STOREY, JOAN C. ACTIVE 12/31/99 5/16/02 360 13.13
90111206 STAPLETON, MARCELLA AND WILLIAM E., W/H ET AL ACTIVE 12/31/99 5/27/02 360 112.5
90111300 RUCKER, BILLIE AND CAROL ACTIVE 12/31/99 4/21/02 360 360
90111401 PRICHARD, HARLEN B. AND ELIZABETH, H/W ET AL ACTIVE 12/31/99 4/16/02 88 44
90111402 PRICHARD, HERBERT L. AND LOIS, H/W ET AL ACTIVE 12/31/99 4/16/02 88 33
90111403 ABBOTT, DOROTHY AND MICHAEL, SR., W/H ACTIVE 12/31/99 4/16/02 88 11
90112101 FIELDS, WILLIAM C. AND CLARA E., H/W ACTIVE 12/31/99 4/28/02 120 106
90112200 HALL, BILL RONNIE & LILLIE ACTIVE 12/31/99 4/30/02 75 75
90112300 MENEFEE, CHARLES F. & BETTY SUE ACTIVE 12/31/99 4/29/02 125 125
90112700 BOWLING, MARY ACTIVE 12/31/99 5/7/02 82 82
90112900 FLAUGHER, BERTIE ET AL ACTIVE 12/31/99 5/14/02 111 111
90113000 FLAUGHER, BERTIE ACTIVE 12/31/99 5/14/02 57 57
90113201 FLAUGHER, BERTIE ET AL ACTIVE 12/31/99 5/14/02 173 129.75
90113202 FLAUGHER, DERON J. ET AL ACTIVE 12/31/99 5/14/02 173 43.25
90113301 FLAUGHER, BERTIE ET AL ACTIVE 12/31/99 5/14/02 40 30
90113302 FLAUGHER, DERON J. ET AL ACTIVE 12/31/99 5/14/02 40 10
</Table>
<PAGE>
EXHIBIT A CONT.
BURKE LEASE PAGE 8
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90083901 JOHN KEVIN ROBERTS ACTIVE 12/15/99 12/15/04 2082 1041
90083902 YOST, MARY LOU, WIDOW ACTIVE 12/31/99 3/23/00 2082 1041
90083903 WILLIAM RUSSELL ROBERTS ACTIVE 12/15/99 12/15/04 2082 0
90083904 WENDY ROBERTS ACTIVE 12/15/99 12/15/04 2082 0
90090000 SPARKS, CARL ACTIVE 12/31/99 12/31/99 137 0
90092400 LEWIS, LAWRENCE & WANDA ACTIVE 12/31/99 6/4/01 210 210
90093901 FRALEY, MERLE ACTIVE 12/31/99 6/21/01 146.25 73.12
90093902 LITTLETON, TERRY & WILMA ACTIVE 12/31/99 8/7/01 146.25 73.13
90094201 WHITT, DONALD & DOROTHY ACTIVE 12/31/99 6/22/01 70 35
90094202 HALL, ARTHUR L. & VADA ACTIVE 12/31/99 9/9/01 70 35
90094300 LEWIS, BEECHER & OPAL ACTIVE 12/31/99 6/26/01 35 35
90094401 LEWIS, MICHAEL & SANDY ACTIVE 12/31/99 6/25/01 50 25
90094500 JUSTICE, RAYMOND & GLADYS ACTIVE 12/31/99 6/26/01 110 110
90094800 GILLUM, MAY, ET AL ACTIVE 12/31/99 7/9/01 85 85
90094901 FRALEY, ELMA FAYE & DANNY ACTIVE 12/31/99 7/10/01 35 17.5
90094902 ROSSI, MAUDE AND RONALD A. W/H ACTIVE 12/31/99 7/10/01 35 17.5
90095001 GILLUM, ALBERT ET AL ACTIVE 12/31/99 7/9/01 260 130
90095002 ROSSI, MAUDE AND RONALD A. W/H ACTIVE 12/31/99 7/9/01 260 130
90095101 GILLUM, ALBERT ET AL ACTIVE 12/31/99 7/9/01 87 43.5
90095102 ROSSI, MAUDE & RONALD ACTIVE 12/31/99 7/9/01 87 43.5
90095201 GILLUM, ALBERT & MAY & ELMA & DANNY FRALEY ACTIVE 12/31/99 7/9/01 130 65
90095202 ROSSI, MAUDE ACTIVE 12/31/99 7/9/01 130 65
90095301 GILLUM, ALBERT ET AL ACTIVE 12/31/99 7/9/01 30 26.25
90095302 ROSSI, MAUDE AND ROLAND A. W/H ACTIVE 12/31/99 7/9/01 30 3.75
90095500 LEWIS, WILBUR & LONDEAN ACTIVE 12/31/99 7/11/01 75 75
90095601 GRIFFITH, MAI & LOWELL ACTIVE 12/31/99 7/11/01 100 75
90095602 LEWIS, DA, JR. AND VIOLA, H/W ACTIVE 12/31/99 8/9/01 100 25
90095701 PERKINS, GARY ACTIVE 12/31/99 7/16/01 105 89.69
90097300 KIDD, SALLY ISON AND DANA, W/H ACTIVE 12/31/99 7/23/01 107 107
90098501 BARKER, JERRY C. AND JUNICE M., H/W ACTIVE 12/31/99 8/14/01 125 100
90098502 BARKER, CLARENCE AND ITLE, H/W ACTIVE 12/31/99 8/14/01 125 25
90098600 DICKERSON, DELMAINE D. AND CAROLE, H/W ACTIVE 12/31/99 8/8/01 100 100
90098800 BARKER, JERRY C. AND JUNICE M., H/W ACTIVE 12/31/99 8/14/01 52 52
</Table>
<PAGE>
EXHIBIT A CONT.
BURKE LEASE PAGE 9
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90099300 PORTER, CHARLES & LIDDIA ACTIVE 12/31/99 8/23/01 100 100
90099400 GREENE, JAMES A. AND BARBARA L., H/W ACTIVE 12/31/99 8/26/01 250 250
90099500 GREENE, JAMES A. AND BARBARA L., H/W ACTIVE 12/31/99 8/26/01 130 130
90099701 ISON, BERTHEL & DOROTHY ACTIVE 12/31/99 9/7/01 75 18.75
90100201 STEPHENS, JEWELL AND EMORY, W/H, AND MARIE STEPHEN ACTIVE 12/31/99 9/23/01 308 154
90100301 STEPHENS, JEWELL AND EMORY, W/H ACTIVE 12/31/99 9/23/01 142 99.4
90100501 GILLUM, DELPHIA ACTIVE 12/31/99 9/17/01 42 21
90100502 GILLUM, DAVID & SANDRA ACTIVE 12/31/99 9/17/01 42 21
90101200 COPLEY ACTIVE 12/31/99 10/21/01 175 175
90101400 BOWMAN, BERNICE ET AL ACTIVE 12/31/99 10/16/01 91 91
90101500 STAFFORD, LINDA D. AND PAUL, W/H ACTIVE 12/31/99 10/23/01 50 50
90101600 GILLUM, ALLEN AND CAROLYN ACTIVE 12/31/99 10/1/01 150 150
90101801 LEWIS, DEWEY AND MARGARET ET AL ACTIVE 12/31/99 10/31/01 165 35.37
90101802 LEWIS, JOE H. AND ELVA, H/W ACTIVE 12/31/99 11/11/01 165 11.79
90101803 WORKMAN, VADA, WIDOW ACTIVE 12/31/99 11/22/01 165 11.79
90101804 WILLIAMS, BARBARA AND FRANKLIN ACTIVE 12/31/99 11/25/01 165 3.93
90101805 RICHEY, PATRICIA AND WILLIAM, W/H ACTIVE 12/31/99 11/25/01 165 3.93
90101806 HUMMITSCH, MARY L. AND KIM C., W/H ACTIVE 12/31/99 11/25/01 165 3.93
90101807 LEWIS, J.B. AND DOROTHY ACTIVE 12/31/99 11/22/01 165 11.79
90102101 LOGAN, LILLIAN ACTIVE 12/31/99 10/31/01 75 18.75
90102102 LEWIS, JOHN L. JR. AND JUDY, H/W ACTIVE 12/31/99 11/6/01 75 3.13
90102103 LEWIS, ALLIE L. AND HELEN, H/W ACTIVE 12/31/99 11/6/01 75 3.13
90102104 MIDKIFF, PATTIE L. AND DAN, W/H ACTIVE 12/31/99 11/6/01 75 3.13
90102105 GRESHAM, DORIS L. AND GEORGE C., W/H ACTIVE 12/31/99 11/7/01 75 3.13
90102106 SCHMIDT, RAMONA K. AND CHARLES E., W/H ACTIVE 12/31/99 11/20/01 75 3.13
90102107 LEWIS, JAMES M. AND NORMA LEE, H/W ACTIVE 12/31/99 11/6/01 75 3.13
90102108 BRADFORD, JAMES AND JOAN, H/W ACTIVE 12/31/99 11/27/01 75 3.75
90102701 WILLIAMS ,BARBARA AND FRANKLIN ACTIVE 12/31/99 11/25/01 50 1.19
90102702 WORKMAN, VADA ACTIVE 12/31/99 11/22/01 50 3.57
90102703 RICHEY, PATRICIA AND WILLIAM ACTIVE 12/31/99 11/25/01 50 1.19
90102704 HUMMITSCH, MARY L. AND KIM C., W/H ACTIVE 12/31/99 11/25/01 50 1.19
90102705 LEWIS, J.B. AND DOROTHY ACTIVE 12/31/99 11/22/01 50 3.57
90102706 LEWIS, JOE H. AND ELVA ET AL ACTIVE 12/31/99 11/8/01 50 14.29
90102801 ISON, PRICIE AND LESTER ACTIVE 12/31/99 11/11/01 844.5 227.06
</Table>
<PAGE>
EXHIBIT A CONT.
BURKE LEASE PAGE 10
<Table>
<Caption>
EXPIRATION GROSS NET
LEASE NO. LESSOR STATUS LEASE DATE DATE ACRES ACRES
--------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
90102802 KAZEE, IVETTA ET AL ACTIVE 12/31/99 11/12/01 844.5 227.06
90103300 MAMMO, ROBERT N. AND BONNIE L., H/W ACTIVE 12/31/99 11/25/01 105 105
90103400 PORTER, GERALD W. AND PATTY D., H/W ACTIVE 12/31/99 11/26/01 62 62
90103500 WORKMAN, JOYCE AND JAMES E., W/H ACTIVE 12/31/99 11/20/01 68 68
90103700 FERGUSON, FRANCES ACTIVE 12/31/99 11/22/01 65 65
90104000 RAYGOZA, CATHY ADDINGTON AND JIM A., W/H ACTIVE 12/31/99 12/19/01 55 55
90104800 FANNIN, LEONARD ACTIVE 12/31/99 1/20/02 127 127
90108701 CLICK, JEAN ISON, WIDOW ET AL ACTIVE 12/31/99 2/25/02 120 17.14
90108702 ISON, LOUIS SHERMAN AND ROSE, H/W ACTIVE 12/31/99 2/25/02 120 8.57
90108703 BESANCON, GLADYS LEE AND ROBERT, W/H ACTIVE 12/31/99 2/25/02 120 8.57
90108704 ISON, OLLIE ELWOOD, WIDOWER ACTIVE 12/31/99 2/25/02 120 8.57
90108705 WILLIS, WILLA DEAN, A MARRIED WOMAN, AND SAMUEL R. ACTIVE 12/31/99 2/25/02 120 8.57
90108706 BOGGS, EDNA L., WIDOW ET AL ACTIVE 12/31/99 12/17/02 120 20.63
90108707 DICKERSON, EDITH AND CLAVIS, W/H ET AL ACTIVE 12/31/99 12/17/02 120 5.63
90108708 TABOR, JUDY A. AND BILL W., W/H ET AL ACTIVE 12/31/99 12/17/02 120 3.75
90109600 LOWMAN, HARRY KING ESTATE ACTIVE 12/31/99 3/13/02 87 87
90112400 STAPLETON, R. W. & HELEN ACTIVE 4/18/97 4/18/00 100 100
90112500 GILLIAM, WILBUR, WIDOWER ACTIVE 12/31/99 4/1/02 55 55
90120200 CORNETT, ELLIS AND VIRGINIA A., H/W ACTIVE 12/31/99 11/3/02 84 84
---------
SUB TOTAL NET ACREAGE 6,706.45
=========
NEW LEASE
Alma Land ACTIVE 11/30/00 11/29/01 100 100
George Adams, Jr. ACTIVE 11/16/01 11/15/01 50 50
George Adams, Jr. ACTIVE 11/16/00 11/15/01 50 50
---------
SUB TOTAL NET ACREAGE 200
---------
SUB TOTAL NET ACREAGE 19,378.86
=========
</Table>
<PAGE>
Exhibit A1
FARMOUT AGREEMENT
DINGUS PROSPECT AREA OF INTEREST
ELLIOTT AND MORGAN COUNTIES, KENTUCKY
THIS AGREEMENT, made and entered into this 22 day of August, 2000, by and
between EQUITABLE PRODUCTION - EASTERN STATES, INC. with an address of 1710
Pennsylvania Avenue, Charleston, West Virginia, 25302, hereinafter referred to
as FARMOR, and HAY EXPLORATION, INC., with an address of 4353 Willard Drive,
Ashland, Kentucky, 41102, hereinafter referred to as FARMEE,
WITNESSETH THAT:
WHEREAS, FARMOR is the owner of certain leasehold rights in the Oil
and Gas Leases that are depicted on Exhibit A, estimated to contain 4,000 gross
acres, more or less, located in Elliott and Morgan Counties, Kentucky, attached
hereto and by reference made a part hereof; and
WHEREAS, FARMOR has agreed to farmout the Oil and Gas Leases or
portions thereof as shown on Exhibit A to FARMOR subject to the terms and
conditions contained herein; and
WHEREAS, the parties hereto wish to establish a contract area within
which such leases are located. FARMEE shall operate said contract area which
shall be identified as the AREA OF INTEREST (AOI). Such AOI shall be all of the
land area and leaseholds situate within the Carter Coordinate Sections depicted
on Exhibit A. The AOI shall further be defined as all existing leases and lands
and future leases and lands that fall within the following Carter Coordinates:
Carter Coordinate Sections
----------------- --------
R-77 21, 22, 23 & 24
R-78 16, 17(W/2), 24(W/2) & 25
Q-77 1, 2, 3, 4, 7(N/2), 8(N/2), 9(N/2) & 10
Q-78 4(W/2), 5, 6, 7(W/2), 14(NW/4) & 15(N/2)
All of the lease and lands within such AOI shall hereinafter be known
as the Farmout Acreage.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, it is agreed by and between the parties hereto as follows:
1. TITLES: FARMOR does not warrant the title to the Farmout Acreage
but it shall, upon request, make available to FARMEE for review, such abstracts
and all other pertinent title documents, without warranty or liability, as it
has in its files. There shall be no obligation on the part of FARMOR to secure
new or supplemental abstracts nor secure any curative instruments in connection
with the title to the Farmout Acreage. Furthermore, FARMEE shall promptly
furnish to FARMOR free of all costs, copies of all abstracts or title opinions
FARMEE acquires on the Farmout Acreage.
2. PRIOR TO DRILLING: Prior to the date that any well is commenced
under this Agreement, FARMEE shall furnish FARMOR with 1) a copy of the related
drilling permit, 2) its accompanying location plat 3) copies of title opinions
and curative if needed and 4) copies of any state regulatory proceedings if
applicable. FARMEE shall also inform FARMOR 1) when the location for said well
is staked, 2) when the material for the drilling thereof is moved to the
location, 3) of the expected time of spud [at least twenty-four (24) hours in
advance of such spud] and 4) when the well is actually spud. After actual
drilling has been commenced, FARMEE shall furnish FARMOR with drilling and
geological information as more fully set forth in Exhibit "B", attached hereto
and by reference made a part hereof.
<PAGE>
3. EXPLORATORY DEEP WELL: FARMEE agrees to spud an Exploratory Deep
Well to a depth sufficient to penetrate the Tomstown Carbonate bed near the base
of the Rome sequence (Contract Depth), in search of oil and/or gas on or before
November 30, 2000, at a legal location of FARMEE's choice on Farmout Acreage.
FARMEE shall complete the drilling of said Exploratory Deep Well within sixty
(60) days after commencement, and shall operate with due diligence and in a good
and workmanlike manner in the conduct of the operations.
The Exploratory Deep Well to be drilled by FARMEE as hereinabove
provided, as well as all operations incident thereto, shall be at the sole risk,
cost and expense of FARMEE. FARMOR shall not be subject to any obligation or
liability whatsoever in connection therewith, however, FARMOR shall own a 7.5%
Carried Working Interest, (as defined below), through Completion (as defined
below) of said Exploratory Deep Well. For the purposes of this Agreement, a
Carried Working Interest shall be defined as a cost-free Working Interest in
which the FARMEE shall bear FARMOR's proportionate share of costs and expenses.
The term Completion shall be defined as such time when a well has been
completed, turned in line and any commercial hydrocarbon is flowing to the
gathering line or to the tanks.
If said Exploratory Deep Well proves to be capable of producing oil or
gas in commercial quantities at Contract Depth, it shall be equipped for
production by FARMEE in a diligent and workmanlike manner.
If such Exploratory Deep Well does not encounter commercially
producible quantities of hydrocarbons at Contract Depth, but encounters
potentially commercial quantities of hydrocarbons at some shallower depth,
FARMEE shall have the option, but not the obligation, to test and thereafter
complete the well if it proves capable of producing commercial quantities of gas
at such shallower depth.
If said Exploratory Deep Well proves to be incapable of producing oil
or gas in commercial quantities at Contract Depth or at any shallower depth,
FARMEE shall plug and abandon said well(s), within ninety (90) days after
commencement of same, in accordance with the rules and regulations of any
regulatory body having jurisdiction, but not until FARMOR has had the option to
take over the well, as more fully described herein. FARMEE shall be responsible
for restoring the premises to its original condition as nearly as practicable
and settle and dispose of all claims for damage to the surface of the Farmout
Acreage.
FARMEE shall independently undertake to secure any and all rights of
access and surface rights at the drillsite location and along all of its
proposed pipeline right of ways upon the Farmout Acreage. FARMEE additionally
agrees to hold harmless FARMOR from any claims for damage or negligence that may
arise as a result of FARMEE's conduct of operations upon any severed mineral
tracts upon the Farmout Acreage.
FARMEE agrees to indemnify and hold harmless FARMOR from any claim(s)
or lien(s) asserted by any person or persons as a direct or indirect result of
FARMEE's operations and to pay promptly all invoices for labor, materials and
other items as they occur. FARMEE agrees to carry, or require any contractor to
carry, insurance as more fully set forth on Exhibit "C".
4. SUBSTITUTE WELL: In the event the Exploratory Deep Well, while
being drilled to Contract Depth, encounters impenetrable substances or other
hole conditions which make further drilling impractical, FARMEE may discontinue
drilling THE Exploratory Deep Well before the Contract Depth requirement
therefor is satisfied. In such event, FARMEE shall have the right, but not the
obligation, to drill another well ("Substitute Well") at a location of FARMEE's
choice on the Farmout Acreage, provided the actual drilling of said Substitute
Well is commenced not later than sixty (60) days after operations cease on the
Exploratory Deep Well and such Substitute Well is drilled within the same unit
as for the Exploratory Deep Well. Such Substitute Well shall be drilled in the
manner and to the depth specified for the Exploratory Deep Well it is to
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replace and must be drilled with due diligence. If a Substitute Well is
commenced, drilled, and completed as herein provided, it shall be deemed for the
purposes of this Agreement to be the Exploratory Deep Well to the same extent as
if the Exploratory Deep Well had been commenced, drilled, and completed in
accordance herewith.
5. SUBSEQUENT WELLS: By virtue of drilling the Exploratory Deep Well
and/or Substitute Well to Contract Depth as hereinbefore specified, FARMEE shall
earn the right and option to drill Subsequent Wells within the AO1 on the
Farmout Acreage provided no more than nine (9) months elapse between the release
of the drilling rig on the previous well and the spudding of a Subsequent Well
on the Farmout Acreage.
If the Exploratory Deep Well was drilled and completed in a formation
shallower than Contract Depth, FARMEE shall drill Subsequent Wells to test
Contract Depth. However, if FARMEE wishes to drill and complete Subsequent Wells
targeting formations shallower than Contract Depth, prior written consent of
FARMOR is required.
Any time after the Exploratory Deep Well has been drilled, Subsequent
Wells may be proposed by either FARMOR or FARMEE on the Farmout Acreage subject
to and under the same terms and conditions and time constraints as for the
Exploratory Deep Well and in accordance with the provisions of Article VI.B. of
Exhibit "D" attached hereto. If such Subsequent Wells are drilled in compliance
with this Agreement (and Exhibit "D"), and result in a well(s) capable of
producing oil and/or gas, FARMEE shall earn assignments of leasehold rights in
the manner and under the same terms and conditions as provided for herein under
Provision 13. In the event such Subsequent Well(s) are completed as dry holes or
wells which did not reach Contract Depth, the time between wells will be limited
to the time constraints governing the Substitute Wells as provided above.
Failure by FARMEE to continuously drill the Farmout Acreage as provided herein
will result in FARMEE forfeiting the right to further develop the Farmout Lands
and to earn further Assignments under this Agreement and a reversion to FARMOR
of all Farmout Acreage not previously earned by FARMEE pursuant to this
Agreement shall automatically occur.
6. PARTICIPATION RIGHTS: FARMOR reserves the right and option to
participate for a 30% Working Interest in each Subsequent Well proposed within
the AOI. FARMOR shall notify FARMEE by AFE and Well Location Plat, at least
thirty (30) days prior to the spudding of any Subsequent Well, and FARMOR shall
have thirty (30) days after receipt of such notice to make its participation
election in the subject well(s). The joint participation in the drilling and
completion of each such well shall be subject to the terms of that certain
Operating Agreement attached hereto as Exhibit "D". FARMOR shall have the right
to operate any wells in which FARMOR elects to participate. If FARMOR elects to
operate any wells, FARMOR shall be subject to the same terms and conditions as
contained in Exhibit D, attached hereto, attributable to Operator therein.
If FARMOR elects not to participate in a Subsequent Well, FARMOR
shall, through completion and turn in line through tanks, retain a 7.5% Carried
Working Interest in each such well.
7. OPTION TO TAKE OVER WELLS: If at any time FARMEE desires to plug
and abandon any well drilled on the Farmout Acreage, FARMEE shall notify FARMOR
in writing. FARMOR shall have ten (10) days after receipt of such notice within
which to advise FARMEE in writing whether or not FARMOR elects to take over
operations as to said well for such further operations as it may wish to
conduct; provided, however, if a rig is on location, then FARMOR shall have
forty-eight (48) hours (exclusive of Saturdays, Sundays, and holidays) within
which to advise of such election. The time allowed for FARMOR's election shall
not commence until FARMEE has properly notified FARMOR that FARMEE intends to
plug and abandon such well and copies of all logs of prospective pay sections in
such well, together with all other information required herein, have been
received by FARMOR. Failure of FARMOR to exercise the option to take over any
such well as aforesaid shall be conclusively deemed
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an election not to take over such well and FARMEE shall plug and abandon such
well at its sole cost, risk and expense.
In the event FARMOR elects to take over any such well, FARMEE shall
immediately assign to FARMOR such well and all materials and equipment placed
therein and thereon by FARMEE, together with any interest in the well and
production therefrom and all interest in the leases comprising the unit around
the well. FARMOR shall pay FARMEE the salvage value of any material and
equipment associated with the well, net of estimated costs of salvaging. Such
well shall be owned by FARMOR free and clear of any burdens, encumbrances, or
assignments by, through, or under FARMEE or its successors in interest. FARMEE
shall, upon request of FARMOR, execute all documents necessary or useful to
fully effectuate assignment of such well, materials, equipment, production and
leases to FARMOR. All costs and expenses in connection with such well takeover
shall be borne and paid by FARMOR. For purposes of FARMEE's earning the right to
drill another well under this Agreement, however, the well which has been taken
over shall be considered a dry hole.
8. INFORMATION CONCERNING WELLS: FARMEE shall furnish FARMOR all
information, and shall follow the procedures as described in the attached
Drilling and Geological Requirements Exhibit "B" for wells it drills on the
Farmout Acreage. All well(s) drilled on the Farmout Acreage shall be at regular
and legal locations, and shall conform to the spacing guidelines governed by the
state for wells drilled hereunder, unless otherwise agreed to by FARMOR and
FARMEE.
9. PROTECTION OF LEASES: FARMEE agrees to preserve and protect the
leasehold estate to be assigned to FARMEE hereunder, in full compliance with the
express and implied terms, conditions and covenants thereof, and give to FARMOR
the full right, if it so desires, to enforce all of the terms and conditions of
said lease(s), both express and implied, either alone or in conjunction with the
mineral owners. FARMEE agrees to protect and preserve said estate from any and
all liens, judgments and any other claims whatsoever. Should FARMEE fail to
comply with any of the terms and provisions of this paragraph, it will be
subject to the default provisions contained herein.
10. FUTURE PURCHASE OF LEASES: It is contemplated by both FARMOR and
FARMEE that additional oil and gas leasing will be necessary from time to time
in order to secure sufficient leasehold portions to comprise drilling units. In
the event leasing becomes necessary, FARMEE shall be solely responsible for all
such leasing activity and the costs related thereto. Any such leases acquired by
FARMEE will be owned 100% by FARMEE.
11. SURRENDER, EXPIRATION OR ABANDONMENT: In the event FARMEE, or its
successors or assigns, after having earned an assignment under this Agreement,
desires to surrender, let expire or abandon all or any portion of the Farmout
Acreage, FARMEE agrees to give FARMOR at least sixty (60) days notice in
writing of its intention to so surrender, let expire or abandon and shall, if
requested to do so by FARMOR, reassign said Farmout Acreage insofar as it covers
the portion being surrendered, expiring or abandoned to FARMOR free of any
encumbrances suffered by, through or under FARMEE, in which event FARMOR shall
have the option if it so desires to purchase any casing and other equipment in
any well or wells that may be situated thereon at the prevailing market price
for second hand material of like quality and kind.
12. LEASE DELAY RENTAL PAYMENTS: In the event delay rental payments
are necessary to maintain all or a part of the leases comprising the Farmout
Acreage, FARMOR will make such payment and FARMEE agrees to reimburse FARMOR for
100% of such rentals within twenty (20) days after receiving an invoice. It is
agreed however, that FARMOR will not be liable to FARMEE in the event through
error or oversight the rental(s) are not timely or correctly paid. FARMEE's
responsibility for payment shall commence with any delay rentals coming due
after the date of this Agreement.
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In the event, prior to or after the delivery of an assignment by
FARMOR to FARMEE hereunder, any shut-in payments are necessary to maintain any
lease(s) comprising the Farmout Acreage in force and effect as a result of
FARMEE's operations, FARMEE shall make such payments and advise FARMOR promptly
in writing that such payments have been made. Following delivery of any
assignment(s) provided for herein, FARMEE agrees to make all payments resulting
from its operations, including royalties to maintain the lease(s) comprising
the acreage earned by FARMEE hereunder.
13. ASSIGNMENTS: In the event FARMEE completes a well as capable of
producing oil and/or gas at Contract Depth, has provided evidence of such
completion to FARMOR and has further faithfully performed all the other terms
and conditions contained in this Agreement, FARMOR shall deliver to FARMEE
without warranty of title express or implied, an assignment of their
proportionate interest in so much of the Farmout Acreage as is included in a one
hundred sixty (160) acre square around each productive well, limited as to all
depths and formations from the surface to One Hundred (100) feet below the total
depth penetrated by FARMEE in such well drilled and logged.
If FARMEE completes a well capable of producing oil and or gas in a
zone or formation above the Contract Depth such that the well will not fall
within the "Deep Well" category as defined by the Commonwealth of Kentucky
Department of Mines and Minerals statutes, FARMOR shall assign to FARMEE a
proportionate interest in so much of the Farmout Acreage as is included in a one
hundred (100) acre square around each productive well, limited as to all depths
and formations from the surface to One Hundred (100) feet below the total depth
penetrated by such well.
14. POOLING: All wells drilled hereunder shall conform with the
existing spacing pattern established for drilling to Contract Depth within the
AOI which is presently on a one hundred sixty (160) acre square grid. Any
proposed alteration to such spacing pattern must be approved by FARMOR in
advance and thereafter presented by FARMEE to the state for final approval
15. FORCE POOLING PROCEEDINGS: In the event FARMEE finds it necessary
to pursue force pooling for any unit around any well drilled hereunder, FARMEE
shall undertake to prepare the forms, submit the application to the state and
attend the state force pool proceeding in preparation of securing the permit for
such well. If a force pooling proceeding is necessary for any well unit in which
FARMOR has elected to take a 30% working interest, FARMOR agrees to pay its
proportionate 30% share of the costs associated with such undertaking after
receiving an invoice therefor. If, however, FARMOR has elected to take a 7.5%
Carried Working Interest in that unit which is the subject of a force pooling
application, FARMEE shall bear the full cost of the entire undertaking and at no
cost, risk or expense to FARMOR.
16: FORMATIONS NOT SUBJECT TO THIS AGREEMENT: FARMOR shall, at all
times, have the right of ingress and egress to any and all depths and formations
not expressly covered by this Agreement, including the right to utilize in such
operations any roadways or plugged and abandoned wells situated on the Farmout
Acreage and to store, handle, transport and market production therefrom, as well
as any and all other rights incident to or appertaining to FARMOR's ownership of
same. FARMOR shall also have the right to use, free of all costs, any roads or
locations built by FARMEE on the Farmout Acreage for its operations, relative to
the depths and formations retained by FARMOR. FARMOR also agrees that during the
term of its use of any road or location built by FARMEE, to maintain same in
good condition as may be reasonably practical and to not interfere with any
shared use by FARMEE.
17. SEISMIC DATA: FARMOR agrees to make available to FARMEE any
seismic data which FARMOR owns relating to the subject AOI. Such seismic data
may be viewed by FARMEE in FARMOR's office during normal business hours but none
of the data shall be copied or retained by FARMEE. FARMOR or FARMEE may propose
to undertake additional seismic prospecting within the AOI throughout the term
of this
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Agreement. No annual acquisition of greater than 20 miles of seismic shall be
conducted without the consent of the other party. The party who proposes to
secure such seismic shall be the owner of, and have ultimate control of the
data. The non-proposing party shall have the election to pay 50% of all seismic
acquisition costs, including processing and interpretive costs in order to own a
joint share in the data. Should the non-proposing party elect to go non-consent
in the seismic acquisition, that party shall forfeit all drilling participation
rights related to wells which may be proposed within 5,000 feet of any seismic
line acquired under the proposal. The non-consenting party may earn the right to
participate in wells within the above stated distance from any seismic line
provided that party reimburses the consenting party 100% of the actual
acquisition, processing and interpretive costs incurred in such seismic program.
18. PREFERENTIAL RIGHT TO PURCHASE AND/OR MARKET GAS: FARMOR, or its
designee, shall have the preferential right and option to purchase and/or market
all or any part of the gas produced from or allocated to the Farmout Acreage
upon the same terms (or on terms the monetary equivalent thereof) as those under
which FARMEE proposes to sell or otherwise dispose of same, or FARMOR may
designate the purchaser of such gas under said terms. FARMEE shall notify FARMOR
in writing of each proposed sale or other disposition of the gas, which notice
shall include all the terms and conditions of each bona fide offer by a
prospective purchaser who is ready, willing and able to purchase the gas, or any
part thereof, and FARMOR shall have thirty (30) days after receiving said
written notice in which to notify FARMEE of its election either to exercise or
waive its preferential right and option. No contract for the sale or other
disposition of the gas, or any part thereof, shall ever be made by FARMEE until
FARMOR shall have first either exercised or waived in writing its herein
described preferential right and option with respect to the gas. FARMOR shall
have a continuing separate right and option with respect to each and every
proposed sale or other disposition of the gas, or part thereof. If FARMOR
exercised its option to purchase or designate a purchaser for the gas, FARMEE
agrees that, upon request, FARMEE will execute an appropriate gas sales
contract. Further, if FARMOR does not exercise its option to purchase or
designate a purchaser for the gas, FARMEE agrees that any subsequently executed
gas sales contract made by FARMEE will describe this Agreement and will indicate
that FARMEE is not authorized and does not intend to dedicate that share of the
gas production owned by FARMOR. It is understood and agreed that the right to
purchase hereby reserved may be assigned by FARMOR any time, at all times and
from time to time without limitation. Nothing herein contained shall require
FARMOR to purchase such gas from the Farmout Acreage or to provide a purchaser
or market therefor.
19. ELECTION TO CONSTRUCT GATHERING SYSTEM: FARMOR shall have a
continuing right and election, but not the obligation, to construct any gas
gathering lines necessary to gather and transport any or all of the gas produced
within the AOI. Should FARMOR elect to construct any such gathering lines, it
shall charge FARMEE its pro-rata share of a tariff that results in an 18% rate
of return (Before Tax) on any capital which is employed to construct such
gathering system.
20. DEFAULT: In the event for any reason that actual drilling of the
Exploratory Deep Well is not commenced by the date herein provided, or it is
timely drilled but Subsequent Well(s) provided for hereunder are not timely
drilled, the penalty to FARMEE shall be automatic termination of this Agreement
and loss of the ability to further develop the Farmout Lands and earn leasehold
rights in the Farmout Acreage not already earned by FARMEE in accordance with
the terms hereof. Except as provided herein, if FARMEE fails to comply with
any provisions of this Agreement, FARMOR may at any time notify FARMEE in
writing giving the particulars concerning such noncompliance, whereupon FARMEE
will then have thirty (30) days after receipt of such notice to satisfy FARMOR
that it is in compliance with all the terms and provisions hereof. In the event
of such failure by FARMEE to demonstrate compliance and reply to FARMOR's letter
within the thirty (30) day time period, this Agreement will automatically
terminate in its entirety, or as to any unearned portion thereof, provided that
in so doing, FARMOR shall not waive or otherwise be precluded from exercising
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any other rights or remedies, at law, or in equity, which it may have for the
breach of this Agreement by FARMEE or for FARMEE's failure to perform under
this Agreement in whole or in part.
21. NOTICE: All notices and information to be given or supplied
hereunder pursuant to the provisions of this Agreement shall be given at the
following addresses unless stipulated otherwise in Exhibit B:
FARMOR:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Contact: Lester Zitkus
Address: 1710 Pennsylvania Avenue
Charleston, WV 25302
Phone No: l-304-343-9566
Fax No: l-304-343-7133
FARMEE
HAY EXPLORATION, INC.
Contact: Monte Hay
Address: 4353 Willard Drive
Ashland, KY 41102
Phone No: l-606-324-7971
Fax No. l-606-324-6340
22. EFFECT OF AGREEMENT: The terms, covenants and conditions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors or assigns. The said terms, covenants and
conditions contained herein shall be covenants running with the Farmout Acreage
covered hereby and with each transfer or assignment of said Farmout Acreage.
This Agreement is not intended to create and nothing contained herein shall be
construed to create an association, trust, joint venture, mining partnership, or
other partnership or entity of any kind, nor to constitute FARMlEE the agent of
FARMOR.
23. APPLICATION OF LAWS: FARMEE agrees to abide by Equal Opportunity
Rules and Regulations along with all valid, applicable federal, state and local
laws, rules, orders and regulations of any duly constituted federal, state or
local regulatory body or authority having jurisdiction thereof and all
development and operations hereunder shall be conducted in conformity therewith.
FARMEE also warrants and agrees to conduct all activities under this Agreement
in compliance with all certificates, authorizations, permits or licenses issued
to FARMEE or FARMOR for activities to be performed hereunder.
24. PREFERENTIAL RIGHT TO PURCHASE / CONSENT TO ASSIGN: Should FARMEE
desire to sell or convey all or any part of its interest in and to this
Agreement, FARMEE shall first offer FARMOR the opportunity to purchase such
interest. If FARMOR elects to purchase the interest, the parties hereto agree to
negotiate in good faith for the purchase and sale of the interest. In the event
FARMOR elects not to purchase the interest, FARMEE shall have the right to sell
the interest to a third party, subject to the written consent of FARMOR. FARMEE,
when requesting consent, will provide the names and addresses of the intended
assignees and the interest to be assigned to each. Once the conveyance of
properties has been finalized, FARMEE must provide FARMOR with a recorded copy
of said conveyance within sixty (60) days of execution of said conveyance. This
Agreement shall ipso facto terminate upon any such conveyance being made
contrary to the provisions of the clause. In addition, should FARMEE decide to
sell any of its interest in this Agreement to any other party, it shall not be
free to do so until after securing the written consent of the FARMOR in advance
of such transaction.
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25. INDEMNIFICATION: All operations associated with and contemplated
to be conducted by FARMEE on the Farmout Acreage (or acreage pooled therewith)
shall be conducted at its sole risk and liability and at no cost to FARMOR.
FARMEE agrees to indemnify and hold FARMOR harmless from any claims, liability,
charges, or expense arising directly or indirectly out of any and all operations
conducted herewith.
26. CONFIDENTIALITY: Without FARMOR's prior written consent,
FARMEE shall not divulge any information obtained from operations hereunder to
any third party, other than to a party owning an interest under this Agreement
or to a governmental authority having jurisdiction, and only to the extent
required by such jurisdiction.
27. CONFLICT: In the event there is a conflict between the terms
contained in this Farmout Agreement and the terms contained in the Operating
Agreement attached hereto as Exhibit D, the terms of this Farmout Agreement
shall be controlling
28. ARBITRATION: On the request of any party hereto, whether made
before or after the institution of any legal proceeding, any action, dispute,
claim, or controversy of any kind now existing or hereafter arising between any
of the parties hereto in any way arising out of, pertaining to, or in connection
with this Agreement ("Dispute") shall be resolved by binding arbitration in
accordance with the terms hereof. Any party may, by summary proceedings, bring
an action in court to compel arbitration of any Dispute.
Any arbitration shall be administered by the American Arbitration
Association ("AAA") in accordance with the terms of this Section, the Commercial
Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal
Arbitration Act. Judgment on any award rendered by an arbitrator may be entered
in any court having jurisdiction.
Any arbitration shall be conducted before one (1) arbitrator. The
arbitrator shall be a practicing attorney licensed to practice in the State of
Kentucky who is knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot agree on an
arbitrator within thirty (30) days after the request for an arbitration, then
any party may request the AAA to select an arbitrator. The arbitrator may engage
engineers, accountants, or other consultants that the arbitrator deems necessary
to render a conclusion in the arbitration proceeding.
To the maximum extent practicable, an arbitration proceeding hereunder
shall be concluded within thirty (30) days of the filing of the Dispute with the
AAA. Arbitration proceedings shall be conducted in Kentucky. Arbitrators shall
be empowered to impose sanctions and to take such other actions as the
arbitrators deem necessary to the same extent a judge could impose sanctions or
take such other actions pursuant to the Federal Rules of Civil Procedure and
applicable law. At the conclusion of any arbitration proceeding, the arbitrator
shall make specific findings of fact and conclusions of law. The arbitrator
shall have the power to award recovery of all costs and fees to the prevailing
party. Each party agrees to keep all Disputes and arbitration proceedings
strictly confidential except for disclosure of information required by
applicable law.
All fees of the arbitrator and any engineer, accountant, or other
consultant engaged by the arbitrator, shall be paid by Buyer and Seller equally
unless otherwise awarded by the arbitrator.
This Agreement shall be governed and construed in accordance with the
laws of the State of Kentucky, without giving effect to any principles of
conflicts of laws. The validity of the various conveyances affecting the title
to real property shall be governed by and construed in accordance with the laws
of the jurisdiction in which such property is situated. The representations and
warranties contained in such conveyances and the remedies available because of a
breach of such representations and warranties shall be
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governed by and construed in accordance with the laws of the State of Kentucky
without giving effect to the principles of conflicts of laws.
29. EXECUTION OF AGREEMENT: This Agreement shall be null and void at
the option of FARMOR if one (1) fully executed copy is not returned to FARMOR
within fifteen (15) days from the date of execution below.
This Farmout Agreement shall supersede and replace that certain
Farmout Agreement entered into by Eastern States Oil & Gas, Inc., predecessor by
name change of FARMOR, and FARMEE dated February 10, 2000, except as to any
obligation of FARMEE to reimburse FARMOR for rental payments made prior to the
date of this Agreement.
Executed this 22 day of August, 2000.
EQUITABLE PRODUCTION - EASTERN STATES, INC. WITNESS
By: /s/ Lester A. Zitkuc /s/ Michele L. Weber
------------------------------ ------------------------------
Lester A. Zitkus
Attorney-In-Fact
Executed this 28 day of August, 2000.
HAY EXPLORATION, INC. WITNESS
By: /s/ Monte Hay /s/ Michele L. Weber
------------------------------ ------------------------------
Monte Hay
President
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EXHIBIT B
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
DRILLING AND GEOLOGICAL REQUIREMENTS
Any well drilled pursuant to the terms and conditions hereinafter stated and of
the agreement to which this exhibit is attached, shall be located and drilled in
compliance with all federal and state laws, executive orders, rules and
regulations of any legally constituted regulatory body of the state in which
operations are being performed and any other governing body having jurisdiction
thereof.
MINIMUM COMPLETION STANDARDS
Casing shall be properly set and the well tested and such other preparations
made as necessary to conduct satisfactory tests of the showing(s). FARMEE, or
its operator, shall properly test each prospective oil or gas horizon and, upon
encountering such horizon in the drilling of any well, shall notify FARMOR when
such horizon is to be tested to allow FARMOR sufficient time to have a
representative present when such horizon is tested. FARMEE also agrees to notify
FARMOR in ample time to have a representative present when conducting electrical
wireline surveys. If the information from any electrical wireline survey, made
either before or after contract depth has been reached, and considered by itself
or in conjunction with other indications or evidence from cuttings, cores or
showings should make the formation appear promising of being a prospective oil
or gas horizon, FARMEE shall properly test such horizon if it was not adequately
tested at the time it was penetrated.
REPORTS TO BE FORWARDED TO:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn: Lester Zitkus & Barbara Hubbard
Address: 1710 Pennsylvania Avenue
Charleston, WV 25302
Phone: l-304-343-9566
FAX: l-304-343-7133 & l-304-343-7870
o Daily drilling reports including, but not limited to, the drilling
progress, formations encountered and tops, oil or gas shows, surveys and
tests. Reports to be verbally conveyed or faxed by 10:00 am for activity
current through 8:00 am the same day.
o Well test and stimulation reports
o Well completion and recompletion reports
o Application for AGPA well category determination
o Plug and Abandon reports
o Monthly reports filed with regulatory authority
o Monthly reports of oil and gas production
REPORTS, LOGS & SAMPLES TO BE FORWARDED TO:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn: ---------------------------------
Address: ---------------------------------
---------------------------------
Phone: --------------------------------- (regular pages)
FAX: --------------------------------- (continuous log sections)
---------------------------------
o Daily updated mudlog pages, when drilling through intervals being
mudlogged, to be faxed by 10:00 am
o Fax copies for all open-hole logs obtained at Total Depth
o Copies of all drill stem tests, core analyses, fluid analyses,
paleontological reports and all other tests, analyses or third party
reports, if made, on wells drilled
o Samples collected no less than every ten (10) feet from base of surface
casing to total depth, if requested by FARMOR
o Representative samples of fluid recovered on formation tests
<PAGE>
EXHIBIT B
Page 2
o Allow FARMOR, if requested, to examine and take chips of all cores cut and
recovered from such well
o Within twenty-four (24) hours (exclusive of weekends and holidays) after
completion of the logging, supply FARMOR with one (1) large-scale copy of a
bulk density log to the total depth of the hole and of a resistivity log
through all formations of interest
o Upon completion of any well drilled hereunder, FARMEE shall furnish FARMOR
with four (4) copies of all final wireline logs including, but not limited
to, the following:
Log From (Depth) To (Depth) Scale
--- ------------ ---------- ---------
Gamma Ray Total Depth Surface 2' = 100'
Gamma Ray Density Total Depth Base Intermediate 5' = 100'
Induction-Caliper Casing
o Upon FARMOR request, agree to make the hole available to FARMOR before
running production casing, and at FARMOR'S expense (including cost of
service and rig time), for its exclusive use in taking sidewall cores or
running a photo-electric (PE) survey, a velocity survey or a dipmeter
survey if FARMEE declines to run same
OTHER INFORMATION:
Upon request by FARMOR, furnish such additional information as it may reasonably
require relative to any phase of the operations conducted pursuant to this
Agreement. FARMOR shall have access to and copies of any and all geophysical
data or seismic surveys that are conducted on or across the lease acreage during
the term of this Agreement. FARMOR shall have free access during customary
business hours to all records relative to such operations.
<PAGE>
EXHIBIT C
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
INSURANCE
FARMEE shall provide, at its expense and in its name, and maintain in full force
and effect at all times during which operations are conducted by FARMEE on the
Farmout Acreage, insurance by a duly licensed insurance company or companies of
the kinds and in the minimum amounts as set forth below.
Prior to beginning any operations on the Farmout Acreage, FARMEE shall furnish
certificates of insurance by FARMEE's insurers in a form satisfactory to FARMOR
under all such policies as evidence that all such insurance is carried, and
providing that not less than ten (10) days prior, written notice of material
change in or cancellation of such insurance, or any part thereof, will be given
to FARMOR.
o Workmen's Compensation and Employer's Liability
FARMEE shall provide insurance covering FARMEE's employees engaged in operations
on the lands subject to this Agreement in compliance with the laws of the state
in which said lands are situated and Employers Liability Insurance of not less
than $1,000,000.00 for injuries or death to any one employee and $100,000.00 for
injuries or death of more than one employee resulting from any one accident;
o General Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted by
FARMEE hereunder with bodily injury and death limit of not less than $100,000.00
for injuries to or death of any one person resulting from any one accident, not
less than $300,000.00 for injuries or death of more than one person resulting
from any on.e accident, and property damage limit of not less than $100,000.00
per accident; $300,000.00 aggregate. Provided further than such property damage
insurance shall not exclude FARMOR's liability for loss of or damage to property
of or above the surface of the earth arising from a blowout or cratering of a
gas well or an oil well; and,
o Automobile Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted by
FARMEE hereunder (including coverage on owned and non-owned automobile
equipment) with bodily injury or death limit of not less than $100,000.00 for
injuries to or death of more than one person resulting from any one accident,
and property damage limit of not less than $25,000.00 per accident.
<PAGE>
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
EXHIBIT D
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
---------
OPERATING AGREEMENT
DATED
2000)
-----------------------, -----
year
OPERATOR HAY EXPLORATION, INC.
---------------------
CONTRACT AREA DINGUS AREA OF INTEREST
-----------------------
CONTAINING 4,000 GROSS ACRES, MORE OR LESS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COUNTY OR PARISH OF ELLIOTT AND MORGAN, STATE OF KENTUCKY
------------------ --------
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
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
------- ----- ----
<S> <C> <C>
I. DEFINITIONS............................................................................ 1
II. EXHIBITS............................................................................... 1
III. INTERESTS OF PARTIES................................................................... 2
A. OIL AND GAS INTERESTS: ............................................................. 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: ...................................... 2
C. SUBSEQUENTLY CREATED INTERESTS: .................................................... 2
IV. TITLES................................................................................. 2
A. TITLE EXAMINATION: ................................................................. 2
B. LOSS OR FAILURE OF TITLE: .......................................................... 3
1. Failure of Title............................................................. 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due....................... 3
3. Other Losses................................................................. 3
4. Curing Title................................................................. 3
V. OPERATOR............................................................................... 4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: ...................................... 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND OF SUCCESSOR: ............................... 4
1. Resignation or Removal of Operator........................................... 4
2. Selection of Successor Operator.............................................. 4
3. Effect of Bankruptcy......................................................... 4
C. EMPLOYEES AND CONTRACTORS: ......................................................... 4
D. RIGHTS AND DUTIES OF OPERATOR: ..................................................... 4
1. Competitive Rates and Use of Affiliates...................................... 4
2. Discharge of Joint Account Obligations....................................... 4
3. Protection from Liens........................................................ 4
4. Custody of Funds............................................................. 5
5. Access to Contract Area and Records.......................................... 5
6. Filing and Furnishing Governmental Reports................................... 5
7. Drilling and Testing Operations.............................................. 5
8. Cost Estimates............................................................... 5
9. Insurance.................................................................... 5
VI. DRILLING AND DEVELOPMENT............................................................... 5
A. INITIAL WELL: ...................................................................... 5
B. SUBSEQUENT OPERATIONS: ............................................................. 5
1. Proposed Operations.......................................................... 5
2. Operations by Less Than All Parties.......................................... 6
3. Stand-By Costs............................................................... 7
4. Deepening.................................................................... 8
5. Sidetracking................................................................. 8
6. Order of Preference of Operations............................................ 8
7. Conformity to Spacing Pattern................................................ 9
8. Paying Wells................................................................. 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: .................................. 9
1. Completion................................................................... 9
2. Rework, Recomplete or Plug Back.............................................. 9
D. OTHER OPERATIONS: .................................................................. 9
E. ABANDONMENT OF WELLS: .............................................................. 9
1. Abandonment of Dry Holes..................................................... 9
2. Abandonment of Wells That Have Produced...................................... 10
3. Abandonment of Non-Consent Operations........................................ 10
F. TERMINATION OF OPERATIONS: ......................................................... 10
G. TAKING PRODUCTION IN KIND: ......................................................... 10
(Option 1) Gas Balancing Agreement............................................... 10
(Option 2) No Gas Balancing Agreement............................................ 11
VII. EXPENDITURES AND LIABILITY OF PARTIES.................................................. 11
A. LIABILITY OF PARTIES: .............................................................. 11
B. LIENS AND SECURITY INTERESTS: ...................................................... 11
C. ADVANCES: .......................................................................... 12
D. DEFAULTS AND REMEDIES............................................................... 12
1. Suspension of Rights......................................................... 13
2. Suit for Damages............................................................. 13
3. Deemed Non-Consent........................................................... 13
4. Advance Payment.............................................................. 13
5. Costs and Attorneys' Fees.................................................... 13
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: .............................. 13
F. TAXES............................................................................... 13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST....................................... 14
A. SURRENDER OF LEASES: ............................................................... 14
B. RENEWAL OR EXTENSION OF LEASES: .................................................... 14
C. ACREAGE OR CASH CONTRIBUTIONS: ..................................................... 14
</TABLE>
i
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
------- ----- ----
<S> <C> <C>
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: ....................................... 15
E. WAIVER OF RIGHTS TO PARTITION....................................................... 15
F. PREFERENTIAL RIGHT TO PURCHASE: .................................................... 15
IX. INTERNAL REVENUE CODE ELECTION......................................................... 15
X. CLAIMS AND LAWSUITS.................................................................... 15
XI. FORCE MAJEURE.......................................................................... 16
XII. NOTICES................................................................................ 16
XIII. TERM OF AGREEMENT...................................................................... 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS................................................... 16
A. LAWS, REGULATIONS AND ORDERS: ...................................................... 16
B. GOVERNING LAW: ..................................................................... 16
C. REGULATORY AGENCIES: ............................................................... 16
XV. MISCELLANEOUS.......................................................................... 17
A. EXECUTION: ......................................................................... 17
B. SUCCESSORS AND ASSIGNS: ............................................................ 17
C. COUNTERPARTS........................................................................ 17
D. SEVERABILITY........................................................................ 17
XVI. OTHER PROVISIONS....................................................................... 17
</TABLE>
ii
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between HAY EXPLORATION, 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 1.
DEFINITIONS
As used in this agreement, the following words and terms shalt 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" shalt 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" shalt 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" shalt 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" shalt 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" shalt 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" shalt mean the wet! required to be drilled by
the parties hereto as provided in Article VI.A.
I. The term "Non-Consent Well" shalt mean a well in which less than at!
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.
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 tying 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 tying within the
Contract Area which are owned by the parties to this agreement.
N. The term "Plug Back" shalt 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" shalt 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" shalt 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, wellbore 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" shalt 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" shalt 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.
S. THE TERM "PAYING QUANTITIES" SHALL MEAN, WITH RESPECT TO ANY WELL,
QUANTITIES OF OIL AND/OR GAS PRODUCTION, THE REVENUES ATTRIBUTABLE TO WHICH,
AFTER DEDUCTING THE LESSOR'S ROYALTY BURDEN ON SUCH PRODUCTION, EXCEED THE
WELL'S OPERATING EXPENSES (NOT INCLUDING DRILLING OR OTHER CAPITAL COSTS),
REGARDLESS OF HOW SMALL THE MARGIN, OVER A SMALL PERIOD OF TIME, NOT TO EXCEED
12 CONSECUTIVE MONTHS.
T. THE TERM "COMMERCIAL QUANTITIES" SHALL MEAN, WITH RESPECT TO ANY WELL,
QUANTITIES OF OIL AND/OR GAS PRODUCTION, THE REVENUES ATTRIBUTABLE TO WHICH,
AFTER DEDUCTING ALL BURDENS ON SUCH PRODUCTION, INCLUDING WITHOUT LIMITATION,
THE LESSOR'S ROYALTY BURDEN, OVERRIDING ROYALTIES, AND PRODUCTION PAYMENT, MAKE
THE WELL, PROFITABLE, TAKING INTO ACCOUNT THE TOTAL COSTS ASSOCIATED WITH THE
WELL OVER ITS ENTIRE LIFE, INCLUDING, WITHOUT LIMITATION, DRILLING COSTS AND
OTHER CAPITAL COSTS AND OPERATING EXPENSES.
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. IT SHALL ALSO MEAN LEGAL ENTITIES SUCH AS CORPORATIONS,
PARTNERSHIPS, JOINT VENTURES, SOLE PROPRIETORSHIPS, ETC.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated ill 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.
B. Exhibit "B," Form of Lease.
X C. Exhibit "C," Accounting Procedure.
---
-1-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
X D. Exhibit "D," Insurance.
---
X E. Exhibit "E," Gas Balancing Agreement.
---
X F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
Facilities.
G. Exhibit "G," Tax Partnership.
---
X H. Other: WELL INFORMATION REQUIREMENTS
---
-2-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
ARTICLE III.
INTERESTS OF PARTIES
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.
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 or production attributable to its working interest hereunder,
such burden shall be deemed a "Subsequently Created Interest."
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 V1I.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 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 Operator 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."
-2-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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
3. LOSSES: All losses of Leases or Interests committed to this agreement,
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.
-3-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
HAY EXPLORATION, 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. *Good Cause shall mean the failure or refusal on the part of the
Operator to carry out its duties hereunder as acts or omissions committed by
Operator that constitute gross negligence or willful misconduct.
Subject to Article VII.D.I., 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 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." In the event Operator
plans to file bankruptcy, Operator agrees to notify all Non-Operators by mall at
least ten (10) days in advance of that filing. Failure of Operator to so notify
the Non-Operators as stated above shall cause this agreement to automatically
terminate.
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 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, the cost of which shall be billed
to the Joint Account, shall be performed or supplied at competitive rate.
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.
3. PROTECTION FROM LIENS: Operator shall pay, or cause to be paid, as and
when they become due and payable, all accounts
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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 V11.B. Nothing in this
paragraph shall be construed to establish a fiduciary relationship between
Operator and Non-Operators for any purpose. Nothing in this paragraph shall
require the maintenance by Operator of separate accounts for the funds of
Non-Operators and Operator shall have the right to comingle such funds with its
own funds.
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.
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
B. SUBSEQUENT OPERATIONS:
1. Proposed Operations: If any party hereto should desire to drill any well
on the Contract Area, 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 by AFE of the proposed operation to the
parties who have not otherwise relinquished their interest in such objective
Zone
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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,
proper 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 in 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 a11 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.
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.l., 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,
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.l. 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 (alter 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) 100% 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) 300% 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.
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 300% 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
vatorem, 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.
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 or 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,
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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 specifed in Article V1.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.l., to all parties
(including Non-Consenting Parties). Thereupon, Articles V1.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
V1.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.
(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: No party may participate in a proposed Sidetracking
operation that does not own an interest in the affected wellbore.
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 tile 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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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.
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:
[ ] 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.
[ ] 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 all 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
Vl.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 equipping of well,
including necessary tankage and/or surface facilities.
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Ten Thousand Dollars ($10,000.00) 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.
Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project costing in excess of Ten Thousand Dollars
($10,000.00). 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 V1.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 51% 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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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 LHC 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 and is capable of producing, even if such well has never in fact
produced, 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.
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 titness 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 51% 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.I, and the
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation,
as appropriate.
G. TAKING PRODUCTION IN KIND:
[X] OPTION NO. 1: GAS BALANCING AGREEMENT ATTACHED
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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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 proportionate 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.
[ ] 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.
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 the 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.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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 my 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.
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.
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 all 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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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 (3) 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-Operator 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 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 (a 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.
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 pursuant to the terms of the Farmout
Agreement to which this Operating Agreement is attached. 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.
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."
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<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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 V111.
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.
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. NEW, RENEWAL OR EXTENSION OF LEASES. THE TERMS OF THIS PARAGRAPH ARE
GOVERNED BY THE TERMS AS CONTAINED IN THE FARMOUT AGREEMENT TO WHICH THIS
OPERATING AGREEMENT IS ATTACHED.
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 of 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.
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<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
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.
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:
[ ] (Optional; Check if applicable.) THE TERMS OF THIS PARAGRAPH ARE GOVERNED
BY THE TERMS AS CONTAINED IN THE FARMOUT AGREEMENT TO WHICH THIS OPERATING
AGREEMENT IS ATTACHED.
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 I, 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 1.76I. 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 I, 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 clam 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.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
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.
[ ] 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.
[X] 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 90 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., 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 90 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.
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 KENTUCKY 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 right, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or
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<PAGE>
A.A.P.L. FORM 61 MODEL FORM OPERATING AGREEMENT - 1989
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.
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
A. In the event there is a conflict between any provision of this Article XVI
and any provision contained within that Farmout Agreement to which this
agreement is attached, the provisions of the Farmout Agreement shall be
controlling.
B. If any provision of this agreement is declared to be unlawful or
unenforceable by a court of competent jurisdiction, this agreement shall be
deemed to be amended, as of the effective date of this agreement, to
delete the unlawful or unenforceable provision, and this agreement shall
nevertheless remain binding as so amended. If such court's ruling is
subsequently reversed or set aside by such court or by a higher court, this
agreement shall be deemed to be amended, as of the effective date of this
agreement, to reinstate such provision, and this agreement shall be deemed
binding as so amended.
C. PRIORITY OF OPERATIONS:
Whenever there is more than one proposal in connection with any well
subject to this Agreement, such proposal shall be considered and disposed
of in the following order of priority:
1. Drilling the well to its authorized depth or attempting a completion
including testing and logging of such well at such depth shall have first
priority over all operations and proposals;
2. A proposal to plug back a well shall prevail over a proposal to deepen
or to sidetrack such well; if there is more than one proposal to plug back,
the proposal to plug back to the next deepest prospective interval shall
have priority over proposal(s) to plug back to shallower prospective
intervals;
3. A proposal to sidetrack a well in order to reach the authorized depth
shall prevail over a proposal to deepen;
4. A proposal to deepen a well shall have last priority;
5. Proposals of the same type and to the same depth shall be given
precedence in the order in which they were made.
D. LIMITATION ON WELL PROPOSALS
Notwithstanding anything in this Agreement to the contrary, no more than
one (1) well may be proposed for drilling, reworking, deepening or plugging
back at any single time, and, until the preceding has been completed, no
subsequent operation may be proposed under this agreement; provided,
however, that this provision shall not apply to obligatory operations
provided for herein.
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<PAGE>
A.A.P.L. FORM 610 MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the ______ day
of _________________ 2000.
EQUITABLE PRODUCTION - EASTERN STATES INC., who has prepared and circulated this
form for execution, represents and warrants that the form was printed from and,
with the exception listed below, is identical to the AAPL Form 610-l989 Model
Form Operating Agreement, as published in computerized form by Forms On-A-Disk,
Inc. No changes, alterations, or modifications, other than those made by
strikethrough and/or type-over and that are clearly recognizable, have been
made to the form.
WITNESS: OPERATOR
HAY EXPLORATION, INC. _________________
_________________________________ By _______________________________________
_________________________________ MONTE HAY _____________________________
Type or print name
Title-PRESIDENT _______________________
Date __________________________________
Tax ID or S.S. No. ____________________
NON-OPERATORS
EQUITABLE PRODUCTION -
EASTERN STATES, INC.___________________
_________________________________ By _______________________________________
_________________________________ LESTER A. ZITKU _______________________
Type or print name
Title ATTORNEY-IN-FACT _____________
Date _________________________________
Tax ID or S.S. No. ___________________
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<PAGE>
A.A.P.L. FORM 610 MODEL FORM OPERATING AGREEMENT - 1989
-19-
<PAGE>
EXHIBIT A
To Operating Agreement dated _______________________________,2000
1. DESCRIPTION OF LANDS SUBJECT TO THIS AGREEMENT
The Contract Area shall be the lands described in and covered by that Farmout
Agreement dated August 22, 2000, to which this agreement is attached as
Exhibit D.
2. RESTRICTIONS AS TO DEPTHS, FORMATIONS, OR SUBSTANCES
This agreement is limited to the depths and formations as specified in that
Farmout Agreement dated August 22, 2000, to which this agreement is attached as
Exhibit D.
3. PARTIES TO AGREEMENT WITH ADDRESS, TELEPHONE AND FAX NUMBERS
Equitable Production - Eastern States, Inc. Phone: 1-304-343-9566
Attn: Lester A. Zitkus FAX : 1-304-343-7133
1710 Pennsylvania Avenue
Charleston, WV 25302
Hay Exploration, Inc. Phone: 1-606-324-7971
Attn: Monte Hay FAX: 1-606-324-6340
4353 Willard Drive
Ashland, KY 41102
4. PERCENTAGE OR FRACTIONAL INTERESTS SUBJECT TO THIS AGREEMENT
The interest of the Parties is set out in the Farmout Agreement, to which this
agreement is attached as Exhibit D.
5. OIL AND GAS LEASES SUBJECT TO THIS AGREEMENT
All properties identified on Exhibit A to the Farmout Agreement, to which this
agreement is attached as Exhibit D.
6. BURDENS ON PRODUCTION
None
<PAGE>
COPAS -- 1995
Recommended by the Council
Kraftbilt 601-95 BOX 800 of Petroleum Accountants
TULSA, OK 74101 Societies
EXHIBIT "C"
Attached to and made a part of that certain Operating Agreement dated ,
2000 between Hay Exploration, Inc. and Equitable Production - Eastern States,
Inc.
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 activities required to handle specific
operating conditions and problems for the exploration, development,
production, protection, maintenance, abandonment, and restoration 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 that 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.
"Material" shall mean personal property, equipment, supplies, or
consumables acquired or held for use on the Joint Property.
"Controllable Material" shall mean Material that at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies (COPAS).
"Parties" shall mean legal entities signatory to the agreement, or their
successors or assigns, to which this Accounting Procedure is attached.
"Affiliate" shall mean, with respect to the Operator, any party directly or
indirectly controlling, controlled by, or under common control with the
Operator.
2. STATEMENTS AND BILLINGS
The Operator shall bill Non-Operators on or before the last day of the
month for their proportionate share if the joint Account for the preceding
month. Such bills shall be accompanied by statements that identify the
authority for expenditure, lease or facility, and all charges and credits
summarized by appropriate categories of investment and expense.
Controllable Material shall be summarized by major Material
classifications. Intangible drilling costs and audit exceptions shall be
separately and clearly identified.
3. ADVANCES AND PAYMENTS BY NON-OPERATORS
A. If gross expenditures for the joint Account are expected to exceed
$5,000.00 in the next succeeding month's operations, the Operator may
require the Non-Operators to advance their share of the estimated cash
outlay for the month's operations. Unless otherwise provided in the
agreement, any billing for such advance shall be payable within 15 days
after receipt of the advance request or by the first day of the month
for which the advance is required, whichever is later. The Operator
shall adjust each monthly billing to reflect advances received from the
Non-Operators for such month.
B. Each Non-Operator shall pay its proportion of all bills within 15 days
of receipt date. If payment is not made within such time, the unpaid
balance shall bear interest compounded monthly using the U.S. Treasury
three-month discount rate plus 3% in effect of the last day of the month
for each month that the payment is delinquent 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. Interest shall begin accruing on the first day of the
month in which the payment was due.
4. ADJUSTMENTS
A. Payment of any such bills shall not prejudice the right of any
Non-Operator to protest or question the correctness thereof; however,
all bills and statements (including payout status statements) related to
expenditures rendered to Non-Operators by the Operator during any
calendar year shall conclusively be presumed to be true and correct
after 24 months following the end of any such calendar year, unless
within the said period a Non-Operator takes specific detailed written
exception thereto and makes claim on the Operator for adjustment.
Copyright (c) 1995 by the Council of Petroleum Accountants Societies.
1
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B. All adjustments initiated by the Operator except those described in (1)
through (4) below are limited to the 24-month period following the end
of the calendar year in which the original charge appeared or should
have appeared on the joint Account statement or payout status statement.
Adjustments made beyond the 24-month period are limited to the
following:
(1) a physical inventory of Controllable Material as provided for in
Section VII
(2) an offsetting entry (whether in whole or in part), which is the
direct result of a specific joint interest audit exception granted
by the Operator relating to another property
(3) a government/regulatory audit
(4) working interest ownership adjustments
5. EXPENDITURE AUDITS
A. A Non-Operator, upon notice in writing to the Operator and other
Non-Operators, shall have the right to audit the Operator's accounts and
records relating to the Joint Account for any calendar year within the
24-month period following the end of such calendar year; however,
conducting an audit shall not extend the time for the taking of written
exception to all the adjustments of accounts as provided for in
Paragraph 4 of this Section 1. Where there are two or more
Non-Operators, the Non-Operators shall make every reasonable effort to
conduct a joint audit in a manner that will result in a minimum of
inconvenience to the Operator. The 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 the Operator, except upon the
resignation or removal of the Operator, and shall be made at the expense
of those Non-Operators approving such audit. The lead audit company's
audit report shall be issued within 180-days after completion of the
audit field work; however, the 180-day time period shall not extend the
24-month requirement for taking specific detailed written exception as
required in Paragraph 4.A. above. All claims shall be supported with
sufficient documentation. Failure to issue the report within the
prescribed time will preclude the Non-Operator from taking exception to
any charge billed within the time period audited.
A timely filed audit report or any timely submitted response thereto
shall suspend the running of any applicable statute of limitations
regarding claims made in the audit report. While any audit claim is
being resolved, the applicable statute of limitations will be suspended;
however, the failure to comply with the deadlines provided herein shall
cause the statute to commence running again.
B. The Operator shall allow or deny all exceptions in writing to an audit
report within 180 days after receipt of such report. Denied exceptions
should be accompanied by a substantive response. Failure to respond to
an exception with substantive information on denials within the time
provided will result in the Operator paying interest on that exception,
if ultimately granted, from the date of the audit report. The interest
charged shall be calculated in the same manner as used in Section I,
Paragraph 3.B.
C. The lead audit company shall reply to the Operator's response to an
audit report within 90 days of receipt, and the Operator shall reply to
the lead audit company's follow-up response within 90 days of receipt.
If the lead audit company does not provide a substantive response to an
exception within 90 days, that unresolved audit exception will be
disallowed. If the Operator does not provide a substantive response to
the lead auditor's follow-up response within 90 days, that unresolved
audit exception will be allowed and credit given the Joint Account.
D. The lead audit company or Operator may call an audit resolution
conference for the purpose of resolving audit issues/exceptions that are
outstanding at least 18 months after the date of the audit report. The
meeting will require one month's written notice to the Operator and all
audit participants, be held at the Operator's office or other mutually
agreed upon location, and require the attendance of representatives of
the Operator and each audit participant responsible for the area(s) in
which the exceptions are based and who have authority to resolve issues
on behalf of their company. Any Party who fails to attend the resolution
conference shall be bound by any resolution reached at the conference.
The lead audit company will coordinate the response/position of the
Non-Operators and continue to maintain its traditional role throughout
the audit resolution process.
Attendees will make good faith efforts to resolve outstanding issues,
and each Party will be required to present substantive information
supporting its position. An audit resolution conference may be held as
often as agreed to by the Parties. Issues unresolved at one conference
can be discussed at subsequent conferences until each such issue is
resolved.
6. AFFILIATES
Charges to the Joint Account for any services or Materials provided by an
Affiliate shall not exceed average commercial rates for such services or
Materials.
Unless otherwise indicated below, Affiliates performing services or
providing Materials for Joint Operations shall provide the Operator with
written agreement to make their records relating to the work performed for
the Joint Account available for audit upon request by a Non-Operator under
this Accounting Procedure. These records shall include, but not be limited
to, invoices, field work tickets, equipment use records, employee time
reports, and payroll summaries relating to the work performed for the
Joint Account. All audits will be conducted pursuant to Section I,
Paragraph 5.
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3. MATERIAL
Materials purchased or furnished by the Operator for use on the Joint
Property as provided under Section VI.
Only such Materials shall be purchased for or transferred to the Joint
Property as may be required for immediate use and are reasonably practical
and consistent with efficient and economical operations. The accumulation
of surplus stocks shall be avoided.
4. TRANSPORTATION
Transportation of contract personnel, and Material necessary for the Joint
Operations but subject to the following limitations:
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 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 the 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 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,
unless agreed to by the Parties.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking costs is available when the actual
charge is less than the amount most recently recommended by COPAS,
excluding accessorial charges. Examples of accessorial charges are
listed in Bulletin 21.
D. No charge shall be made for transportation costs associated with
relocating employees, including the costs of moving their household
goods and personal effects, unless agreed to by the Parties.
5. SERVICES
The cost of contract services, equipment, and utilities provided by sources
other than the Operator.
6. EQUIPMENT FURNISHED BY THE OPERATOR
A. Equipment located on the Joint Property owned by the Operator shall be
charged to the Joint Account at the average prevailing commercial rate
for such equipment. If an average commercial rate is used to bill the
Joint Account, the Operator shall adequately document and support such
rate and shall periodically review and update the rate.
B. In lieu of charges in Paragraph 6.A. above, or if a prevailing
commercial rate is not available, equipment owned by the Operator will
be charged to the Joint Account at the Operator's actual cost. Such
costs may include all expenses that would be chargeable pursuant to this
Section III if such equipment were jointly owned, depreciation using
straight line depreciation method, interest on investment (less gross
accumulated depreciation) not to exceed 12% per annum, and an element of
the estimated cost to dismantle and abandon the equipment. Charges for
depreciation will no longer be allowable once the equipment has been
fully depreciated. Actual cost shall not exceed the average prevailing
commercial rate.
C. When applicable for Operator-owned or -leased motor vehicles, the
Operator shall use rates published by the Petroleum Motor Transport
Association or such other organization recognized by COPAS as the
official source of such rates. When such rates are not available, the
Operator shall comply with the provisions of Paragraph A or B above.
7. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property resulting from damages or losses incurred, except those resulting
from the Operator's gross negligence or willful misconduct.
8. TAXES AND PERMITS
All taxes and permits of every kind and nature, including penalties and
interest, assessed or levied upon or in connection with the Joint Property,
or the production therefrom, and which have been paid by the Operator for
the benefit of the Parties
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If ad valorem taxes paid by the Operator are based in whole or in part
upon separate valuations of each Party's working interest, then
notwithstanding any contrary provisions, the charges to Parties will be
made in accordance with the tax value generated by each Party's working
interest.
9. INSURANCE
Net premiums paid for insurance required to be carried for the protection
of the Parties.
If Joint Operations are conducted at locations where the Operator acts as
self-insurer, the Operator shall charge the Joint Account manual rates as
regulated by the state in which the Joint Property is located, or in the
case of offshore operations, the adjacent state as adjusted for offshore
operations by the U.S. Longshoreman and Harbor Workers (USL&H) or Jones Act
surcharge, as appropriate.
11. ECOLOGICAL AND ENVIRONMENTAL
Costs of surveys as well as pollution containment, actual control, and
resulting responsibilities as required by applicable laws or resulting from
statutory regulations
12. ABANDONMENT AND RECLAMATION
Costs incurred for abandonment and reclamation of the Joint Property,
including costs required by governmental or other regulatory authority.
IV. COSTS INCURRED OFF THE JOINT PROPERTY
The Operator shall charge the Joint Account for the following items, which are
incurred off the Joint Property for Joint Operations.
1. FACILITIES
A. PRODUCTION-HANDLING FACILITIES
(1) ALLOCATED
The Operator shall allocate charges to the Joint Account on an equitable
and consistent basis for facilities that handle substances extracted
from or injected into the real property subject to the agreement to
which this Accounting Procedure is attached if such facilities are not
listed in Paragraph (2) below or covered by a separate facility
agreement. Allocable charges for such facilities that are leased or
rented shall be at the Operator's cost. All allocable charges for such
facilities owned by the Operator shall be operating costs as defined in
Section III incurred on the facility site plus depreciation, interest on
investment (less gross accumulated depreciation) not to exceed 12% per
annum, and estimated dismantling and abandonment costs. Charges for
depreciation will no longer be allowable once the equipment has been
fully depreciated. Such rates shall not exceed average commercial rates
prevailing in the area of the Joint Property.
In lieu of charges in Paragraph 1.A.(1) above for Operator-owned
facilities, the Operator may elect to charge average commercial rates
prevailing in the immediate area of the Joint Property. If average
commercial rates are used, the Operator shall adequately document and
support the rates.
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7. APPROVAL BY PARTIES
An affirmative vote of both Parties shall be required for all items in this
Accounting Procedure requiring approval by the Parties. This vote shall be
taken in writing, in a meeting, or by telephone and results shall be
binding on all Parties. All votes must be confirmed in writing by each
Party to the Operator within two business days. The Operator shall give
notice to all Parties of the results.
II. METHOD OF CHARGES TO JOINT ACCOUNT
The Operator shall charge the Joint Account for the costs of Joint Operations in
accordance with only one of the following options. The method of charges to the
Joint Account may be changed if approved by the Parties in accordance with
Section I, Paragraph 7.
1. [X] FIXED RATE COSTS ARE INCLUDED IN THE PRODUCING WELL RATE CHARGE AS
STATED IN ARTICLE V.1,A.
Active wells are those wells that qualify for a producing overhead charge
as specified in Section V, Paragraph 1.A.(3) of this procedure.
The fixed rate will compensate the Operator for all costs applicable to
Joint Operations except for royalties, ad valorem taxes, and
production/severance taxes paid by the Operator for the Joint Operations
and except downhole well work, Controllable Material, and all projects that
qualify for drilling, construction, and/or catastrophe overhead as
specified in Section V of this procedure along with all other third party
costs. These exception costs shall be charged as specified in Sections III,
IV, and V of this procedure.
III. COSTS INCURRED ON THE JOINT PROPERTY
The Operator shall charge the Joint Account for the following items less
discounts taken, which are incurred on the Joint Property for Joint
Operations. Employees and contract personnel who spend substantially all
their time in offices that are not Joint Property are not chargeable under
this Section while working in those offices.
1. RENTALS AND ROYALTIES
Lease rentals and royalties paid by the Operator.
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2. ECOLOGICAL AND ENVIRONMENTAL
Ecological and environmental costs are those that arise from compliance
with governmental or regulatory requirements or prudent operations. These
costs that are incurred of the Joint Property shall be
[X] allocated directly to the Joint Account
[ ] included in the Overhead rates provided in Section V
3. LEGAL EXPENSE
The Operator may not charge for services of the Operator's legal staff or
fees and expense of outside attorneys unless approved by the Parties in
writing. Other expenses of handling, settling, or otherwise discharging
litigation, claims, liens, title examinations, and curative work necessary
to protect or recover the Joint Property shall be chargeable.
5. ENGINEERING, DESIGN, AND DRAFTING
Engineering, design, and drafting costs associated with major construction
or catastrophes, as defined in Section V, Paragraph 2, of this Accounting
Procedure, may be charged to the Joint Account only when the Operator
elects to charge overhead for major construction or catastrophes per
Section V, Paragraph 2.B. Such charges shall be determined in a manner
consistent with those defined in Section III, Paragraphs 2 and 5.
V. OVERHEAD
The Operator shall be compensated for costs not chargeable in Section III (Costs
Incurred On The Joint Property) or Section IV (Costs Incurred Off The Joint
Property) that are incurred in connection with and in support of Joint
Operations.
1. OVERHEAD -- DRILLING AND PRODUCING OPERATIONS
As compensation for overhead in connection with drilling and producing
operations, the Operator shall charge on either a
[X] Fixed Rate Basis, Paragraph 1.A., or
[ ] Percentage Basis, Paragraph 1.B.
A. OVERHEAD -- FIXED RATE BASIS
(1) The Operator shall charge the Joint Account at the following rates
per well.
Drilling well rate $7,000.00 per well.
Producing well rate per month $750.00*
*if gas from a particular well requires treatment for H2S (wellhead gas H2S
concentration exceeds 4ppm), then all costs associated with the treatment
of gas from that well will be billed to all ownership based on working
interests in addition to the working interest share of the fixed $750 per
month producing well rate.
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(2) Application of overhead-drilling well rate shall be as follows:
(b) Charges for wells undergoing any type of workover, recompletion,
or abandonment for a period of five consecutive work days or
more shall be made at the drilling well rate. Such charges shall
be applied for the period from the date workover operations,
with the rig or other units used in workover, commence through
the date of the rig or other unit release, except that no
charges shall be made during suspension of operations for 15 or
more consecutive calendar days.
(3) Application of overhead-producing well rate shall be as follows:
(a) An active well completion for any portion of the month shall
qualify for a one-well charge for the entire month. An active
completion is one that is
[1] produced,
[2] injected into for recovery or disposal, or
[3] used to obtain a water supply to support production
operations.
(b) Each active completion in a multi-completed well in which
production is not commingled downhole shall qualify for a
one-well charge providing each completion is considered a
separate well by the governing regulatory authority.
(c) 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 the drilling well rate applies.
(d) All wells not meeting the criteria set forth in this Paragraph A
(3) (a), (b), or (c) shall not qualify for a producing overhead
charge.
2. OVERHEAD -- MAJOR CONSTRUCTION AND CATASTROPHES
Major construction is defined as any project in excess of $5,000.00
required for the construction and installation of fixed assets, the
expansion of fixed assets, or in the dismantling for abandonment of fixed
assets as required for the development and operation of the Joint Property.
Catastrophe is defined as a calamitous event bringing damage, loss, or
destruction resulting from a single occurrence requiring expenditures in
excess of $25,000.00 to restore the Joint Property to the equivalent
condition that existed prior to the event causing the damage.
To compensate the Operator for overhead costs incurred in connection with
major construction and catastrophes, the Operator shall either negotiate a
rate prior to beginning the work or shall charge the Joint Account for
overhead based on the following rates:
A. If the Operator absorbs engineering, design, and drafting costs related
to the project, the overhead assessment will be 10% of total project
costs.
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B. If the Operator charges engineering, design, and drafting costs related
to the project directly to the Joint Account, the overhead assessment
will be 10% of total project costs.
For each project, the Operator shall provide advance notice to the
Non-Operators in writing if option A or B above will be used for
calculating construction or catastrophe overhead. For purposes of
calculating overhead, the cost of drilling and workover wells shall be
excluded and catastrophe expenditures to which these rates apply shall not
be reduced by insurance recoveries. Overhead assessed under the
construction and catastrophe provisions shall be in lieu of all other
overhead provisions.
VI. MATERIAL PURCHASES, TRANSFERS, AND DISPOSITIONS
The Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for direct purchases, transfers, and dispositions.
The Operator normally provides all Material for use on the Joint Property but
does not warrant the Material furnished. At the Operator's option, Material may
be supplied by Non-Operators.
1. DIRECT PURCHASES
Direct purchases shall be charged to the Joint Account at the price paid by
the Operator after deduction of all discounts received. A direct purchase
is determined to occur when all agreement is made between an Operator and a
third party for the acquisition of Materials for a specific well site or
location. Material provided by the Operator under "vendor stocking
programs," where the initial use is for a Joint Property and title of the
Material does not pass from the vendor until usage, is considered a direct
purchase. If Material is found to be defective or is returned to the vendor
for any other reason, credit shall be passed to the Joint Account where
adjustments have been received by the Operator from the manufacturer,
distributor, or agent.
2. TRANSFERS
A transfer is determined to occur when the Operator furnishes Material from
its storage facility or from another operated property. Additionally, the
Operator has assumed liability for the storage costs and changes in value
and has previously secured and held title to the transferred Material.
Similarly, the removal of Material from a Joint Property to the Operator's
facility or to another operated property is also considered a transfer.
Material that is moved from the Joint Property to a temporary storage
location pending disposition may remain charged to the Joint Account and is
not considered a transfer.
A. PRICING
The value of Material transferred to/from the Joint Property should
generally reflect the market value on the date of transfer. Transfers of
new Material will be priced using one of the following new Material bases:
(1) Published prices in effect on the date of movement as adjusted by
the appropriate COPAS Historical Price Multiplier (HPM) or prices
provided by the COPAS Computerized Equipment Pricing System (CEPS)
The HPMs and the associated date of published price to which they
should be applied will be published by COPAS periodically.
(a) For oil country tubulars and line pipe, the published price
shall be based upon eastern mill (Houston for special crud)
carload base prices effective as of the date of movement, plus
transportation cost as defined in Section VI, Paragraph 2.B.
(b) For other Material, the published price shall be the published
list price in effect at the date of movement, as listed by a
supply store nearest the Joint Property or point of manufacture,
plus transportation costs as defined in Section VI, Paragraph
2.B.
(2) A price quotation that reflects a current realistic acquisition cost
may be obtained from a supplier/manufacturer.
(3) Historical purchase price may be used, providing it reflects a
current realistic acquisition cost on the date of movement.
Sufficient price documents should be available to Non-Operators for
purposes of verifying Material transfer valuation.
(4) As agreed to by the Parties
B. FREIGHT
Transportation costs should be added to the Material transfer price
based on one of the following:
(1) Transportation costs for oil country tubulars and line pipe shall be
calculated using the distance from eastern mill to the railway
receiving point nearest the Joint Property based on the carload
weight basis as recommended by COPAS in Bulletin 21 and current
interpretations.
(2) Transportation costs for special mill items shall be calculated from
that mill's shipping point to the railway receiving point nearest
the Joint Property. For transportation costs from other than eastern
mills, the 30,000-pound Specialized Motor Carriers interstate truck
rate shall be used. Transportation costs for macaroni tubing shall
be calculated based on the Specialized Motor Carriers rate per
weight of tubing transferred to the railway receiving point nearest
the Joint Property.
(3) Transportation costs for special end tubular goods shall be
calculated using the 30,000-pound Specialized Motor Carriers
interstate truck rate from Houston, Texas, to the railway receiving
point nearest the Joint Property.
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(4) Transportation costs for Material other than that described in
Section VI, Paragraphs 2.B(1) through (3), if applicable, shall be
calculated from the supply store or point of manufacture, whichever
is appropriate, to the railway receiving point nearest the Joint
Property.
C. CONDITION
(1) Condition "A" -- New and unused Material in sound and serviceable
condition shall be charged at one hundred percent of the price as
determined in Section VI, paragraphs 2.A and 13. Material
transferred from the Joint Property that was not placed in service
on the Joint Property shall be credited as charged without gain or
loss. Any unused Material that was charged to the Joint Account
through a direct purchase will be credited to the Joint Account at
the original cost paid. All refurbishing costs necessary to correct
handling or transportation damages amid other related costs will be
borne by the divesting property. The Joint Account is responsible
for Material preparation, handling, and transportation costs for new
and unused Material charged to the property either through a direct
purchase or transfer. Any preparation costs performed, including any
internal or external coating and wrapping, will be credited on new
Material provided these costs were not repeated for the receiving
property.
(2) Condition "B" -- Used Material in sound and serviceable condition
and suitable for reuse without reconditioning shall be priced at the
condition percentage most recently recommended by COPAS times the
price determined by the pricing guidelines in Section VI, Paragraphs
2.A and B. Any cost of reconditioning to return the Material to
Condition B will be absorbed by the divesting property.
If the Material was originally charged to the Joint Account as used
Material and placed in service on the Joint Property, the Material
will be credited at the condition percentage most recently
recommended by COPAS times the price as determined in Section VI,
Paragraphs 2.A and B.
Used Material transferred from the Joint Property that was not
placed in service on the property shall be credited as charged
without gain or loss.
(3) Condition "C" -- Material that is not in sound and serviceable
condition and not suitable for its original function until after
reconditioning shall be priced at the condition percentage most
recently recommended by COPAS times the price determined in Section
VI, Paragraphs 2.A and B. 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.
(4) Condition "D" -- Other Material that is no longer suitable for its
original purpose but usable for some other purpose is considered
Condition D Material. Included under Condition "D" is also obsolete
items or Material that does not meet original specifications but
still has value and can be used in other services as a substitute
for items with different specifications. Due to the condition or
value of other used and obsolete items, it is not possible to price
these items under Section VI, Paragraph 2.A. The price used should
result in the Joint Account being charged or credited with the value
of the service rendered or use of the Material. In some instances,
it may be necessary or desirable to have the Material specially
priced as agreed to by the parties.
(5) Condition "E" -- Junk shall be priced at prevailing scrap value
prices.
D. OTHER PRICING PROVISIONS
(1) Preparations Costs
Costs incurred by the Operator in making Material serviceable
including inspection, third party surveillance services, and other
similar services will be charged to the Joint Account at prices
reflective of the Operator's actual costs of the services.
Documentation must be retained to support the cost of service. New
coating and/or wrapping may be charged per Section VI, Paragraph
2.A.
(2) Loading and Unloading Costs
Loading and unloading costs related to the movement of the Material
to the Joint Property shall be charged in accordance with the
methods specified in COPAS Bulletin 21.
3. DISPOSITION OF SURPLUS
Surplus Material is that Material, whether new or used, that is no longer
required for Joint Operations. The Operator may purchase, but shall be
under no obligation to purchase, the interest of the Non-Operator in
surplus Material.
Dispositions for the purpose of this procedure are considered to be the
relinquishment of title of the Material from the Joint Property to either a
third party, a Non-Operator, or to the Operator. To avoid the accumulation
of surplus Materials, the Operator should make good faith efforts to
dispose of surplus within 12 months through buy/sale agreements, trade,
sale to a third party, division in-kind, or other dispositions as agreed to
by the Parties.
An Operator may, though a sale to an unrelated third party or entity,
dispose of surplus Material having a gross sale value that is less than or
equal to the Operator's expenditure limit as set forth in the Operating
Agreement to which this Accounting Procedure is attached without the prior
approval of the Non-Operator. If the gross sale value exceeds the Operating
Agreement expenditure limit, the disposal must be agreed to by the
Parties.
The Operator may dispose of Condition D and E Material under procedures
normally utilized by the Operator without prior approval.
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4. SPECIAL PRICING PROVISIONS
A. PREMIUM PRICING
Whenever Material is not readily replaceable due to 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 use and to billing Non-Operators for
such Material. During premium pricing periods, each Non-Operator shall
have the right to furnish in-kind all or part of his share of such
Material suitable for use and acceptable to the Operator by so electing
and notifying the Operator within ten days after receiving notice from
the Operator.
B. SHOP-MADE ITEMS
Shop-made items may be priced using the value of the Material used to
construct the item plus labor costs. If the Material is from a scrap or
junk account, the Material may be priced at either 25% of the current
price as determined in Section VI, Paragraph 2.A, or scrap value,
whichever is higher, plus estimated labor costs to fabricate the item.
C. MILL REJECTS
Mill rejects purchased as "limited service" casing or tubing shall be
priced at 80% of K-55/J-55 price as determined in Section VI, Paragraphs
2.A and B, Line pipe converted to casing or tubing with casing or tubing
couplings attached shall be priced as K-55/J-55 casing or tubing at the
nearest size and weight.
VII. INVENTORIES OF CONTROLLABLE MATERIAL
The Operator shall maintain records of Controllable Material charged to the
Joint Account, as defined in the COPAS Material Classification Manual, with
sufficient detail to perform the physical inventories requested unless directed
otherwise by the Non-Operators.
Adjustments to the Joint Account by the Operator resulting from a physical
inventory of jointly owned Controllable Material are limited to the six months
following the taking of the inventory. Charges and credits for overages or
shortages will be valued for the Joint Account based on Condition B prices in
effect on the date of physical inventory and determined in accordance with
Section VI, Paragraphs 2.A. and B, unless the inventorying Parties can prove
another Material condition applies.
1. DIRECTED INVENTORIES
With an interval of not less than five years, physical inventories shall be
performed by the Operator upon written request of a majority in working
interests of the Non-Operators.
Expenses of directed inventories will be borne by the Joint Account and may
include the following:
A. Audit per diem rate for each inventory person in line with the auditor
rates determined, adjusted, and published each April by COPAS
The per diem should also be applied to a reasonable number of days for
pre-inventory work and for report preparation. The amount of time
required for this additional work may vary from inventory to inventory.
B. Actual travel including Operator-provided transportation and personal
expenses for the inventory team
C. Reasonable charges for report typing and processing
The Operator is expected to exercise judgment in keeping expenses within
reasonable limits. Unless otherwise agreed, costs associated with any
post-report follow-up work in settling the inventory will be absorbed by
the Non-Operator incurring such costs. Any anticipated disproportionate
costs should be discussed and agreed upon prior to commencement of the
inventory.
When directed inventories are performed, all Parties shall be governed by
such inventory.
2. NON-DIRECTED INVENTORIES
A. OPERATOR INVENTORIES
Periodic physical inventories that are not requested by the Non-Operator
may be performed by the Operator at the Operator's discretion. The
expenses of conducting such Operator inventories shall not be charged to
the Joint Account.
B. NON-OPERATOR INVENTORIES
Any Non-Operator(s) may conduct a physical inventory at reasonable times
with prior notification to the Operator. Such inventories shall be
conducted at the sole cost and risk of the participating
Non-Operator(s).
C. OTHER INVENTORIES
Other physical inventories may be taken whenever there is any sale or
change of interest. When possible, the selling Party should notify all
other owners 30 days prior to the anticipated closing date. When there
is a change in Operator of the Joint Property, an inventory by the
former and new Operator should be taken. The expenses of conducting such
other inventories shall be charged to the Joint Account.
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EXHIBIT D
TO OPERATING AGREEMENT DATED ,2000
INSURANCE
A. Operator shall carry, for the benefit of the joint account, insurance with
responsible insurance carriers as follows:
1. Workmen's Compensation and Employer's Liability.
(a) State Statutory Requirements for Workmen's Compensation
(b) Employer's Liability - $100,000 for each person
2. Comprehensive General liability
(a) Bodily Injury with limits of not less than:
$100,000 each person
$500,000 each accident
(b) Property Damage
(c) Such coverage shall include contractual liability
3. Automobile Liability (including Hired and Non-Owned Vehicles)
(a) Bodily Injury with limits of not less than:
$100,000 each person
$500,000 each accident
(b) Property damage with limits of not less than:
$500,000 each accident
4. Not less than $2,000,000 nor more than $5,000,000 of Umbrella
Liability with respect to scheduled liability policies.
5. All other insurance, if any, which may be required by applicable
law.
B. Operator shall not be obligated to carry any insurance other than that
specified above. Any party may, at its own expense, acquire such insurance
as it deems proper to protect itself against any claims, losses, damages or
destruction arising out of the operation of the Contract Area. Operator
shall not be liable to Non-Operator for loss suffered on account of the
insufficiency of insurance carried, or of the insurer with whom carried.
<PAGE>
EXHIBIT "E"
Attached to and made a part of that certain Operating Agreement dated
,2000 by and Hay Exploration, Inc., as Operator, and Equitable
Production-Eastern States, Inc., as Non-Operator.
GAS BALANCING AGREEMENT
The parties to the Operating Agreement to which this agreement is attached,
own the working interest in the gas rights underlying the Contract Area covered
by such Operating Agreement in accordance with the percentages of participation
as set forth in Exhibit "A" to said Agreement.
In accordance with the terms of the Operating Agreement, each party thereto
has the right to take in kind its share of gas produced from the Contract Area
and market or otherwise dispose of same. In the event and at any time any party
hereto is not taking or marketing its full share of gas, or has contracted to
sell it's share of gas produced from Contract Area to a purchaser which at any
time does not take the full share of gas attributable to the interest of such
party, the terms of this agreement shall automatically become operative.
During the period when any party hereto is not marketing or otherwise
disposing of its full share of gas produced from any well and/or proration unit
within the Contract Area, the other party hereto shall be entitled to produce,
in addition to their own share of production, that portion of such other party's
share of production which said party is unable to market or otherwise dispose of
and shall be entitled to take such gas production and deliver same to its or
their purchaser(s). All parties hereto shall share in and own the liquid
hydrocarbons recovered from such gas by lease equipment in accordance with their
respective interests and subject to the aforesaid Operating Agreement, but the
party or parties taking such gas shall own all of such gas delivered to its or
their purchaser(s).
A gas balance account shall be established for each party, and when it is
not marketing or otherwise disposing of its full share of the gas produced, such
party's account shall be credited with an amount of gas equal to its full share
of the gas produced less its share of gas used in lease operations, vented, or
lost, and less that portion marketed or otherwise disposed of by such party. The
Operator will maintain a current gas balance account for all parties and will
furnish all parties hereto monthly statements showing the total quantity of gas
produced, the amount used in lease operations, vented or lost, the total
quantity of liquid hydrocarbons recovered therefrom, and the monthly and
cumulative gas balance of each party. (Underproduced party would show a negative
gas balance and overproduced party would show a positive gas balance.)
Notwithstanding anything to the contrary contained herein, or contained in
the Operating Agreement to which this Exhibit "E" is attached, each party taking
in kind a share of production hereunder shall be required to make settlement
with the royalty owners for the proportionate royalties payable out of the gas
so taken by such Party. Each party hereto agrees to hold each other harmless
from any and all claims for royalty payments asserted by royalty owners to whom
each party is accountable. The term "royalty owner" shall include owners of
royalty, overriding royalties, production payments and similar interests.
Any party at any time may market or otherwise dispose of its full share of
any gas produced. In addition to such share, any party with a negative balance
in its gas balance account, after notice to the Operator and until it has
balanced its gas balance account, shall be entitled to take a share of gas
determined by multiplying fifty percent (50%) of the interest in the current
gas production of the party having a positive balance in this gas balance
account by a fraction, the numerator of which is the interest in the proration
unit of such party with the negative balance and the denominator of which is the
total percentage interest in such proration unit of all parties having negative
balances and who are currently marketing or otherwise disposing of a portion of
their negative balance in addition to their share of gas.
Each party marketing or otherwise disposing of gas shall pay the production
taxes due on such gas.
Nothing herein shall be construed to deny any party the right, from time to
time, to produce and deliver to its purchaser its full share of the allowable
gas production to meet the deliverability tests required by its purchaser.
- l-
<PAGE>
At the end of each 12 month period after the date production is first
turned in line, or at such time when the production of gas from a proration unit
be permanently discontinued before the gas account is balanced, a cash
settlement will be made between the party credited with negative balances
(underproduced party) and positive balances (overproduced party). In making such
settlement, the underproduced party will be paid by the overproduced party a sum
of money calculated as follows:
for all volumes of gas for which settlement is made, the underproduced
party shall be paid the lower of the price actually received by the
overproduced party or the weighted average of the Inside F.E.R.C.'s
Gas Market Report ("IFGMR") index price of spot gas delivered to
pipelines, Columbia Gas Transmission Corporation, Appalachia (WVA, OH,
KY), for purchases made during the prior 12 month period. Any and all
applicable taxes previously paid by the overproduced party for such
volumes shall be deducted from the settlement amount, as well as any
reasonable marketing costs incurred directly in connection with the
sale of the overproduction.
In the event the overproduced party has paid royalties attributable to such
overproduction to which the underproduced party's interest was subject, the
amount of such royalties shall also be deducted from such settlement. The
weighted average price paid by IFGMR for its spot purchases for the production
period shall be calculated by multiplying the volumes produced by the well by
the IFGMR price paid for spot purchases for each of the months in the production
period, adding up the amount derived for all the months in the production
period, and dividing such sum by the total gas produced by the well during the
production period.
Nothing herein shall change or affect each party's obligation to pay its
proration share of all liabilities incurred, as provided in the aforesaid
Operating Agreement.
The agreement shall constitute a separate agreement as to each proration
unit within the Contract Area. It shall inure to the benefit of and be binding
upon the parties hereto, their successors, legal representatives and assigns. It
shall become effective in accordance with its terms and shall remain in force
and effect as long as the Operating Agreement to which it is attached remains in
effect.
-2-
<PAGE>
EXHIBIT F
TO OPERATING AGREEMENT DATE _________________, 2000
Non-Discrimination and Certification of Non-Segregated Facilities
In connection with performance of work under this Operating Agreement, Operator
shall comply with all of the provisions of Section 202 (1) to (7), inclusive, of
Executive Order 11246 (30 F.R. 12319), which are hereby incorporated by
reference in this Operating Agreement.
<PAGE>
EXHIBIT "H"
TO OPERATING AGREEMENT DATED ,2000.
WELL INFORMATION REQUIREMENTS
NOTIFICATIONS
Non-Operator(s) will be notified of the following operational activities:
a) Intent to spud -- 48 hours before drilling operations commence
b) Logging, coring or drill stem testing -- 24 hours prior to
commencement
c) Casing point elections -- As per Operating Agreement
REGULATORY INFORMATION
One copy of all regulatory filings submitted to any state or federal agency will
be forwarded to Non-Operator(s) by US Mail at the time they are submitted. These
data will include, but are not limited to the following:
<TABLE>
<S> <C>
a) drilling/completion permit d) completion reports/monthly production data
b) survey/location plat e) MWD logging data
c) daily drilling/completion report f) directional survey data
</TABLE>
Two copies of all field prints and three copies of all final prints of the
following data will be provided to Non-Operator(s) as soon as it becomes
available to the operator:
<TABLE>
<S> <C>
a) open hole logs/surveys e) velocity or seismic surveys
b) geological prognosis (prior to spud) f) bottom hole pressure or production tests
c) DST, formation test data g) PVT analyses; oil, gas, water analyses
d) core description/analyses h) computed logs (if routinely performed)
</TABLE>
Upon written request prior to spud, the Operator will acquire drill cuttings as
specified by Non-Operator(s). Samples of said cuttings will be kept on location
until drilling operations are completed.
Non-Operator(s), or its authorized representatives, shall, at times and at their
own risk, have access to the derrick floor, and to any and all information
obtained or acquired in the course of, or as a result of drilling any well
subject to this agreement.
When drilling on air, operator will take gas checks, in accordance with current
industry practices, within 100 feet after drilling through any formation known
to be productive of oil or gas within a two-mile radius of the drilling
location. All other gas shows encountered during drilling process will be gauged
immediately.
The minimum logging suite will consist of resistivity, bulk density, neutron
porosity, gamma ray, and temperature (air holes only) from base of surface
casing to TD. Detail logs will be acquired over zones of interest at the request
of Non-Operator(s).
COMMUNICATIONS
The correspondence and data transmission required herein will be directed as
follows:
Mailing Address: Equitable Production - Eastern States, Inc.
Attn: Lester A. Zitkus
1710 Pennsylvania Avenue
Charleston, WV 25302
Telephone: (304) 343-9566 (office)
FAX: ( ) (fax for regulatory and geological items)
FAX: ( ) (fax for continuous feed for logs)
<PAGE>
EXHIBIT A 2
FARMOUT AGREEMENT
CARTER PROSPECT AREA OF INTEREST
CARTER COUNTY, KENTUCKY
THIS AGREEMENT, made and entered into this 22 day of August, 2000, by and
between EQUITABLE PRODUCTION - EASTERN STATES, INC., with an address of 1710
Pennsylvania Avenue, Charleston, West Virginia, 25302, hereinafter referred to
as FARMOR, and HAY EXPLORATION, INC., with an address of 4353 Willard Drive,
Ashland, Kentucky, 41102, hereinafter referred to as FARMEE,
WITNESSETH THAT:
WHEREAS, FARMOR is the owner of certain leasehold rights in the Oil and Gas
Leases that are depicted on Exhibit A, estimated to contain 5,900 gross acres,
more or less, located in Carter County, Kentucky, attached hereto and by
reference made a part hereof; and
WHEREAS, FARMOR has agreed to farmout the Oil and Gas Leases or portions
thereof as shown on Exhibit A to FARMOR subject to the terms and conditions
contained herein; and
WHEREAS, the parties hereto wish to establish a contract area within which
such leases are located. FARMEE shall operate said contract area which shall be
identified as the AREA OF INTEREST (AOI). Such A01 shall be all of the land area
and leaseholds situate within the Carter Coordinate Sections depicted on Exhibit
A. The A01 shall further be defined as all existing leases and lands and future
leases and lands that fall within the following Carter Coordinates:
Carter Coordinate Sections
----------------- --------
v-79 21&22
V-80 25 & 24 (W/2)
u-79 1,2,7(E/2), 8,9, 10, 11, 12, 13, 14, 17,18 & 19
U-80 4(W/2), 5 & 6
All of the lease and lands within such A01 shall hereinafter be known as
the Farmout Acreage.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, it is agreed by and between the parties hereto as follows:
1. TITLES: FARMOR does not warrant the title to the Farmout Acreage but it
shall, upon request, make available to FARMEE for review, such abstracts and all
other pertinent title documents, without warranty or liability, as it has in its
files. There shall be no obligation on the part of FARMOR to secure new or
supplemental abstracts nor secure any curative instruments in connection with
the title to the Farmout Acreage. Furthermore, FARMEE shall promptly furnish to
FARMOR free of all costs, copies of all abstracts or title opinions FARMEE
acquires on the Farmout Acreage.
2. PRIOR TO DRILLING: Prior to the date that any well is commenced under
this Agreement, FARMEE shall furnish FARMOR with 1) a copy of the related
drilling permit, 2) its accompanying location plat 3) copies of title opinions
and curative if needed and 4) copies of any state regulatory proceedings if
applicable. FARMEE shall also inform FARMOR 1) when the location for said well
is staked, 2) when the material for the drilling thereof is moved to the
location, 3) of the expected time of spud [at least twenty-four (24) hours in
advance of such spud] and 4) when the well is actually spud. After actual
drilling has been commenced, FARMEE shall furnish FARMOR with drilling and
geological information as more fully set forth in Exhibit "B", attached hereto
and by reference made a part hereof.
<PAGE>
3. EXPLORATORY DEEP WELL: FARMEE agrees to spud an Exploratory Deep Well to
a depth sufficient to penetrate the Tomstown Carbonate bed near the base of the
Rome sequence (Contract Depth), in search of oil and/or gas on or before thirty
(30) days after Total Depth is reached in the exploratory deep well FARMEE is
obligated to drill under that certain Farmout Agreement dated August 22, 2000,
and referred to as the "Dingus Prospect Farmout Agreement". The Exploratory
Deep Well shall be drilled at a legal location of FARMEE's choice on Farmout
Acreage. FARMEE shall complete the drilling of the Exploratory Deep Well within
sixty (60) days after commencement, and shall operate with due diligence and in
a good and workmanlike manner in the conduct of the operations.
The Exploratory Deep Well to be drilled by FARMEE as hereinabove provided,
as well as all operations incident thereto, shall be at the sole risk, cost and
expense of FARMEE. FARMOR shall not be subject to any obligation or liability
whatsoever in connection therewith, however, FARMOR shall own a 7.5% Carried
Working Interest, (as defined below), through Completion (as defined below) of
said Exploratory Deep Well. For the purposes of this Agreement, a Carried
Working Interest shall be defined as a cost-free Working Interest in which the
FARMEE shall bear FARMOR's proportionate share of costs and expenses. The term
Completion shall be defined as such time when a well has been completed, turned
in line and any commercial hydrocarbon is flowing to the gathering line or to
the tanks.
If the Exploratory Deep Well proves to be capable of producing oil or gas
in commercial quantities at Contract Depth, it shall be equipped for production
by FARMEE in a diligent and workmanlike manner.
If the Exploratory Deep Well does not encounter commercially producible
quantities of hydrocarbons at Contract Depth, but encounters potentially
commercial quantities of hydrocarbons at some shallower depth, FARMEE shall have
the option, but not the obligation, to test and thereafter complete the well if
it proves capable of producing commercial quantities of gas at such shallower
depth.
If the Exploratory Deep Well proves to be incapable of producing oil or gas
in commercial quantities at Contract Depth or at any shallower depth, FARMEE
shall plug and abandon said well(s), within ninety (90) days after commencement
of same, in accordance with the rules and regulations of any regulatory body
having jurisdiction, but not until FARMOR has had the option to take over the
well, as more fully described herein FARMEE shall be responsible for restoring
the premises to its original condition as nearly as practicable and settle and
dispose of all claims for damage to the surface of the Farmout Acreage.
FARMEE shall independently undertake to secure any and all rights of access
and surface rights at the drillsite location and along all of its proposed
pipeline right of ways upon the Farmout Acreage. FARMEE additionally agrees to
hold harmless FARMOR from any claims for damage or negligence that may arise as
a result of FARMEE's conduct of operations upon any severed mineral tracts upon
the Farmout Acreage.
FARMEE agrees to indemnify and hold harmless FARMOR from any claim(s) or
lien(s) asserted by any person or persons as a direct or indirect result of
FARMEE's operations and to pay promptly all invoices for labor, materials and
other items as they occur. FARMEE agrees to carry, or require any contractor to
carry, insurance as more fully set forth on Exhibit "C".
4. SUBSTITUTE WELL: In the event the Exploratory Deep Well, while being
drilled to Contract Depth, encounters impenetrable substances or other hole
conditions which make further drilling impractical, FARMEE may discontinue
drilling the Exploratory Deep Well before the Contract Depth requirement
therefor is satisfied. In such event, FARMEE shall have the right, but not the
obligation, to drill another well ("Substitute Well") at a location of FARMEE's
choice on the Farmout Acreage, provided the actual drilling of said Substitute
Well is commenced not later than sixty (60) days after operations cease on the
Exploratory Deep Well and such Substitute Well is drilled
2
<PAGE>
within the same unit as for the Exploratory Deep Well. Such Substitute Well
shall be drilled in the manner and to the depth specified for the Exploratory
Deep Well it is to replace and must be drilled with due diligence. If a
Substitute Well is commenced, drilled, and completed as herein provided, it
shall be deemed for the purposes of this Agreement to be the Exploratory Deep
Well to the same extent as if the Exploratory Deep Well had been commenced,
drilled, and completed in accordance herewith.
5. SUBSEQUENT WELLS: By virtue of drilling the Exploratory Deep Well and/or
Substitute Well to Contract Depth as hereinbefore specified, FARMEE shall earn
the right and option to drill Subsequent Wells within the A0I on the Farmout
Acreage provided no more than nine (9) months elapse between the release of the
drilling rig on the previous well and the spudding of a Subsequent Well on the
Farmout Acreage.
If the Exploratory Deep Well was drilled and completed in a formation
shallower than Contract Depth, FARMEE shall drill Subsequent Wells to test
Contract Depth. However, if FARMEE wishes to drill and complete Subsequent
Wells targeting formations shallower than Contract Depth, prior written consent
of FARMOR is required.
Any time after the Exploratory Deep Well has been drilled, Subsequent Wells
may be proposed by either FARMOR or FARMEE on the Farmout Acreage subject to and
under the same terms and conditions and time constraints as for the Exploratory
Deep Well and in accordance with the provisions of Article VI.B. of Exhibit
"D" attached hereto. If such Subsequent Wells are drilled in compliance with
this Agreement (and Exhibit "D"), and result in a well(s) capable of producing
oil and/or gas, FARMEE shall earn assignments of leasehold rights in the manner
and under the same terms and conditions as provided for herein under Provision
13. In the event such Subsequent Well(s) are completed as dry holes or wells
which did not reach Contract Depth, the time between wells will be limited to
the time constraints governing the Substitute Wells as provided above. Failure
by FARMEE to continuously drill the Farmout Acreage as provided herein will
result in FARMEE forfeiting the right to further develop the Farmout Lands and
to earn further Assignments under this Agreement and a reversion to FARMOR of
all Farmout Acreage not previously earned by FARMEE pursuant to this Agreement
shall automatically occur.
6. PARTICIPATION RIGHTS: FARMOR reserves the right and option to
participate for a 30% Working Interest in each Subsequent Well proposed within
the AOI. FARMOR shall notify FARMEE by AFE and Well Location Plat, at least
thirty (30) days prior to the spudding of any Subsequent Well, and FARMOR shall
have thirty (30) days after receipt of such notice to make its participation
election in the subject well(s). The joint participation in the drilling and
completion of each such well shall be subject to the terms of that certain
Operating Agreement attached hereto as Exhibit "D" FARMOR shall have the right
to operate any wells in which FARMOR elects to participate. If FARMOR elects to
operate any wells, FARMOR shall be subject to the same terms and conditions as
contained in Exhibit D, attached hereto, attributable to Operator therein.
If FARMOR elects not to participate in a Subsequent Well, FARMOR shall,
through completion and turn in line through tanks, retain a 7.5% Carried Working
Interest in each such well,
7. OPTION TO TAKE OVER WELLS: If at any time FARMEE desires to plug and
abandon any well drilled on the Farmout Acreage, FARMEE shall notify FARMOR in
writing. FARMOR shall have ten (10) days after receipt of such notice within
which to advise FARMEE in writing whether or not FARMOR elects to take over
operations as to said well for such further operations as it may wish to
conduct; provided, however, if a rig is on location, then FARMOR shall have
forty-eight (48) hours (exclusive of Saturdays, Sundays, and holidays) within
which to advise of such election. The time allowed for FARMOR's election shall
not commence until FARMEE has properly notified FARMOR that FARMEE intends to
plug and abandon such well and copies of all logs of prospective pay sections in
such well, together with all other
3
<PAGE>
information required herein, have been received by FARMOR. Failure of FARMOR to
exercise the option to take over any such well as aforesaid shall be
conclusively deemed an election not to take over such well and FARMEE shall plug
and abandon such well at its sole cost, risk and expense.
In the event FARMOR elects to take over any such well, FARMEE shall
immediately assign to FARMOR such well and all materials and equipment placed
therein and thereon by FARMEE, together with any interest in the well and
production therefrom and all interest in the leases comprising the unit around
the well. FARMOR shall pay FARMEE the salvage value of any material and
equipment associated with the well, net of estimated costs of salvaging. Such
well shall be owned by FARMOR free and clear of any burdens, encumbrances, or
assignments by, through, or under FARMEE or its successors in interest. FARMEE
shall, upon request of FARMOR, execute all documents necessary or useful to
fully effectuate assignment of such well, materials, equipment, production and
leases to FARMOR. All costs and expenses in connection with such well takeover
shall be borne and paid by FARMOR. For purposes of FARMEE earning the right to
drill another well under this Agreement, however, the well which has been taken
over shall be considered a dry hole.
8. INFORMATION CONCERNING WELLS: FARMEE shall furnish FARMOR all
information, and shall follow the procedures as described in the attached
Drilling and Geological Requirements Exhibit "B" for wells it drills on the
Farmout Acreage. All well(s) drilled on the Farmout Acreage shall be at regular
and legal locations, and shall conform to the spacing guidelines governed by the
state for wells drilled hereunder, unless otherwise agreed to by FARMOR and
FARMEE.
9. PROTECTION OF LEASES: FARMEE agrees to preserve and protect the
leasehold estate to be assigned to FARMEE hereunder, in full compliance with the
express and implied terms, conditions and covenants thereof, and give to FARMOR
the full right, if it so desires, to enforce all of the terms and conditions of
said lease(s), both express and implied, either alone or in conjunction with the
mineral owners. FARMEE agrees to protect and preserve said estate from any and
all liens, judgments and any other claims whatsoever. Should FARMEE fail to
comply with any of the terms and provisions of this paragraph, it will be
subject to the default provisions contained herein
10 FUTURE PURCHASE OF LEASES: It is contemplated by both FARMOR and FARMEE
that additional oil and gas leasing will be necessary from time to time in order
to secure sufficient leasehold portions to comprise drilling units. In the event
leasing becomes necessary, FARMEE shall be solely responsible for all such
leasing activity and the costs related thereto. Any such leases acquired by
FARMEE will be owned 100% by FARMEE.
11. SURRENDER, EXPIRATION OR ABANDONMENT: In the event FARMEE, or its
successors or assigns, after having earned an assignment under this Agreement,
desires to surrender, let expire or abandon all or any portion of the Farmout
Acreage, FARMEE agrees to give FARMOR at least sixty (60) days notice in writing
of its intention to so surrender, let expire or abandon and shall, if requested
to do so by FARMOR, reassign said Farmout Acreage insofar as it covers the
portion being surrendered, expiring or abandoned to FARMOR free of any
encumbrances suffered by, through or under FARMEE, in which event FARMOR shall
have the option if it so desires to purchase any casing and other equipment in
any well or wells that may be situated thereon at the prevailing market price
for second hand material of like quality and kind.
12. LEASE DELAY RENTAL PAYMENTS: In the event delay rental payments are
necessary to maintain all or a part of the leases comprising the Farmout
Acreage, FARMOR will make such payment and FARMEE agrees to reimburse FARMOR for
100% of such rentals within twenty (20) days after receiving an invoice. It is
agreed however, that FARMOR will not be liable to FARMEE in the event through
error or oversight the rental(s) are not timely or correctly paid. FARMEE's
responsibility
4
<PAGE>
for payment shall commence with any delay rentals coming due after the date of
this Agreement.
In the event, prior to or after the delivery of an assignment by FARMOR to
FARMEE hereunder, any shut-in payments are necessary to maintain any lease(s)
comprising the Farmout Acreage in force and effect as a result of FARMEE's
operations, FARMEE shall make such payments and advise FARMOR promptly in
writing that such payments have been made. Following delivery of any
assignment(s) provided for herein, FARMEE agrees to make all payments resulting
from its operations, including royalties to maintain the lease(s) comprising the
acreage earned by FARMEE hereunder.
13. ASSIGNMENTS: In the event FARMEE completes a well as capable of
producing oil and/or gas at Contract Depth, has provided evidence of such
completion to FARMOR and has further faithfully performed all the other terms
and conditions contained in this Agreement, FARMOR shall deliver to FARMEE
without warranty of title express or implied, an assignment of their
proportionate interest in so much of the Farmout Acreage as is included in a one
hundred sixty (160) acre square around each productive well, limited as to all
depths and formations from the surface to One Hundred (100) feet below the total
depth penetrated by FARMEE in such well drilled and logged.
If FARMEE completes a well capable of producing oil and or gas in a zone or
formation above the Contract Depth such that the well will not fall within the
"Deep Well" category as defined by the Commonwealth of Kentucky Department of
Mines and Minerals statutes, FARMOR shall assign to FARMEE a proportionate
interest in so much of the Farmout Acreage as is included in a one hundred (100)
acre square around each productive well, limited as to all depths and formations
from the surface to One Hundred (100) feet below the total depth penetrated by
such well.
14. POOLING: All wells drilled hereunder shall conform with the existing
spacing pattern established for drilling to Contract Depth within the A01 which
is presently on a one hundred sixty (160) acre square grid. Any proposed
alteration to such spacing pattern must be approved by FARMOR in advance and
thereafter presented by FARMEE to the state for final approval
15. FORCE POOLING PROCEEDINGS: In the event FARMEE finds it necessary to
pursue force pooling for any unit around any well drilled hereunder, FARMEE
shall undertake to prepare the forms, submit the application to the state and
attend the state force pool proceeding in preparation of securing the permit for
such well. If a force pooling proceeding is necessary for any well unit in which
FARMOR has elected to take a 30% working interest, FARMOR agrees to pay its
proportionate 30% share of the costs associated with such undertaking after
receiving an invoice therefor. If, however, FARMOR has elected to take a 7.5%
Carried Working Interest in that unit which is the subject of a force pooling
application, FARMEE shall bear the full cost of the entire undertaking and at no
cost, risk or expense to FARMOR.
16: FORMATIONS NOT SUBJECT TO THIS AGREEMENT: FARMOR shall, at all times,
have the right of ingress and egress to any and all depths and formations not
expressly covered by this Agreement, including the right to utilize in such
operations any roadways or plugged and abandoned wells situated on the Farmout
Acreage and to store, handle, transport and market production therefrom, as well
as any and all other rights incident to or appertaining to FARMOR's ownership of
same. FARMOR shall also have the right to use, free of all costs, any roads or
locations built by FARMEE on the Farmout Acreage for its operations, relative to
the depths and formations retained by FARMOR. FARMOR also agrees that during the
term of its use of any road or location built by FARMEE, to maintain same in
good condition as may be reasonably practical and to not interfere with any
shared use by FARMEE.
17. SEISMIC DATA: FARMOR agrees to make available to FARMEE any seismic
data which FARMOR owns relating to the subject AOI. Such seismic data may be
viewed by FARMEE in FARMOR's office during normal business hours but none of
5
<PAGE>
the data shall be copied or retained by FARMEE. FARMOR or FARMEE may propose to
undertake additional seismic prospecting within the A0I throughout the term of
this Agreement. No annual acquisition of greater than 20 miles of seismic shall
be conducted without the consent of the other party. The party who proposes to
secure such seismic shall be the owner of, and have ultimate control of the
data. The non-proposing party shall have the election to pay 50% of all seismic
acquisition costs, including processing and interpretive costs in order to own a
joint share in the data. Should the non-proposing party elect to go non-consent
in the seismic acquisition, that party shall forfeit all drilling participation
rights related to wells which may be proposed within 5,000 feet of any seismic
line acquired under the proposal. The non-consenting party may earn the right to
participate in wells within the above stated distance from any seismic line
provided that party reimburses the consenting party 100% of the actual
acquisition, processing and interpretive costs incurred in such seismic program.
18: PREFERENTIAL RIGHT TO PURCHASE AND/OR MARKET GAS: FARMOR, or its
designee, shall have the preferential right and option to purchase and/or market
all or any part of the gas produced from or allocated to the Farmout Acreage
upon the same terms (or on terms the monetary equivalent thereof) as those under
which FARMEE proposes to sell or otherwise dispose of same, or FARMOR may
designate the purchaser of such gas under said terms. FARMEE shall notify FARMOR
in writing of each proposed sale or other disposition of the gas, which notice
shall include all the terms and conditions of each bona fide offer by a
prospective purchaser who is ready, willing and able to purchase the gas, or any
part thereof, and FARMOR shall have thirty (30) days after receiving said
written notice in which to notify FARMEE of its election either to exercise or
waive its preferential right and option. No contract for the sale or other
disposition of the gas, or any part thereof, shall ever be made by FARMEE until
FARMOR shall have first either exercised or waived in writing its herein
described preferential right and option with respect to the gas. FARMOR shall
have a continuing separate right and option with respect to each and every
proposed sale or other disposition of the gas, or part thereof. If FARMOR
exercised its option to purchase or designate a purchaser for the gas, FARMEE
agrees that, upon request, FARMEE will execute an appropriate gas sales
contract. Further, if FARMOR does not exercise its option to purchase or
designate a purchaser for the gas, FARMEE agrees that any subsequently executed
gas sales contract made by FARMEE will describe this Agreement and will indicate
that FARMEE is not authorized and does not intend to dedicate that share of the
gas production owned by FARMOR. It is understood and agreed that the right to
purchase hereby reserved may be assigned by FARMOR any time, at all times and
from time to time without limitation. Nothing herein contained shall require
FARMOR to purchase such gas from the Farmout Acreage or to provide a purchaser
or market therefor.
19. ELECTION TO CONSTRUCT GATHERING SYSTEM: FARMOR shall have a continuing
right and election, but not the obligation, to construct any gas gathering lines
necessary to gather and transport any or all of the gas produced within the AOI.
Should FARMOR elect to construct any such gathering lines, it shall charge
FARMEE its pro-rata share of a tariff that results in an 18% rate of return
(Before Tax) on any capital which is employed to construct such gathering
system.
20. DEFAULT: In the event for any reason that actual drilling of the
Exploratory Deep Well is not commenced by the date herein provided, or it is
timely drilled but Subsequent Well(s) provided for hereunder are not timely
drilled, the penalty to FARMEE shall be automatic termination of this Agreement
and loss of the ability to further develop the Farmout Lands and earn leasehold
rights in the Farmout Acreage not already earned by FARMEE in accordance with
the terms hereof. Except as provided herein, if FARMEE fails to comply with any
provisions of this Agreement, FARMOR may at any time notify FARMEE in writing
giving the particulars concerning such noncompliance, whereupon FARMEE will then
have thirty (30) days after receipt of such notice to satisfy FARMOR that it is
in compliance with all the terms and provisions hereof. In the event of such
failure by FARMEE to demonstrate compliance and reply to FARMOR's letter within
the thirty (30) day time period, this Agreement will
6
<PAGE>
the data shall be copied or retained by FARMEE. FARMOR or FARMEE may propose to
undertake additional seismic prospecting within the A0I throughout the term of
this Agreement. No annual acquisition of greater than 20 miles of seismic shall
be conducted without the consent of the other party. The party who proposes to
secure such seismic shall be the owner of, and have ultimate control of the
data. The non-proposing party shall have the election to pay 50% of all seismic
acquisition costs, including processing and interpretive costs in order to own a
joint share in the data. Should the non-proposing party elect to go non-consent
in the seismic acquisition, that party shall forfeit all drilling participation
rights related to wells which may be proposed within 5,000 feet of any seismic
line acquired under the proposal. The non-consenting party may earn the right to
participate in wells within the above stated distance from any seismic line
provided that party reimburses the consenting party 100% of the actual
acquisition, processing and interpretive costs incurred in such seismic program.
18: PREFERENTIAL RIGHT TO PURCHASE AND/OR MARKL3T GAS: FARMOR, or its
designee, shall have the preferential right and option to purchase and/or market
all or any part of the gas produced from or allocated to the Farmout Acreage
upon the same terms (or on terms the monetary equivalent thereof) as those under
which FARMEE proposes to sell or otherwise dispose of same, or FARMOR may
designate the purchaser of such gas under said terms, FARMEE shall notify FARMOR
in writing of each proposed sale or other disposition of the gas, which notice
shall include all the terms and conditions of each bona fide offer by a
prospective purchaser who is ready, willing and able to purchase the gas, or any
part thereof, and FARMOR shall have thirty (30) days after receiving said
written notice in which to notify FARMEE of its election either to exercise or
waive its preferential right and option. No contract for the sale or other
disposition of the gas, or any part thereof, shall ever be made by FARMEE until
FARMOR shall have first either exercised or waived in writing its herein
described preferential right and option with respect to the gas. FARMOR shall
have a continuing separate right and option with respect to each and every
proposed sale or other disposition of the gas, or part thereof. If FARMOR
exercised its option to purchase or designate a purchaser for the gas, FARMEE
agrees that, upon request, FARMEE will execute an appropriate gas sales
contract. Further, if FARMOR does not exercise its option to purchase or
designate a purchaser for the gas, FARMEE agrees that any subsequently executed
gas sales contract made by FARMEE will describe this Agreement and will indicate
that FARMEE is not authorized and does not intend to dedicate that share of the
gas production owned by FARMOR. It is understood and agreed that the right to
purchase hereby reserved may be assigned by FARMOR any time, at all times and
from time to time without limitation. Nothing herein contained shall require
FARMOR to purchase such gas from the Farmout Acreage or to provide a purchaser
or market therefor.
19. ELECTION TO CONSTRUCT GATHERING SYSTEM: FARMOR shall have a continuing
right and election, but not the obligation, to construct any gas gathering lines
necessary to gather and transport any or all of the gas produced within the AOI.
Should FARMOR elect to construct any such gathering lines, it shall charge
FARMEE its pro-rata share of a tariff that results in an 18% rate of return
(Before Tax) on any capital which is employed to construct such gathering
system.
20. DEFAULT: In the event for any reason that actual drilling of the
Exploratory Deep Well is not commenced by the date herein provided (including
FARMEE's failure to timely drill and/or complete the exploratory deep well in
the Dingus Prospect Farmout Agreement), or it is timely drilled but Subsequent
Well(s) provided for hereunder are not timely drilled, the penalty to FARMEE
shall be automatic termination of this Agreement and loss of the ability to
further develop the Farmout Lands and earn leasehold rights in the Farmout
Acreage not already earned by FARMEE in accordance with the terms hereof. Except
as provided herein, if FARMEE fails to comply with any provisions of this
Agreement, FARMOR may at any time notify FARMEE in writing giving the
particulars concerning such noncompliance, whereupon FARMEE will then have
thirty (30) days after receipt of such notice to satisfy FARMOR that it is in
compliance with all the terms and provisions hereof. In the event of such
failure by FARMEE to demonstrate compliance and reply to FARMOR's letter within
the thirty (30) day time period, this Agreement will
7
<PAGE>
25. INDEMNIFICATION: All operations associated with and contemplated to be
conducted by FARMEE on the Farmout Acreage (or acreage pooled therewith) shall
be conducted at its sole risk and liability and at no cost to FARMOR. FARMEE
agrees to indemnify and hold FARMOR harmless from any claims, liability,
charges, or expense arising directly or indirectly out of any and all operations
conducted herewith.
26 CONFIDENTIALITY: Without FARMOR's prior written consent, FARMEE shall
not divulge any information obtained from operations hereunder to any third
party, other than to a party owning an interest under this Agreement or to a
governmental authority having jurisdiction, and only to the extent required by
such jurisdiction.
27. CONFLICT: In the event there is a conflict between the terms contained
in this Farmout Agreement and the terms contained in the Operating Agreement
attached hereto as Exhibit D, the terms of this Farmout Agreement shall be
controlling.
28. ARBITRATION: On the request of any party hereto, whether made before
or after the institution of any legal proceeding, any action, dispute, claim, or
controversy of any kind now existing or hereafter arising between any of the
parties hereto in any way arising out of, pertaining to, or in connection with
this Agreement ("Dispute") shall be resolved by binding arbitration in
accordance with the terms hereof. Any party may, by summary proceedings, bring
an action in court to compel arbitration of any Dispute.
Any arbitration shall be administered by the American Arbitration
Association ("AAA") in accordance with the terms of this Section, the Commercial
Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal
Arbitration Act. Judgment on any award rendered by an arbitrator may be entered
in any court having jurisdiction.
Any arbitration shall be conducted before one (1) arbitrator. The
arbitrator shall be a practicing attorney licensed to practice in the State of
Kentucky who is knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot agree on an
arbitrator within thirty (30) days after the request for an arbitration, then
any party may request the AAA to select an arbitrator. The arbitrator may engage
engineers, accountants, or other consultants that the arbitrator deems necessary
to render a conclusion in the arbitration proceeding.
To the maximum extent practicable, an arbitration proceeding hereunder
shall be concluded within thirty (30) days of the filing of the Dispute with the
AAA. Arbitration proceedings shall be conducted in Kentucky. Arbitrators shall
be empowered to impose sanctions and to take such other actions as the
arbitrators deem necessary to the same extent a judge could impose sanctions or
take such other actions pursuant to the Federal Rules of Civil Procedure and
applicable law. At the conclusion of any arbitration proceeding, the arbitrator
shall make specific findings of fact and conclusions of law. The arbitrator
shall have the power to award recovery of all costs and fees to the prevailing
party. Each party agrees to keep all Disputes and arbitration proceedings
strictly confidential except for disclosure of information required by
applicable law.
All fees of the arbitrator and any engineer, accountant, or other
consultant engaged by the arbitrator, shall be paid by Buyer and Seller equally
unless otherwise awarded by the arbitrator.
This Agreement shall be governed and construed in accordance with the laws
of the State of Kentucky, without giving effect to any principles of conflicts
of laws. The validity of the various conveyances affecting the title to real
property shall be governed by and construed in accordance with the laws of the
jurisdiction in which such property is situated. The representations and
warranties contained in such conveyances and the remedies available because of a
breach of such representations and warranties shall be governed by and construed
in accordance with the laws of the State of Kentucky without giving effect to
the principles of conflicts of laws.
8
<PAGE>
29. EXECUTION OF AGREEMENT: This Agreement shall be null and void at the
option of FARMOR if one (1) fully executed copy is not returned to FARMOR within
fifteen (15) days from the date of execution below.
This Farrnout Agreement shall supersede and replace that certain Farrnout
Agreement entered into by Eastern States Oil & Gas, Inc., predecessor by name
change of FARMOR , and FARMEE dated February 10, 2000, except as to any
obligation of FARMEE to reimburse FARMOR for rental payments made prior to the
date of this Agreement.
Executed this 22 day of August, 2000
EQUITABLE PRODUCTION - EASTERN STATES, INC. WITNESS
BY: /s/ Lester A. Zitkus /s/ Michele L. Weber
------------------------------- -------------------------------
Lester A. Zitkus Michele L. Weber
Attorney-In-Fact
Executed this 28 day of August, 2000
HAY EXPLORATION, INC. WITNESS
BY: /s/ Monte Hay /s/ Michele L. Weber
------------------------------- -------------------------------
Monte Hay Michele L. Weber
President
9
<PAGE>
EXHIBIT B
TO FARMOUT AGREEMENT DATED August 22, 2000
DRILLING AND GEOLOGICAL RETIREMENTS
Any well drilled pursuant to the terms and conditions hereinafter stated and of
the agreement to which this exhibit is attached, shall be located and drilled in
compliance with all federal and state laws, executive orders, rules and
regulations of any legally constituted regulatory body of the state in which
operations are being performed and any other governing body having jurisdiction
thereof.
MINIMUM COMPLETION STANDARDS
Casing shall be properly set and the well tested and such other preparations
made as necessary to conduct satisfactory tests of the showing(s). FARMEE, or
its operator, shall properly test each prospective oil or gas horizon and, upon
encountering such horizon in the drilling of any well, shall notify FARMOR when
such horizon is to be tested to allow FARMOR sufficient time to have a
representative present when such horizon is tested. FARMEE also agrees to notify
FARMOR in ample time to have a representative present when conducting electrical
wireline surveys. If the information from any electrical wireline survey, made
either before or after contract depth has been reached, and considered by itself
or in conjunction with other indications or evidence from cuttings, cores or
showings should make the formation appear promising of being a prospective oil
or gas horizon, FARMEE shall properly test such horizon if it was not adequately
tested at the time it was penetrated.
REPORTS TO BE FORWARDED TO:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn: Lester Zitkus & Barbara Hubbard
Address: 1710 Pennsylvania Avenue
Charleston, WV 25302
Phone: l-304-343-9566
FAX: l-304-343-7133 & l-304-343-7870
- Daily drilling reports including, but not limited to, the drilling
progress, formations encountered and tops, oil or gas shows, surveys and
tests. Reports to be verbally conveyed or faxed by 10:00 am for activity
current through 8:00 am the same day.
- Well test and stimulation reports
- Well completion and recompletion reports
- Application for AGPA well category determination
- Plug and Abandon reports
- Monthly reports filed with regulatory authority
- Monthly reports of oil and gas production
REPORTS, LOGS & SAMPLES TO BE FORWARDED TO:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn:
------------------------------------------
Address:
---------------------------------------
Phone:
-----------------------------------------
FAX:
------------------------------------------- (regular pages)
(continuous log sections)
-------------------------------------------
- Daily updated mudlog pages, when drilling through intervals being
mudlogged, to be faxed by 10:00 am
- Fax copies for all open-hole logs obtained at Total Depth
- Copies of all drill stem tests, core analyses, fluid analyses,
paleontological reports and all other tests, analyses or third party
reports, if made, on wells drilled
- Samples collected no less than every ten (10) feet from base of surface
casing to total depth, if requested by FARMOR
- Representative samples of fluid recovered on formation tests
<PAGE>
Exhibit B
Page 2
- Allow FARMOR, if requested, to examine and take chips of all cores cut and
recovered 1 - from such well
- Within twenty-four (24) hours (exclusive of weekends and holidays)
after(completion of the logging, supply FARMOR with one (1) large-scale
copy of a bulk density log to the total depth of the hole and of a
resistivity log through all formations of interest
- Upon completion of any well drilled hereunder, FARMEE shall furnish FARMOR
with four (4) copies of all final wireline logs including, but not limited
to, the following:
Loa From (Depth) To (Depth) Scale
--- ------------ ---------- -----
Gamma Ray Total Depth Surface 2" = 100'
Gamma Ray Density Total Depth Base Intermediate 5" = 100'
Induction-Caliper Casing
- Upon FARMOR request, agree to make the hole available to FARMOR before
running production casing. and at FARMOR'S expense (including cost of
service and rig time), for A its exclusive use& taking sidewall cores or
runmng a photo-e ectric (FE) survey, a velocity survey or a dipmeter survey
if FARMEE declines to run same
OTHER INFORMATION:
Upon request by FARMOR, furnish such additional information 1s it may reasonably
require relative to any phase of the operations conducted pursuant to this
Agreement. FARMOR shall have access to and copies of any and all geophysical
data or seismic surveys that are conducted on or across the lease acreage during
the term of this Agreement. FARMOR shall have free access during customary
business hours to all records relative to such operations.
<PAGE>
EXHIBIT C
TO FARMOUT AGREEMENT DATED August 22, 2000
INSURANCE
FARMEE shall provide, at its expense and in its name, and maintain in full force
and effect at all times during which operations are conducted by FARMEE on the
Farmout Acreage, insurance by a duly licensed insurance company or companies of
the kinds and in the minimum amounts as set forth below.
Prior to beginning any operations on the Farmout Acreage, FARMEE shall furnish
certificates of insurance by FARMEE's insurers in a form satisfactory to FARMOR
under all such policies as evidence that all such insurance is carried, and
providing that not less than ten (10) days prior, written notice of material
change in or cancellation of such insurance, or any part thereof, will be given
to FARMOR.
- Workmen's Compensation and Employer's Liability
FARMEE shall provide insurance covering FARMEE's employees engaged in
operations on the lands subject to this Agreement in compliance with the laws of
the state in which said lands are situated and Employers Liability Insurance of
not less than $1,000,000.00 for injuries or death to any one employee and
$100,000.00 for injuries or death of more than one employee resulting from any
one accident;
- General Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted
by FARMEE hereunder with bodily injury and death limit of not less than
$100,000.00 for injuries to or death of any one person resulting from any one
accident, not less than $300,000.00 for injuries or death of more than one
person resulting from any one accident, and property damage limit of not less
than $1,000,000.00 per accident; $300,000.00 aggregate. Provided further than
such property damage insurance shall not exclude FARMOR's liability for loss of
or damage to property of or above the surface of the earth arising from a
blowout or cratering of a gas well or an oil well; and,
- Automobile Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted
by FARMEE hereunder (including coverage on owned and non-owned automobile
equipment) with bodily injury or death limit of not less than $100,000.00 for
injuries to or death of more than one person resulting from any one accident,
and property damage limit of not less than $25,000.00 per accident.
<PAGE>
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGFTEEMENT
EXHIBIT D
TO FARMOUT AGREEMENT DATED August 22, 2000
OPERATING AGREEMENT
DATED
-------------------------, 2000 ,
YEAR
OPERATOR HAY EXPLORATION, INC.
------------------------------------------------------------------------
CONTRACT AREA CARTER PROSPECT - AREA OF INTEREST
-------------------------------------------------------------------
CONTAINING 5,900 GROSS ACRES, MORE OR LESS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COUNTY OR PARISH OF CARTER , STATE OF KENTUCKY
--------------------------- -----------------------
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
<PAGE>
A.A.P.L. FORM 610 - MODEL OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title PAGE
------- ----- ----
<S> <C> <C>
I. DEFINITIONS 1
II. EXHIBITS 1
III. INTERESTS OF PARTIES 2
A. OIL AND GAS INTERESTS: 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: 2
C. SUBSEQUENTLY CREATED INTERESTS: 2
IV. TITLES 2
A. TITLE EXAMINATION: 2
B. LOSS OR FAILURE OF TITLE: 3
1. Failure of Title 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due 3
3. Other Losses 3
4. Curing Title 3
V. OPERATOR 4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: 4
1. Resignation or Removal of Operator 4
2. Selection of Successor Operator 4
3. Effect of Bankruptcy 4
C. EMPLOYEES AND CONTRACTORS: 4
D. RIGHTS AND DUTIES OF OPERATOR: 4
1. Competitive Rates and Use of Affiliates 4
2. Discharge of Joint Account Obligations 4
3. Protection from Liens 4
4. Custody of Funds 5
5. Access to Contract Area and Records 5
6. Filing and Furnishing Governmental Reports 5
7. Drilling and Testing Operations 5
8. Cost Estimates 5
9. Insurance 5
VI. DRILLING AND DEVELOPMENT 5
A. INITIAL WELL: 5
B. SUBSEQUENT OPERATIONS: 5
1. Proposed Operations 5
2. Operations by Less Than All Parties 6
3. Stand-By Costs 7
4. Deepening 8
5. Sidetracking 8
6. Order of Preference of Operations 8
7. Conformity to Spacing Pattern 9
8. Paying Wells 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: 9
1. Completion 9
2. Rework, Recomplete or Plug Back 9
D. OTHER OPERATIONS: 9
E. ABANDONMENT OF WELLS: 9
1. Abandonment of Dry Holes 9
2. Abandonment of Wells That Have Produced 10
3. Abandonment of Non-Consent Operations 10
F. TERMINATION OF OPERATIONS: 10
G. TAKING PRODUCTION IN
KIND: 10
(Option 1) Gas Balancing Agreement 10
(Option 2) No Gas Balancing Agreement 11
VII. EXPENDITURES AND LIABILITY OF PARTIES 11
A. LIABILITY OF PARTIES: 11
B. LIENS AND SECURITY INTERESTS: 11
C. ADVANCES: 12
D. DEFAULTS AND REMEDIES: 12
1. Suspension of Rights 13
2. Suit for Damages 13
3. Deemed Non-Consent 13
4. Advance Payment 13
5. Costs and Attorneys' Fees 13
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: 13
F. TAXES: 13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST 14
A. SURRENDER OF LEASES: 14
B. RENEWAL OR EXTENSION OF LEASES: 14
C. ACREAGE OR CASH CONTRIBUTIONS: 14
</TABLE>
i
<PAGE>
A.A.P.L. FORM 610 - MODEL OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: 15
E. WAIVER OF RIGHTS TO PARTITION: 15
F. PREFERENTIAL RIGHT TO PURCHASE: 15
IX. INTERNAL REVENUE CODE ELECTION 15
X. CLAIMS AND LAWSUITS 15
XI. FORCE MAJEURE 16
XII. NOTICES 16
XIII. TERM OF AGREEMENT 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS 16
A. LAWS, REGULATIONS AND ORDERS: 16
B. GOVERNING LAW: 16
C. REGULATORY AGENCIES: 16
XV. MISCELLANEOUS 17
A. EXECUTION: 17
B. SUCCESSORS AND ASSIGNS: 17
C. COUNTERPARTS: 17
D. SEVERABILITY: 17
XVI. OTHER PROVISIONS 17
</TABLE>
ii
<PAGE>
THIS AGREEMENT, entered into by and between HAY EXPLORATION, Inc,
hereinafter designated and referred to as "Operator," and the signatory party
parties other than Operator, sometimes hereinafter referred to individuals as
"Non-Operator," and collectively as "Non-Operator."
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 1.
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 not 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 V1.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.
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.
0. 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.
S. The term "Paying Quantities" shall mean, with respect to any well,
quantities of Oil and/or Gas production, the revenues attributable to which,
after deducting the lessor's royalty burden on such production, exceed the
well's operating expenses (not including drilling or other capital costs),
regardless of how small the margin, over a small period of time, not to exceed
12 consecutive months.
T. The term "Commercial Quantities" shall mean, with respect to any well,
quantities of Oil and/or Gas production, the revenues attributable to which,
after deducting all burdens on such production, including without limitation,
the lessor's royalty burden, overriding royalties, and production payment, make
the well profitable, taking into account the total costs associated with the
well over its entire life, including, without limitation, drilling costs and
other capital costs and operating expenses.
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. It shall also mean legal entities such as corporations,
partnerships, joint ventures, sole proprietorships, etc.
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.
B. Exhibit "B," Form of Lease.
X C. Exhibit "C," Accounting Procedure.
- 1 -
<PAGE>
X D. Exhibit "ID," Insurance.
---
X E. Exhibit "E," Gas Balancing Agreement.
---
X F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
--- Facilities.
G. Exhibit "G," Tax Partnership.
---
X H. Other: WELL INFORMATION REQUIREMENTS
---
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A.A.P.L. FORM 610 - MODEL FROM OPERATING AGREEMENT - 1989
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.
ARTICLE III.
INTERESTS OF PARTIES
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.
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 interest 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."
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.
Operator 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."
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<PAGE>
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
3. Losses: All losses of Leases or Interests committed to this agreement,
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.
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ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
HAY EXPLORATION, 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. *GOOD CAUSE SHALL MEAN THE FAILURE OR REFUSAL ON THE PART OF THE
OPERATOR TO CARRY OUT ITS DUTIES HEREUNDER AS ACTS OR OMISSIONS COMMITTED BY
OPERATOR THAT CONSTITUTE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
Subject to Article VII.D. I., 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 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." IN THE EVENT OPERATOR PLANS TO FILE FOR
BANKRUPTCY, OPERATOR AGREES TO NOTIFY ALL NON-OPERATORS BY MAIL AT LEAST TEN
(10) DAYS IN ADVANCE OF THAT FILING. FAILURE OF OPERATOR TO SO NOTIFY THE
NON-OPERATORS AS STATED ABOVE SHALL CAUSE THIS AGREEMENT TO AUTOMATICALLY
TERMINATE.
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 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, the cost of which shall be billed
to the Joint Account, shall be performed or supplied at competitive rates.
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.
3. Protection from Liens: Operator shall pay, or cause to be paid, as and
when they become due and payable, all accounts
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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
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<PAGE>
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. Nothing in this paragraph shall require the
maintenance by Operator of separate accounts for the funds of Non-Operators and
operator shall have the right to comingle such funds with its own funds.
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 sha11 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 topics 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.
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
B. Subsequent Operations
1. Proposed Operations: If any party hereto should desire to drill any will
on the Contract Area 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 by AFE of the proposed operation to the parties who have not
otherwise relinquished their interest in such objective Zone
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.I. OR VI.C.I. (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.
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.I., 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,
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
Deepening, Recompleting or Plugging Back, or a Completion pursuant to
Article VI.C.I. 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) 100% 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) 300% 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.
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 300% 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.
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,
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A.A.P.L. FORM 610 - MODEL FROM OPERATING AGREEMENT - 1989
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 lo 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.
(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: No party may participate in a proposed Sidetracking
operation that does not own an interest in the affected wellbore.
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
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A.A.P.L. FORM 610 - MODEL FROM OPERATING AGREEMENT - 1989
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.
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:
[ ] 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.
[X] 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.
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Ten Thousand Dollars ($10,000.00) 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.
Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project costing in excess of Ten Thousand Dollars
($10,000.00). 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 by 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 51% 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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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 and is capable of producing, even if such well has never in fact
produced 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.
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 available
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 available
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 an 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 51% 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:
[X] OPTION NO. 1: GAS BALANCING AGREEMENT ATTACHED
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
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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 proportionate 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.
[ ] 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.
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 VIIB., 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 (1O) 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 the 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.
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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 V1I.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or alter 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.
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
alter 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 event 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.
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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
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 pursuant to the terms of the
Farmout Agreement to which this Operating Agreement is attached. 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.
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."
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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 and 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.
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. NEW, RENEWAL OR EXTENSION OF LEASES:
The terms of this paragraph are governed by the terms as contained in the
Farmout Agreement to which this Operating Agreement is attached.
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 or
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.
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<PAGE>
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.
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) The terms of this paragraph are governed by
the terms as contained in the Farmont Agreement to which this Operating
Agreement is attached.
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 ss.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 9, 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 at 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.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
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.
[ ] 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.
[X] 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 90 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, Recompleting, Plugging Back or Reworking
operations are commenced within 90 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.
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, nonperformance, 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 Kentucky 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
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A.A.P.L. FORM 610 MODEL FORM AGREEMENT - 1989
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 a11 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.
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
A. In the event there is a conflict between any provision of this Article
XVI and any provision contained within that Farmout Agreement to which this
agreement is attached, the provisions of the Farmout Agreement shall be
controlling.
B. If any provision of this agreement is declared to be unlawful or
unenforceable by a court of competent jurisdiction, this agreement shall be
deemed to be amended, as of the effective date of this agreement, to delete
or unenforceable provisions and this agreement shall nevertheless remain
binding as so amended. If such court's ruling is subsequently reversed or
set aside by such court or by a higher court, this agreement shall be
deemed to be amended, as of the effective date of this agreement, to
reinstate such provision, and this agreement shall be deemed binding as so
amended.
C. PRIORITY OF OPERATIONS:
Whenever there is more than one proposal in connection with any well
subject to this Agreement, such proposal shall be considered and disposed
of in the following order of priority:
1. Drilling the well to its authorized depth or attempting a completion
including testing and logging of such well at such depth shall have first
priority over all operations and proposals;
2. A proposal to plug back a well shall prevail over a proposal to deepen
or to sidetrack such well; if there is more than one proposal to plug back,
the proposal; to plug back to the next deepest prospective interval shall
have priority over proposals to plug back to shallower prospective
intervals;
3. A proposal to sidetrack a well in order to reach the authorized depth
shall prevail over a proposal to deepen;
4. A proposal to deepen a well shall have last priority;
5. Proposals of the same type and to the same depth shall be given
precedence in the order in which they were made.
D. LIMITATION ON WELL PROPOSAL
Notwithstanding anything in this Agreement to the contrary, no more than
one (1) well may be proposed for drilling reworking, deepening or plugging
back at any single time, and, until the preceding has been completed, no
subsequent operation may be proposed under this agreement; provided,
however, that this provision shall not apply to obligatory operations
provided for herein,
- 17 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the
___________________day of _____________________________ , 2000.
EQUITABLE PRODUCTION - EASTERN STATES INC., who has prepared and circulated this
form for execution, represents and warrants that the form was printed from and,
with the exception listed below, is identical to the AAPL Form 610-1989 Model
Form Operating Agreement, as published in computerized form by Forms On-A-Disk,
Inc. No changes, alternations, or modifications, other than those made by
strikethrough and/or type-over and that are clearly recognizable
, have been made to the form.
WITNESS: OPERATOR
HAY EXPLORATION, INC.
----------------------
By
-------------------------------- -------------------------------------------
MONTE HAY
-------------------------------- -------------------------------------------
Type or print name
Title-President
---------------------------
Date
-------------------------------------
Tax ID or S.S. No.
-------------------------
NON-OPERATORS
EQUITABLE PRODUCTION - EASTERN STATES, INC.
By
-------------------------------- -------------------------------------------
LESTER A. ZITKUS
-------------------------------- -------------------------------------------
Type or print name
Title ATTORNEY-IN-FACT
--------------------
Date
--------------------------------------
Tax ID or S.S. No.
------------------------
- 18 -
<PAGE>
- 19 -
<PAGE>
EXHIBIT A
To Operating Agreement dated ________________________,2000
1. DESCRIPTION OF LANDS SUBJECT TO THIS AGREEMENT
The Contract Area shall be the lands described in and covered by that Farmout
Agreement dated August 22, 2000, to which this agreement is attached as
Exhibit D.
2. RESTRICTIONS AS TO DEPTHS, FORMATIONS, OR SUBSTANCES
This agreement is limited to the depths and formations as specified in that
Farmout Agreement dated August 22, 2000, to which this agreement is attached as
Exhibit D.
3. PARTIES TO AGREEMENT WITH ADDRESS, TELEPHONE AND FAX NUMBERS
Equitable Production - Eastern States, Inc. Phone: l-304-343-9566
Attn: Lester A. Zitkus FAX: l-304-343-7133
1710 Pennsylvania Avenue
Charleston, WV 25302
Hay Exploration, Inc. Phone: 1-606-324-9971
Attn: Monte Hay FAX: l-606-324-6340
4353 Willard Drive
Ashland, KY 41102
4. PERCENTAGE OR FRACTIONAL INTERESTS SUBJECT TO THIS AGREEMENT
The interest of the Parties is set out in the Farmout Agreement, to which this
agreement is attached as Exhibit D.
5. OIL AND GAS LEASES SUBJECT TO THIS AGREEMENT
All properties identified on Exhibit A to the Farmout Agreement, to which this
agreement is attached as Exhibit D.
6. BURDENS ON PRODUCTION
None
<PAGE>
Kraftbilt 601-95 BOX 800 COPAS-1995
TULSA, OK 74101 Recommended by the Council of
Petroleum Accountants Societies
EXHIBIT "C"
Attached to and made a part of that certain Operating Agreement dated
____________________, 2000 between Hay Exploration, Inc. and Equitable
Production - Eastern States, Inc.
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 activities required to handle specific
operating conditions and problems for the exploration, development,
production, protection, maintenance, abandonment, and restoration 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 that 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.
"Material" shall mean personal property, equipment, supplies, or
consumables acquired or held for use on the Joint Property.
"Controllable Material" shall mean Material that at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies (COPAS).
"Parties" shall mean legal entities signatory to the agreement, or their
successors or assigns, to which this Accounting Procedure is attached.
"Affiliate" shall mean, with respect to the Operator, any party directly or
indirectly controlling, controlled by, or under common control with the
Operator.
2. STATEMENTS AND BILLINGS
The Operator shall bill Non-Operators on or before the last day of the
month for their proportionate share of the Joint Account for the preceding
month. Such bills shall be accompanied by statements that identify the
authority for expenditure, lease or facility, and all charges and credits
summarized by appropriate categories of investment and expense.
Controllable Material shall be summarized by major Material
classifications. Intangible drilling costs and audit exceptions shall be
separately and clearly identified.
3. ADVANCES AND PAYMENTS BY NON-OPERATORS
A. If gross expenditures for the Joint Account are expected to exceed
$5,OOO.OO in the next succeeding month's operations, the Operator may
require the Non-Operators to advance their share of the estimated cash
outlay for the month's operations. Unless otherwise provided in the
agreement, any billing for such advance shall be payable within 15
days after receipt of the advance request or by the first day of the
month for which the advance is required, whichever is later. The
Operator shall adjust each monthly billing to reflect advances
received from the Non-Operators for such month.
B. Each Non-Operator shall pay its proportion of all bills within 15 days
of receipt date. If payment is not made within such time, the unpaid
balance shall bear interest compounded monthly using the U.S. Treasury
three-month discount rate plus 3% in effect on the first day of the
month for each month that the payment is delinquent 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. Interest shall begin accruing on the
first day of the month in which the payment was due.
4. ADJUSTMENTS
A. Payment of any such bills shall not prejudice the right of any
Non-Operator to protest or question the correctness thereof; however,
all bills and statements (including payout status statements) related
to expenditures rendered to Non-Operators by the Operator during any
calendar year shall conclusively be presumed to be true and correct
after 24 months following the end of any such calendar year, unless
within the said period a Non-Operator takes specific detailed written
exception thereto and makes claim on the Operator for adjustment.
Copyright (C) 1995 by the Council of Petroleum Accountants Societies.
1
<PAGE>
B. All adjustments initiated by the Operator except those described in
(1) through (4) below are limited to the 24-month period following the
end of the calendar year in which the original charge appeared or
should have appeared on the Joint Account statement or payout status
statement. Adjustments made beyond the 24-month period are limited to
the following:
(1) a physical inventory of Controllable Material as provided for in
Section VII
(2) an offsetting entry (whether in whole or in part), which is the
direct result of a specific joint interest audit exception granted by
the Operator relating to another property
(3) a government/regulatory audit
(4) working interest ownership adjustments
5. EXPENDITURE AUDITS
A. A Non-Operator, upon notice in writing to the Operator and other
Non-Operators, shall have the right to audit the Operator's accounts
and records relating to the Joint Account for any calendar year within
the 24-month period following the end of such calendar year; however,
conducting an audit shall not extend the time for the taking of
written exception to and the adjustment 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 that will result in a minimum of
inconvenience to the Operator. The 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 the Operator, except upon the
resignation or removal of the Operator, and shall be made at the
expense of those Non-Operators approving such audit. The lead audit
company's audit report shall be issued within 180 days after
completion of the audit field work; however, the 180 day time
period shall not extend the 24-month requirement for taking specific
detailed written exception as required in Paragraph 4.A. above.
All claims shall be supported with sufficient documentation. Failure
to issue the report within the prescribed time will preclude the
Non-Operator from taking exception to any charge billed within the
time period audited.
A timely filed audit report or any timely submitted response thereto
shall suspend the running of any applicable statute of limitations
regarding claims made in the audit report. While any audit claim is
being resolved, the applicable statute of limitations will be
suspended; however, the failure to comply with the deadlines provided
herein shall cause the statute to commence running again.
B. The Operator shall allow or deny all exceptions in writing to an
audit report within 180 days after receipt of such report. Denied
exceptions should be accompanied by a substantive response. Failure to
respond to an exception with substantive information on denials
within the time provided will result in the Operator paying interest
on that exception, if ultimately granted, from the date of the audit
report. The interest charged shall be calculated in the same manner as
used in Section I, Paragraph 3.B.
C. The lead audit company shall reply to the Operator's response to an
audit report within 90 days of receipt, and the Operator shall reply
to the lead audit company's follow-up response within 90 days of
receipt. If the lead audit company does not provide a substantive
response to an exception within 90 days, that unresolved audit
exception will be disallowed. If the Operator does not provide a
substantive response to the lead auditor's follow-up response within
90 days, that unresolved audit exception will be allowed and credit
given the Joint Account.
D. The lead audit company or Operator may call an audit resolution
conference for the purpose of resolving audit issues/exceptions
that are outstanding at least 18 months after the date of the audit
report. The meeting will require one month's written notice to the
Operator and all audit participants, be held at the Operator's office
or other mutually agreed upon location, and require the attendance of
representatives of the Operator and each audit participant responsible
for the area(s) in which the exceptions are based and who have
authority to resolve issues on behalf of their company. Any Party who
fails to attend the resolution conference shall be bound by any
resolution reached at the conference. The lead audit company will
coordinate the response/position of the Non-Operators and continue
to maintain its traditional rote throughout the audit resolution
process.
Attendees will make good faith efforts to resolve outstanding issues,
and each Party will be required to present substantive information
supporting its position. An audit resolution conference may be held as
often as agreed to by the Parties. Issues unresolved at one conference
can be discussed at subsequent conferences until each such issue is
resolved.
6. AFFILLATES
Charges to the Joint Account for any services or Materials provided by an
Afliliate shall not exceed average commercial rates for such services or
Materials.
Unless otherwise indicated below, Affiliates performing services or
providing Materials for Joint Operations shall provide the Operator with
written agreement to make their records relating to the work performed for
the Joint Account available for audit upon request by a Non-Operator under
this Accounting Procedure. These records shall include, but not be limited
to, invoices, field work tickets, equipment use records, employee time
reports, and payroll summaries relating to the work performed for the Joint
Account. All audits will be conducted pursuant to Section I, Paragraph 5.
2
<PAGE>
3. MATERIAL
Materials purchased or furnished by the Operator for use on the Joint
Property as provided under Section VI
Only such Materials shall be purchased for or transferred to the Joint
Property as may be required for immediate use and are reasonably practical
and consistent with efficient and economical operations. The accumulation
of surplus stocks shall be avoided.
4. TRANSPORTATION
Transportation of contract personnel, and Material necessary for the Joint
Operations but subject to the following limitations:
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
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 the 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 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, unless agreed to by the Parties.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking costs is available when the actual
charge is less than the amount most recently recommended by COPAS,
excluding accessorial charges. Examples of accessorial charges are
listed in Bulletin 21.
D. No charge shall be made for transportation costs associated with
relocating employees, including the costs of moving their household
goods and personal effects, unless agreed to by the Parties.
5. SERVICES
The cost of contract services, equipment, and utilities provided by sources
other than the Operator
6. EQUIPMENT FURNISHED BY THE OPERATOR
A. Equipment located on the Joint Property owned by the Operator shall be
charged to the Joint Account at the average prevailing commercial rate
for such equipment. If an average commercial rate is used to bill the
Joint Account, the Operator shall adequately document and support such
rate and shall periodically review and update the rate.
B. In lieu of charges in Paragraph 6.A. above, or if a prevailing
commercial rate is not available, equipment owned by the Operator will
be charged to the Joint Account at the Operator's actual cost. Such
costs may include all expenses that would be chargeable pursuant to
this Section III if such equipment were jointly owned, depreciation
using straight line depreciation method, interest on investment (less
gross accumulated depreciation) not to exceed 12% per annum, and an
element of the estimated cost to dismantle and abandon the equipment.
Charges for depreciation will no longer be allowable once the
equipment has been fully depreciated. Actual cost shall not exceed
the average prevailing commercial rate.
C. When applicable for Operator-owned or -leased motor vehicles, the
Operator shall use rates published by the Petroleum Motor Transport
Association or such other organization recognized by COPAS as the
official source of such rates. When such rates are not available, the
Operator shall comply with the provisions of Paragraph A or B above.
7. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property resulting from damages or losses incurred, except those resulting
from the Operator's gross negligence or willful misconduct
8. TAXES AND PERMITS
All taxes and permits of every kind and nature, including penalties and
interest, assessed or levied upon or in connection with the Joint Property,
or the production therefrom, and which have been paid by the Operator for
the benefit of the Parties
4
<PAGE>
If ad valorem taxes paid by the Operator are based in whole or in part
upon separate valuations of each Party's working interest, then
notwithstanding any contrary provisions, the charges to Parties will be
made in accordance with the tax value generated by each Party's working
interest.
9. INSURANCE
Net premiums paid for insurance required to be carried for the protection
of the Parties
If Joint Operations are conducted at locations where the Operator acts as
self-insurer, the Operator shall charge the Joint Account manual rates as
regulated by the state in which the Joint Property is located, or in the
case of offshore operations, the adjacent state as adjusted for offshore
operations by the U.S. Longshoreman and Harbor Workers (USL&H) or Jones Act
surcharge, as appropriate.
11. ECOLOGICAL AND ENVIRONMENTAL
Costs of surveys as well as pollution containment, actual control, and
resulting responsibilities as required by applicable laws or resulting
from statutory regulations
12. ABANDONMENT AND RECLAMATION
Costs incurred for abandonment and reclamation of the Joint Property,
including costs required by governmental or other regulatory authority
IV. COSTS INCURRED OFF THE JOINT PROPERTY
The Operator shall charge the Joint Account for the following items, which are
incurred off the Joint Property for Joint Operations.
1. FACILITIES
A. PRODUCTION-HANDLING FACILITIES
(1) ALLOCATED
The Operator shall allocate charges to the Joint Account on an
equitable and consistent basis for facilities that handle
substances extracted from or injected into the real property
subject to the agreement to which this Accounting Procedure is
attached if such facilities are not listed in Paragraph (2) below
or covered by a separate facility agreement. Allocable charges
for such facilities that are leased or rented shall be at the
Operator's cost. All allocable charges for such facilities owned
by the Operator shall be operating costs as defined in Section
III incurred on the facility site plus depreciation, interest on
investment (less gross accumulated depreciation) not to exceed
12% per annum, and estimated dismantling and abandonment costs.
Charges for depreciation will no longer be allowable once the
equipment has been fully depreciated. Such rates shall not exceed
average commercial rates prevailing in the area of the Joint
Property.
In lieu of charges in Paragraph 1.A.(1) above for Operator-owned
facilities, the Operator may elect to charge average commercial
rates prevailing in the immediate area of the Joint Property. If
average commercial rates are used, the Operator shall adequately
document and support the rates.
5
<PAGE>
7. APPROVAL BY PARTIES
An affirmative vote of both Parties shall be required for all items in this
Accounting Procedure requiring approval by the Parties. This vote shall be
taken in writing, in a meeting, or by telephone and results shall be
binding on all Parties. All votes must be confirmed in writing by each
Party to the Operator within two business days. The Operator shall give
notice to all parties of the results.
II. METHOD OF CHARGES TO JOINT ACCOUNT
The Operator shall charge the Joint Account for the costs of Joint Operations in
accordance with only one of the following options. The method of charges to the
Joint Account may be changed if approved by the Parties in accordance with
Section 1, Paragraph 7.
1. [X] FIXED RATE COSTS ARE INCLUDED IN THE PRODUCING WELL RATE CHARGE AS
STATED IN ARTICLE V.1.A.
Active wells are those wells that qualify for a producing overhead charge
as specified in Section V, Paragraph 1.A.(3) of this procedure.
The fixed rate will compensate the Operator for all costs applicable to
Joint Operations except for royalties, ad valorem taxes, and production/
severance taxes paid by the Operator for the Joint Operations and except
downhole well work, Controllable Material, and all projects that qualify for
drilling, construction, and/or catastrophe overhead as specified in Section V of
this procedure along with all other third party costs. These exception costs
shall be charged as specified in Sections III, IV, and V of this procedure.
III. COSTS INCURRED ON THE JOINT PROPERTY
The Operator shall charge the Joint Account for the following items less
discounts taken, which are incurred on the Joint Property for Joint Operations.
Employees and contract personnel who spend substantially all their time in
offices that are not Joint Property are not chargeable under this Section while
working in those offices.
1. RENTALS AND ROYALTIES
Lease rentals and royalties paid by the Operator.
3
<PAGE>
2. ECOLOGICAL AND ENVIRONMENTAL
Ecological and environmental costs are those that arise from compliance
with governmental or regulatory requirements or prudent operations. These
costs that are incurred off the Joint Property shall be
[X] allocated directly to the Joint Account
[ ] included in the Overhead rates provided in Section V
3. LEGAL EXPENSE
The Operator may not charge for services of the Operator's legal staff or
fees and expense of outside attorneys unless approved by the Parties in
writing. Other expenses of handling, settling, or otherwise discharging
litigation, claims, liens, title examinations, and curative work necessary
to protect or recover the Joint Property shall be chargeable.
5. ENGINEERING, DESIGN, AND DRAFTING
Engineering, design, and drafting costs associated with major construction
or catastrophes, as defined in Section V, Paragraph 2, of this Accounting
Procedure, may be charged to the Joint Account only when the Operator
elects to charge overhead for major construction or catastrophes per
Section V, Paragraph 2.B. Such charges shall be determined in a manner
consistent with those defined in Section III, Paragraphs 2 and 5.
V. OVERHEAD
The Operator shall be compensated for costs not chargeable in Section III (Costs
Incurred on the Joint Property) or Section IV (Costs Incurred off the Joint
Property) that are incurred in connection with and in support of Joint
Operations.
1. OVERHEAD-DRILLING AND PRODUCING OPERATIONS
As compensation for overhead in connection with drilling and producing
operations, the Operator shall charge on either a
[X] Fixed Rate Basis, Paragraph 1.A., or
[ ] Percentage Basis, Paragraph 1.B.
A. OVERHEAD-FIXED RATE BASIS
(1) The Operator shall charge the Joint Account at the following
rates per well.
Drilling well rate $7,000.00 per well.
Producing well rate per month $750.00*
* if gas from a particular well requires treatment for H2S (wellhead gas H2S
concentration exceeds 4ppm), then all costs associated with the treatment of
gas from that well will be billed to all ownership based on Working Interests
in addition to the Working Interest share of the fixed $750 per month
producing well rate.
6
<PAGE>
(2) Application of overhead-drilling well rate shall be as follows:
(a) Charges for wells undergoing any type of workover, recompletion,
or abandonment for a period of five consecutive work days or more
shall be made at the drilling well rate. Such charges shall be
applied for the period from the date workover operations, with
the rig or other units used in workover, commence through the
date of the rig or other unit release, except that no charges
shall be made during suspension of operations for 15 or more
consecutive calendar days.
(3) Application of overhead-producing well rate shall be as follows:
(a) An active well completion for any portion of the month shall
qualify for a one-well charge for the entire month. An active
completion is one that is
[1] produced,
[2] injected into for recovery or disposal, or
[3] used to obtain a water supply to support production
operations.
(b) Each active completion in a multi-completed well in which
production is not commingled downhole shall qualify for a
one-well charge providing each completion is considered a
separate well by the governing regulatory authority.
(c) 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 the drilling well rate applies.
(d) All wells not meeting the criteria set forth in this Paragraph
A (3)(a), (b), or (c) shall not qualify for a producing overhead
charge.
2. OVERHEAD -- MAJOR CONSTRUCTION AND CATASTROPHES
Major construction is defined as any project in excess $5,000.00 required
for the construction and installation of fixed assets, the expansion of
fixed assets, or in the dismantling for abandonment of fixed assets as
required for the development and operation of the Joint Property.
Catastrophe is defined as a calamitous event bringing damage, loss, or
destruction resulting from a single occurrence requiring expenditures in
excess of $25,000.00 to restore the Joint Property to the equivalent
condition that existed prior to the event causing the damage.
To compensate the Operator for overhead costs incurred in connection with
major construction and catastrophes, the Operator shall either negotiate a
rate prior to beginning the work or shall charge the Joint Account for
overhead based on the following rates:
A. If the Operator absorbs engineering, design, and drafting costs
related to the project, the overhead assessment will be 10% of total
project costs.
7
<PAGE>
B. If the Operator charges engineering, design, and drafting costs
related to the project directly to the Joint Account, the overhead
assessment will be 10% of total project costs.
For each project, the Operator shall provide advance notice to the
Non-Operators in writing if option A or B above will be used for
calculating construction or catastrophe overhead. For purposes of
calculating overhead, the cost of drilling and workover wells shall be
excluded and catastrophe expenditures to which these rates apply shall not
be reduced by insurance recoveries. Overhead assessed under the
construction and catastrophe provisions shall be in lieu of all other
overhead provisions.
VI. MATERIAL PURCHASES, TRANSFERS, AND DISPOSITIONS
The Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for direct purchases, transfers, and dispositions.
The Operator normally provides all Material for use on the Joint Property but
does not warrant the Material furnished. At the Operator's option, Material may
be supplied by Non-Operators.
1. DIRECT PURCHASES
Direct purchases shall, be charged to the Joint Account at the price paid
by the Operator after deduction of all discounts received. A direct
purchase is determined to occur when an agreement is made between an
Operator and a third party for the acquisition of Materials for a specific
well site or location. Material provided by the operator under "vendor
stocking programs," where the initial use is for a Joint Property and title
of the Material does not pass from the vendor until usage, is considered a
direct purchase. If Material is found to be defective or is returned to the
vendor for any other reason, credit shall be passed to the Joint Account
when adjustments have been received by the Operator from the manufacturer,
distributor, or agent.
2. TRANSFERS
A transfer is determined to occur when the Operator furnishes Material from
its storage facility or from another operated property. Additionally, the
Operator has assumed liability for the storage costs and changes in value
and has previously secured and held title to the transferred Material.
Similarly, the removal of Material from a Joint Property to the Operator's
facility or to another operated property is also considered a transfer.
Material that is moved from the Joint Property to a temporary storage
location pending disposition may remain charged to the Joint Account and is
not considered a transfer.
A. PRICING
The value of Material transferred to/from the Joint Property should
generally reflect the market value on the date of transfer. Transfers
of new Material will be priced using one of the following new
Material bases:
(1) Published prices in effect on the date of movement as adjusted
by the appropriate COPAS Historical Price Multiplier (HPM) or
prices provided by the COPAS Computerized Equipment Pricing
System (CEPS)
The HPMs and the associated date of published price to which they
should be applied will be published by COPAS periodically.
(a) For oil country tubulars and line pipe, the published price
shall be based upon eastern mill (Houston for special end)
carload base prices effective as of the date of movement,
plus transportation cost as defined in Section VI,
Paragraph 2.B.
(b) For other Material, the published price shall be the
published list price in effect at the date of movement, as
listed by a supply store nearest the Joint Property or
point of manufacture, plus transportation costs as defined
in Section VI, Paragraph 2.B.
(2) A price quotation that reflects a current realistic acquisition
cost may be obtained from a supplier/manufacturer.
(3) Historical purchase price may be used, providing it reflects a
current realistic acquisition cost on the date of movement. A
Sufficient price documents should be available to Non-Operators
for purposes of verifying Material transfer valuation.
(4) As agreed to by the Parties
B. FREIGHT
Transportation costs should be added to the Material transfer price
based on one of the following:
(1) Transportation costs for oil country tubulars and line pipe shall
be calculated using the distance from eastern mill to the railway
receiving point nearest the Joint Property based on the carload
weight basis as recommended by COPAS in Bulletin 21 and current
interpretations.
(2) Transportation costs for special mill items shall be calculated
from that mill's shipping point to the railway receiving point
nearest the Joint Property. For transportation costs from other
than eastern mills, the 30,000-pound Specialized Motor Carriers
interstate truck rate shall be used. Transportation costs for
macaroni tubing shall be calculated based on the Specialized
Motor Carriers rate per weight of tubing transferred to the
railway receiving point nearest the Joint Property.
(3) Transportation costs for special end tubular goods shall be
calculated using the 30,000-pound Specialized Motor Carriers
interstate truck rate from Houston, Texas, to the railway
receiving point nearest the Joint Property.
8
<PAGE>
(4) Transportation costs for Material other than that described in Section
VI, Paragraphs 2.B(l) through (3), if applicable, shall be calculated
from the supply store or point of manufacture, whichever is
appropriate, to the railway receiving point nearest the Joint
Property.
C. CONDITION
(1) Condition "A"-New and unused Material in sound and serviceable
condition shall be charged at one hundred percent of the price as
determined in Section VI, Paragraphs 2.A and B. Material transferred
from the Joint Property that was not placed in service on the Joint
Property shall be credited as charged without gain or loss. Any unused
Material that was charged to the Joint Account through a direct
purchase will be credited to the Joint Account at the original cost
paid. All refurbishing costs necessary to correct handling or
transportation damages and other related costs will be borne by the
divesting property. The Joint Account is responsible for Material
preparation, handling, and transportation costs for new and unused
Material charged to the property either through a direct purchase or
transfer. Any preparation costs performed, including my internal or
external coating and wrapping, will be credited on new Material
provided these costs were not repeated for the receiving property.
(2) Condition "B"-Used Material in sound and serviceable condition and
suitable for reuse without reconditioning shall be priced at the
condition percentage most recently recommended by COPAS times the
price determined by the pricing guidelines in Section VI, Paragraphs
2.A and B. Any cost of reconditioning to return the Material to
Condition B will be absorbed by the divesting property.
If the Material was originally charged to the Joint Account as used
Material and placed in service on the Joint Property, the Material
will be credited at the condition percentage most recently recommended
by COPAS times the price as determined in Section VI, Paragraphs 2.A
and B.
Used Material transferred from the Joint Property that was not placed
in service on the property shall be credited as charged without gain
or loss.
(3) Condition "C"-Material that is not in sound and serviceable condition
and not suitable for its original function until after reconditioning
shall be priced at the condition percentage most recently recommended
by COPAS times the price determined in Section VI, Paragraphs 2.A and
B. 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.
(4) Condition "D"-Other Material that is no longer suitable for its
original purpose but usable for some other purpose is considered
Condition D Material. Included under Condition "D" is also obsolete
items or Material that does not meet original specifications but still
has value and can be used in other services as a substitute for items
with different specifications. Due to the condition or value of other
used and obsolete items, it is not possible to price these items under
Section VI, Paragraph 2.A. The price used should result in the Joint
Account being charged or credited with the value of the service
rendered or use of the Material. In some instances, it may be
necessary or desirable to have the Material specially priced as agreed
to by the parties.
(5) Condition "E"-Junk shall be priced at prevailing scrap value prices.
D. OTHER PRICING PROVISIONS
(1) Preparations Costs
Costs incurred by the Operator in making Material serviceable
including inspection, third party surveillance services, and ocher
similar services will be charged to the Joint Account at prices
reflective of the Operator's actual costs of the services.
Documentation must be retained to support the cost of service. New
coating and/or wrapping may be charged per Section VI, Paragraph 2.A.
(2) Loading and Unloading Costs
Loading and unloading costs related to the movement of the Material to
the Joint Property shall be charged in accordance with the methods
specified in COPAS Bulletin 21.
3. DISPOSITION OF SURPLUS
Surplus Material is that Material, whether new or used, that is no longer
required for Joint Operations. The Operator may purchase, but shall be
under no obligation to purchase, the interest of the Non-Operator in
surplus Material.
Dispositions for the purpose of this procedure are considered to be the
relinquishment of title of the Material from the Joint Property to either a
third party, a Non-Operator, or to the Operator. To avoid the accumulation
of surplus Materials, the Operator should make good faith efforts to
dispose of surplus within 12 months through buy/sale agreements, trade,
sale to a third party, division in-kind, or other dispositions as agreed
to by the Parties.
An Operator may, through a sale to an unrelated third party or entity,
dispose of surplus Material having a gross sale value that is less than or
equal to the Operator's expenditure limit as set forth in the Operating
Agreement to which this Accounting Procedure is attached without the prior
approval of the Non-Operator. If the gross sale value exceeds the Operating
Agreement expenditure limit, the disposal must be agreed to by the Parties.
The Operator may dispose of Condition D and E Material under procedures
normally utilized by the Operator without prior approval.
9
<PAGE>
4. SPECIAL PRICING PROVISIONS
A. PREMIUM PRICING Whenever Material is not readily replaceable due to
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 use and to billing Non-Operators for such
Material. During premium pricing periods, each Non-Operator shall have the
right to furnish in-kind all or part of his share of such Material suitable
for use and acceptable to the Operator by so electing and notifying the
Operator within ten days after receiving notice from the Operator.
B. SHOP-MADE ITEMS
Shop-made items may be priced using the value of the Material used to
construct the item plus labor costs. If the material is from a scrap or
junk account, the Material may be priced at either 25% of the current price
as determined in Section VI, Paragraph 2.A, or scrap value, whichever is
higher, plus estimated labor costs to fabricate the item.
C. MILL REJECTS
Mill rejects purchased as "limited service" casing or tubing shall be
priced at 80% of K-55/J-55 price as determined in Section VI, Paragraphs
2.A and B. Line pipe converted to casing or tubing with casing or tubing
couplings attached shall be priced as K-55/J-55 casing or tubing at the
nearest size and weight.
VII. INVENTORIES OF CONTROLLABLE MATERIAL
The Operator shall maintain records of Controllable Material charged to the
Joint Account, as defined in the COPAS Material Classification Manual, with
sufficient detail to perform the physical inventories requested unless directed
otherwise by the Non-Operators.
Adjustments to the Joint Account by the Operator resulting from a physical
inventory of jointly owned Controllable Material are limited to the six months
following the taking of the inventory. Charges and credits for coverages or
shortages will be valued for the Joint Account based on Condition B prices in
effect on the date of physical inventory and determined in accordance with
Section VI, Paragraphs 2.A. and B, unless the inventorying Parties can Prove
another Material condition applies.
1. DIRECTED INVENTORIES
With an interval of not less than five years, physical inventories shall be
performed by the Operator upon written request of a majority in working
interests of the Non-Operators.
Expenses of directed inventories will be borne by the Joint Account and may
include the following:
A. Audit per diem rate for each inventory person in line with the auditor
rates determined, adjusted, and published each April by COPAS.
The per diem should also be applied to a reasonable number of days for
pre-inventory work and for report preparation. The amount of time
required for this additional work may vary from inventory to
inventory.
B. Actual travel including Operator-provided transportation and personal
expenses for the inventory team.
C. Reasonable charges for report typing and processing
The Operator is expected to exercise judgment in keeping expenses within
reasonable limits. Unless otherwise agreed, costs associated with any
post-report follow-up work in settling the inventory will be absorbed by
the Non-Operator incurring such costs. Any anticipated disproportionate
costs should be discussed and agreed upon prior to commencement of the
inventory.
When directed inventories are performed, all Parties shall be governed by
such inventory.
2. NON-DIRECTED INVENTORIES
A. OPERATOR INVENTORIES
Periodic physical inventories that are not requested by the
Non-Operator may be performed by the Operator at the
Operator's discretion. The expenses of conducting such Operator inventories
shall not be charged to the Joint Account.
B. NON-OPERATOR INVENTORIES
Any Non-Operator(s) may conduct a physical inventory at reasonable times
with prior notification to the Operator. Such inventories shall be
conducted at the sole cost and risk of the participating Non-Operator(s).
C. OTHER INVENTORIES
Other physical inventories may be taken whenever there is any sale or
change of interest. When possible, the selling Party should notify all
other owners 30 days prior to the anticipated closing date. When there is a
change in Operator of the Joint Property, an inventory by the former and
new Operator should be taken. The expenses of conducting such other
inventories shall be charged to the Joint Account.
10
<PAGE>
EXHIBIT D
TO OPERATING AGREEMENT DATED ________________________,200O
INSURANCE
A. Operator shall carry, for the benefit of the joint account, insurance with
responsible insurance carriers as follows:
1. Workmen's Compensation and Employer's Liability.
(a) State Statutory Requirements for Workmen's Compensation
(b) Employer's Liability - $100,000 for each person
2. Comprehensive General liability
(a) Bodily Injury with limits of not less than:
$100,000 each person
$500,000 each accident
(b) Property Damage
(c) Such coverage shall include contractual liability
3. Automobile Liability (including Hired and Non-Owned Vehicles)
(a) Bodily Injury with limits of not less than:
$100,000 each person
$500,000 each accident
(b) Property damage with limits of not less than:
$500,000 each accident
4. Not less than $2,000,000 nor more than $5,000,000 of Umbrella
Liability with respect to scheduled liability policies.
5. All other insurance, if any, which may be required by applicable
law.
B. Operator shall not be obligated to carry any insurance other than that
specified above. Any party may, at its own expense, acquire such insurance
as it deems proper to protect itself against any claims, losses, damages or
destruction arising out of the operation of the Contract Area. Operator
shall not be liable to Non-Operator for loss suffered on account of the
insufficiency of insurance carried, or of the insurer with whom carried.
<PAGE>
EXHIBIT "E"
Attached to and made a part of that certain Operating Agreement dated
________________, 2000 by and Hay Exploration, Inc., as Operator, and Equitable
Production - Eastern States, Inc., as Non-Operator.
GAS BALANCING AGREEMENT
The parties to the Operating Agreement to which this agreement is attached,
own the working interest in the gas rights underlying the Contract Area covered
by such Operating Agreement in accordance with the percentages of participation
as set forth in Exhibit "A" to said Agreement.
In accordance with the terms of the Operating Agreement, each party thereto
has the right to take in kind its share of gas produced from the Contract Area
and market or otherwise dispose of same. In the event and at any time any party
hereto is not taking or marketing its full share of gas, or has contracted to
sell it's share of gas produced from Contract Area to a purchaser which at any
time does not take the full share of gas attributable to the interest of such
party, the terms of this agreement shall automatically become operative.
During the period when any party hereto is not marketing or otherwise
disposing of its full share of gas produced from any well and/or proration unit
within the Contract Area, the other party hereto shall be entitled to produce,
in addition to their own share of production, that portion of such other party's
share of production which said party is unable to market or otherwise dispose of
and shall be entitled to take such gas production and deliver same to its or
their purchaser(s). All parties hereto shall share in and own the liquid
hydrocarbons recovered from such gas by lease equipment in accordance with their
respective interests and subject to the aforesaid Operating Agreement, but the
party or parties taking such gas shall own all of such gas delivered to its or
their purchaser(s).
A gas balance account shall be established for each party, and when it is
not marketing or otherwise disposing of its full share of the gas produced, such
party's account shall be credited with an amount of gas equal to its full share
of the gas produced less its share of gas used in lease operations, vented, or
lost, and less that portion marketed or otherwise disposed of by such party. The
Operator will maintain a current gas balance account for all parties and will
furnish all parties hereto monthly statements showing the total quantity of gas
produced, the amount used in lease operations, vented or lost, the total
quantity of liquid hydrocarbons recovered therefrom, and the monthly and
cumulative gas balance of each party. (Underproduced party would show a negative
gas balance and overproduced party would show a positive gas balance.)
Notwithstanding anything to the contrary contained herein, or contained in
the Operating Agreement to which this Exhibit "E" is attached, each party taking
in kind a share of production hereunder shall be required to make settlement
with the royalty owners for the proportionate royalties payable out of the gas
so taken by such Party. Each party hereto agrees to hold each other harmless
from any and all claims for royalty payments asserted by royalty owners to whom
each party is accountable. The term "royalty owner" shall include owners of
royalty, overriding royalties, production payments and similar interests.
Any party at any time may market or otherwise dispose of its full share of
any gas produced. In addition to such share, any party with a negative balance
in its gas balance account, after notice to the Operator and until it has
balanced its gas balance account, shall be entitled to take a share of gas
determined by multiplying fifty percent (50%) of the interest in the current gas
production of the party having a positive balance in this gas balance account by
a fraction, the numerator of which is the interest in the proration unit of such
party with the negative balance and the denominator of which is the total
percentage interest in such proration unit of all parties having negative
balances and who are currently marketing or otherwise disposing of a portion of
their negative balance in addition to their share of gas.
Each party marketing or otherwise disposing of gas shall pay the production
taxes due on such gas.
Nothing herein shall be construed to deny any party the right, from time to
time, to produce and deliver to its purchaser its full share of the allowable
gas production to meet the deliverability tests required by its purchaser.
- 1 -
<PAGE>
At the end of each 12 month period after the date production is first
turned in line, or at such time when the production of gas from a proration unit
be permanently discontinued before the gas account is balanced, a cash
settlement will be made between the party credited with negative balances
(underproduced party) and positive balances (overproduced party). In making such
settlement, the underproduced party will be paid by the overproduced party a sum
of money calculated as follows:
for all volumes of gas for which settlement is made, the underproduced
party shall be paid the lower of the price actually received by the
overproduced party or the weighted average of the Inside F.E.R.C.'s Gas
Market Report ("IFGMR") index price of spot gas delivered to pipelines,
Columbia Gas Transmission Corporation, Appalachia (WVA, OH, KY), for
purchases made during the prior 12 month period, any and all applicable
taxes previously paid by the overproduced party for such volumes shall be
deducted from the settlement amount, as well as any reasonable marketing
costs incurred directly in connection with the sale of the overproduction.
In the event the overproduced party has paid royalties attributable to
such overproduction to which the underproduced party's interest was subject, the
amount of such royalties shall also be deducted from such settlement. The
weighted average price paid by IFGMR for its spot purchases for the production
period shall be calculated by multiplying the volumes produced by the well by
the IFGMR price paid for spot purchases for each of the months in the production
period, adding up the amount derived for all the months in the production
period, and dividing such sum by the total gas produced by the well during the
production period.
Nothing herein shall change or affect each party's obligation to pay its
proration share of all liabilities incurred, as provided in the aforesaid
Operating Agreement.
The agreement shall constitute a separate agreement as to each proration
unit within the Contract Area. It shall inure to the benefit of and be binding
upon the parties hereto, their successors, legal representatives and assigns. It
shall become effective in accordance with its terms and shall remain in force
and effect as long as the Operating Agreement to which it is attached remains in
effect.
- 2 -
<PAGE>
EXHIBIT F
TO OPERATING AGREEMENT DATED _________________________,2000
Non-Discrimination and Certification of Non-Segregated Facilities
In connection with performance of work under this Operating Agreement, Operator
shall comply with all of the provisions of Section 202 (1) to (7), inclusive, of
Executive Order 11246 (30 F.R. 12319), which are hereby incorporated by
reference in this Operating Agreement.
<PAGE>
EXHIBIT "H"
TO OPERATING AGREEMENT DATED _________________________, 2000.
WELL INFORMATION REQUIREMENTS
NOTIFICATIONS
Non-Operator(s) will be notified of the following operational activities:
a) Intent to spud - 48 hours before drilling operations commence
b) Logging, coring or drill stem testing - 24 hours prior to commencement
c) Casing point elections - As per Operating Agreement
REGULATORY INFORMATION
One copy of all regulatory filings submitted to any state or federal agency will
be forwarded to Non-Operator(s) by US Mail at the time they are submitted. These
data will include, but are not limited to the following:
a) drilling/completion permit
b) survey/location plat
c) daily drilling/completion report
d) completion reports/monthly production data
e) MWD logging data
f) directional survey data
Two copies of all field prints and three copies of all final prints of the
following data will be provided to Non-Operator(s) as soon as it becomes
available to the operator:
a) open hole logs/surveys
b) geological prognosis (prior to spud)
c) DST, formation test data
d) core description/analyses
e) velocity or seismic surveys
f) bottom hole pressure or production tests
g) PVT analyses; oil, gas, water analyses
h) computed logs (if routinely performed)
Upon written request prior to spud, the Operator will acquire drill cuttings as
specified by Non-Operator(s). Samples of said cuttings will be kept on location
until drilling operations are completed.
Non-Operator(s), or its authorized representatives, shall, at times and at their
own risk, have access to the derrick floor, and to any and all information
obtained or acquired in the course of, or as a result of drilling any well
subject to this agreement.
When drilling on air, operator will take gas checks, in accordance with current
industry practices, within 100 feet after drilling through any formation known
to be productive of oil or gas within a two-mile radius of the drilling
location. All other gas shows encountered during drilling process will be gauged
immediately.
The minimum logging suite will consist of resistivity, bulk density, neutron
porosity, gamma ray, and temperature (air holes only) from base of surface
casing to TD. Detail logs will be acquired over zones of interest at the request
of Non-Operator(s).
COMMUNICATIONS
The correspondence and data transmission required herein will be directed as
follows:
Mailing Address: Equitable Production - Eastern States, Inc.
Attn: Lester A. Zitkus
1710 Pennsylvania Avenue
Charleston, WV 25302
Telephone: (304) 343-9566 (office)
FAX: (___)_________________ (fax for regulatory and
geological items)
FAX: (___)_________________ (fax for continuous feed for logs)
<PAGE>
EXHIBIT A3
FARMOUT AGREEMENT
BURKE PROSPECT AREA OF INTEREST
ELLIOTT COUNTY, KENTUCKY
THIS AGREEMENT, made and entered into this 22 day of August, 2000, by and
between EQUITABLE PRODUCTION - EASTERN STATES, INC., with an address of 1710
Pennsylvania Avenue, Charleston, West Virginia, 25302, hereinafter referred to
as FARMOR, and HAY EXPLORATION, INC., with an address of 4353 Willard Drive,
Ashland, Kentucky, 41102, hereinafter referred to as FARMEE,
WITNESSETH THAT:
WHEREAS, FARMOR is the owner of certain leasehold rights in the Oil and Gas
Leases that are depicted on Exhibit A, estimated to contain 4,500 gross acres,
more or less, located in Elliott County, Kentucky, attached hereto and by
reference made a part hereof; and
WHEREAS, FARMOR has agreed to farmout the Oil and Gas Leases or portions
thereof as shown on Exhibit A to FARMOR subject to the terms and conditions
contained herein; and
WHEREAS, the parties hereto wish to establish a contract area within which
such leases are located. FARMEE shall operate said contract area which shall be
identified as the AREA OF INTEREST (AOI). Such AO1 shall be all of the land area
and leaseholds situate within the Carter Coordinate Sections depicted on Exhibit
A. The A01 shall further be defined as all existing leases and lands and future
leases and lands that fall within the following Carter Coordinates:
<TABLE>
<CAPTION>
Carter Coordinate Sections
----------------- ---------
<S> <C>
T-77 11 (S/2) & 20
T-78 l(W/2), 2,3,4,7, 8,9 l0(W/2), ll(W/2), 12, 13,
14, 15(S/2), 16, 17, 18 & 19
U-78 21(SW/4), 22(S/2) & 23(S/2)
</TABLE>
All of the lease and lands within such A01 shall hereinafter be known as
the Farmout Acreage.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, it is agreed by and between the parties hereto as follows:
1. TITLES: FARMOR does not warrant the title to the Farmout Acreage but it
shall, upon request, make available to FARMEE for review, such abstracts and all
other pertinent title documents, without warranty or liability, as it has in its
files. There shall be no obligation on the part of FARMOR to secure new or
supplemental abstracts nor secure any curative instruments in connection with
the title to the Farmout Acreage. Furthermore, FARMEE shall promptly furnish to
FARMOR free of all costs, copies of all abstracts or title opinions FARMEE
acquires on the Farmout Acreage.
2. PRIOR TO DRILLING: Prior to the date that any well is commenced under
this Agreement, FARMEE shall furnish FARMOR with 1) a copy of the related
drilling permit, 2) its accompanying location plat 3) copies of title opinions
and curative if needed and 4) copies of any state regulatory proceedings if
applicable. FARMEE shall also inform FARMOR 1) when the location for said well
is staked, 2) when the material for the drilling thereof is moved to the
location, 3) of the expected time of spud [at least twenty-four (24) hours in
advance of such spud] and 4) when the well is actually spud. After actual
drilling has been commenced, FARMEE shall furnish FARMOR with drilling and
geological information as more fully set forth in Exhibit "B", attached hereto
and by reference made a part hereof.
<PAGE>
3. EXPLORATORY DEEP WELL: FARMEE agrees to spud an Exploratory Deep Well to
a depth sufficient to penetrate the Tomstown Carbonate bed near the base of the
Rome sequence (Contract Depth), in search of oil and/or gas on or before six (6)
months after the completion date of the exploratory deep well FARMEE is
obligated to drill under that certain Farmout Agreement dated August 22, and
referred to as the "Carter Prospect Farmout Agreement". The Exploratory Deep
Well shall be drilled at a legal location of FARMEE's choice on Farmout Acreage.
FARMEE shall complete the drilling of the Exploratory Deep Well within sixty
(60) days after commencement, and shall operate with due diligence and in a good
and workmanlike manner in the conduct of the operations.
The Exploratory Deep Well to be drilled by FARMEE as hereinabove provided,
as well as all operations incident thereto, shall be at the sole risk, cost and
expense of FARMEE. FARMOR shall not be subject to any obligation or liability
whatsoever in connection therewith, however, FARMOR shall own a 7.5% Carried
Working Interest, (as defined below), through Completion (as defined below) of
said Exploratory Deep Well. For the purposes of this Agreement, a Carried
Working Interest shall be defined as a cost-free Working Interest in which the
FARMEE shall bear FARMOR's proportionate share of costs and expenses. The term
Completion shall be defined as such time when a well has been completed, turned
in line and any commercial hydrocarbon is flowing to the gathering line or to
the tanks.
If the Exploratory Deep Well proves to be capable of producing oil or gas
in commercial quantities at Contract Depth, it shall be equipped for production
by FARMEE in a diligent and workmanlike manner.
If the Exploratory Deep Well does not encounter commercially producible
quantities of hydrocarbons at Contract Depth, but encounters potentially
commercial quantities of hydrocarbons at some shallower depth, FARMEE shall have
the option, but not the obligation, to test and thereafter complete the well if
it proves capable of producing commercial quantities of gas at such shallower
depth.
If the Exploratory Deep Well proves to be incapable of producing oil or gas
in commercial quantities at Contract Depth or at any shallower depth, FARMEE
shall plug and abandon said well(s), within ninety (90) days after commencement
of same, in accordance with the rules and regulations of any regulatory body
having jurisdiction, but not until FARMOR has had the option to take over the
well, as more fully described herein FARMEE shall be responsible for restoring
the premises to its original condition as nearly as practicable and settle and
dispose of all claims for damage to the surface of the Farmout Acreage.
FARMEE shall independently undertake to secure any and all rights of access
and surface rights at the drillsite location and along all of its proposed
pipeline right of ways upon the Farmout Acreage. FARMEE additionally agrees to
hold harmless FARMOR from any claims for damage or negligence that may arise as
a result of FARMEE's conduct of operations upon any severed mineral tracts upon
the Farmout Acreage.
FARMEE agrees to indemnify and hold harmless FARMOR from any claim(s) or
lien(s) asserted by any person or persons as a direct or indirect result of
FARMEE's operations and to pay promptly all invoices for labor, materials and
other items as they occur. FARMEE agrees to carry, or require any contractor to
carry, insurance as more fully set forth on Exhibit "C".
4. SUBSTITUTE WELL: In the event the Exploratory Deep Well, while being
drilled to Contract Depth, encounters impenetrable substances or other hole
conditions which make further drilling impractical, FARMEE may discontinue
drilling the Exploratory Deep Well before the Contract Depth requirement
therefor is satisfied. In such event, FARMEE shall have the right, but not the
obligation, to drill another well ("Substitute Well") at a location of FARMEE's
choice on the Farmout Acreage, provided the actual drilling of said Substitute
Well is commenced not later than sixty (60) days after operations cease on the
Exploratory Deep Well and such Substitute Well is drilled
2
<PAGE>
within the same unit as for the Exploratory Deep Well. Such Substitute Well
shall be drilled in the manner and to the depth specified for the Exploratory
Deep Well it is to replace and must be drilled with due diligence. If a
Substitute Well is commenced, drilled, and completed as herein provided, it
shall be deemed for the purposes of this Agreement to be the Exploratory Deep
Well to the same extent as if the Exploratory Deep Well had been commenced,
drilled, and completed in accordance herewith.
5. SUBSEQUENT WELLS: By virtue of drilling the Exploratory Deep Well and/or
Substitute Well to Contract Depth as hereinbefore specified, FARMEE shall earn
the right and option to drill Subsequent Wells within the A01 on the Farmout
Acreage provided no more than nine (9) months elapse between the release of the
drilling rig on the previous well and the spudding of a Subsequent Well on the
Farmout Acreage.
If the Exploratory Deep Well was drilled and completed in a formation
shallower than Contract Depth, FARMEE shall drill Subsequent Wells to test
Contract Depth. However, if FARMEE wishes to drill and complete Subsequent Wells
targeting formations shallower than Contract Depth, prior written consent of
FARMOR is required.
Any time after the Exploratory Deep Well has been drilled, Subsequent Wells
may be proposed by either FARMOR or FARMEE on the Farmout Acreage subject to and
under the same terms and conditions and time constraints as for the Exploratory
Deep Well and in accordance with the provisions of Article VI.B. of Exhibit "D"
attached hereto. If such Subsequent Wells are drilled in compliance with this
Agreement (and Exhibit "D"), and result in a well(s) capable of producing oil
and/or gas, FARMEE shall earn assignments of leasehold rights in the manner and
under the same terms and conditions as provided for herein under Provision 13.
In the event such Subsequent Well(s) are completed as dry holes or wells which
did not reach Contract Depth, the time between wells will be limited to the time
constraints governing the Substitute Wells as provided above. Failure by FARMEE
to continuously drill the Farmout Acreage as provided herein will result in
FARMEE forfeiting the right to further develop the Farmout Lands and to earn
further Assignments under this Agreement and a reversion to FARMOR of all
Farmout Acreage not previously earned by FARMEE pursuant to this Agreement shall
automatically occur.
6. PARTICIPATION RIGHTS: FARMOR reserves the right and option to
participate for a 30% Working Interest in each Subsequent Well proposed within
the AOI. FARMOR shall notify FARMEE by AFE and Well Location Plat, at least
thirty (30) days prior to the spudding of any Subsequent Well, and FARMOR shall
have thirty (30) days after receipt of such notice to make its participation
election in the subject well(s). The joint participation in the drilling and
completion of each such well shall be subject to the terms of that certain
Operating Agreement attached hereto as Exhibit "D". FARMOR shall have the right
to operate any wells in which FARMOR elects to participate. If FARMOR elects to
operate any wells, FARMOR shall be subject to the same terms and conditions as
contained in Exhibit D, attached hereto, attributable to Operator therein.
If FARMOR elects not to participate in a Subsequent Well, FARMOR shall,
through completion and turn in line through tanks, retain a 7.5% Carried Working
Interest in each such well.
7. OPTION TO TAKE OVER WELLS: If at any time FARMEE desires to plug and
abandon any well drilled on the Farmout Acreage, FARMEE shall notify FARMOR in
writing. FARMOR shall have ten (10) days after receipt of such notice within
which to advise FARMEE in writing whether or not FARMOR elects to take over
operations as to said well for such further operations as it may wish to
conduct; provided, however, if a rig is on location, then FARMOR shall have
forty-eight (48) hours (exclusive of Saturdays, Sundays, and holidays) within
which to advise of such election. The time allowed for FARMOR's election shall
not commence until FARMEE has properly notified FARMOR that FARMEE intends to
plug and abandon such well and copies of all logs of prospective pay sections in
such well, together with all other
3
<PAGE>
information required herein, have been received by FARMOR. Failure of FARMOR to
exercise the option to take over any such well as aforesaid shall be
conclusively deemed an election not to take over such well and FARMEE shall plug
and abandon such well at its sole cost, risk and expense.
In the event FARMOR elects to take over any such well, FARMEE shall
immediately assign to FARMOR such well and all materials and equipment placed
therein and thereon by FARMEE, together with any interest in the well and
production therefrom and all interest in the leases comprising the unit around
the well. FARMOR shall pay FARMEE the salvage value of any material and
equipment associated with the well, net of estimated costs of salvaging. Such
well shall be owned by FARMOR free and clear of any burdens, encumbrances, or
assignments by, through, or under FARMEE or its successors in interest. FARMEE
shall, upon request of FARMOR, execute all documents necessary or useful to
fully effectuate assignment of such well, materials, equipment, production and
leases to FARMOR. All costs and expenses in connection with such well takeover
shall be borne and paid by FARMOR. For purposes of FARMEE's earning the right to
drill another well under this Agreement, however, the well which has been taken
over shall be considered a dry hole.
8. INFORMATION CONCERNING WELLS: FARMEE shall furnish FARMOR all
information, and shall follow the procedures as described in the attached
Drilling and Geological Requirements Exhibit "B" for wells it drills on the
Farmout Acreage. All well(s) drilled on the Farmout Acreage shall be at regular
and legal locations, and shall conform to the spacing guidelines governed by the
state for wells drilled hereunder, unless otherwise agreed to by FARMOR and
FARMEE.
9. PROTECTION OF LEASES: FARMEE agrees to preserve and protect the
leasehold estate to be assigned to FARMEE hereunder, in full compliance with the
express and implied terms, conditions and covenants thereof, and give to FARMOR
the full right, if it so desires, to enforce all of the terms and conditions of
said lease(s), both express and implied, either alone or in conjunction with the
mineral owners. FARMEE agrees to protect and preserve said estate from any and
all liens, judgments and any other claims whatsoever. Should FARMEE fail to
comply with any of the terms and provisions of this paragraph, it will be
subject to the default provisions contained herein.
10. FUTURE PURCHASE OF LEASES: It is contemplated by both FARMOR and FARMEE
that additional oil and gas leasing will be necessary from time to time in order
to secure sufficient leasehold portions to comprise drilling units In the event
leasing becomes necessary, FARMEE shall be solely responsible for all such
leasing activity and the costs related thereto. Any such leases acquired by
FARMEE will be owned 100% by FARMEE.
11. SURRENDER, EXPIRATION OR ABANDONMENT: In the event FARMEE, or its
successors or assigns, after having earned an assignment under this Agreement,
desires to surrender, let expire or abandon all or any portion of the Farmout
Acreage, FARMEE agrees to give FARMOR at least sixty (60) days notice in writing
of its intention to so surrender, let expire or abandon and shall, if requested
to do so by FARMOR, reassign said Farmout Acreage insofar as it covers the
portion being surrendered, expiring or abandoned to FARMOR free of any
encumbrances suffered by, through or under FARMEE, in which event FARMOR shall
have the option if it so desires to purchase any casing and other equipment in
any well or wells that may be situated thereon at the prevailing market price
for second hand material of like quality and kind.
12. LEASE DELAY RENTAL PAYMENTS: In the event delay rental payments are
necessary to maintain all or a part of the leases comprising the Farmout
Acreage, FARMOR will make such payment and FARMEE agrees to reimburse FARMOR
for 100% of such rentals within twenty (20) days after receiving an invoice. It
is agreed however, that FARMOR will not be liable to FARMEE in the event
through error or oversight the rental(s) are not timely or correctly paid.
FARMEE's responsibility
4
<PAGE>
for payment shall commence with any delay rentals coming due after the date of
this Agreement.
In the event, prior to or after the delivery of an assignment by FARMOR to
FARMEE hereunder, any shut-in payments are necessary to maintain any lease(s)
comprising the Farmout Acreage in force and effect as a result of FARMEE's
operations, FARMEE shall make such payments and advise FARMOR promptly in
writing that such payments have been made. Following delivery of any
assignment(s) provided for herein, FARMEE agrees to make all payments resulting
from its operations, including royalties to maintain the lease(s) comprising the
acreage earned by FARMEE hereunder.
13. ASSIGNMENTS: In the event FARMEE completes a well as capable of
producing oil and/or gas at Contract Depth, has provided evidence of such
completion to FARMOR and has further faithfully performed all the other terms
and conditions contained in this Agreement, FARMOR shall deliver to FARMEE
without warranty of title express or implied, an assignment of their
proportionate interest in so much of the Farmout Acreage as is included in a one
hundred sixty (160) acre square around each productive well, limited as to all
depths and formations from the surface to One Hundred (100) feet below the total
depth penetrated by FARMEE in such well drilled and logged.
If FARMEE completes a well capable of producing oil and or gas in a zone or
formation above the Contract Depth such that the well will not fall within the
"Deep Well" category as defined by the Commonwealth of Kentucky Department of
Mines and Minerals statutes, FARMOR shall assign to FARMEE a proportionate
interest in so much of the Farmout Acreage as is included in a one hundred
(100) acre square around each productive well, limited as to all depths and
formations from the surface to One Hundred (100) feet below the total depth
penetrated by such well.
14. POOLING: All wells drilled hereunder shall conform with the existing
spacing pattern established for drilling to Contract Depth within the A01 which
is presently on a one hundred sixty (160) acre square grid. Any proposed
alteration to such spacing pattern must be approved by FARMOR in advance and
thereafter presented by FARMEE to the state for final approval
15. FORCE POOLING PROCEEDINGS: In the event FARMEE finds it necessary to
pursue force pooling for any unit around any well drilled hereunder, FARMEE
shall undertake to prepare the forms, submit the application to the state and
attend the state force pool proceeding in preparation of securing the permit for
such well. If a force pooling proceeding is necessary for any well unit in which
FARMOR has elected to take a 30% working interest, FARMOR agrees to pay its
proportionate 30% share of the costs associated with such undertaking after
receiving an invoice therefor. If, however, FARMOR has elected to take a 7.5%
Carried Working Interest in that unit which is the subject of a force pooling
application, FARMEE shall bear the full cost of the entire undertaking and at no
cost, risk or expense to FARMOR.
16: FORMATIONS NOT SUBJECT TO THIS AGREEMENT: FARMOR shall, at all times,
have the right of ingress and egress to any and all depths and formations not
expressly covered by this Agreement, including the right to utilize in such
operations any roadways or plugged and abandoned wells situated on the Farmout
Acreage and to store, handle, transport and market production therefrom, as well
as any and all other rights incident to or appertaining to FARMOR's ownership of
same, FARMOR shall also have the right to use, free of all costs, any roads or
locations built by FARMEE on the Farmout Acreage for its operations, relative to
the depths and formations retained by FARMOR. FARMOR also agrees that during the
term of its use of any road or location built by FARMEE, to maintain same in
good condition as may be reasonably practical and to not interfere with any
shared use by FARMEE.
17. SEISMIC DATA: FARMOR agrees to make available to FARMEE any seismic
data which FARMOR owns relating to the subject AOI. Such seismic data may be
viewed by FARMEE in FARMOR's office during normal business hours but none of
5
<PAGE>
the data shall be copied or retained by FARMEE. FARMOR or FARMEE may propose to
undertake additional seismic prospecting within the A01 throughout the term of
this Agreement. No annual acquisition of greater than 20 miles of seismic shall
be conducted without the consent of the other party. The party who proposes to
secure such seismic shall be the owner of, and have ultimate control of the
data. The non-proposing party shall have the election to pay 50% of all seismic
acquisition costs, including processing and interpretive costs in order to own a
joint share in the data. Should the non-proposing party elect to go non-consent
in the seismic acquisition, that party shall forfeit all drilling participation
rights related to wells which may be proposed within 5,000 feet of any seismic
line acquired under the proposal. The non-consenting party may earn the right to
participate in wells within the above stated distance from any seismic line
provided that party reimburses the consenting party 100% of the actual
acquisition, processing and interpretive costs incurred in such seismic program.
18. PREFERENTIAL RIGHT TO PURCHASE AND/OR MARKET GAS: FARMOR, or its
designee, shall have the preferential right and option to purchase and/or market
all or any part of the gas produced from or allocated to the Farmout Acreage
upon the same terms (or on terms the monetary equivalent thereof) as those under
which FARMEE proposes to sell or otherwise dispose of same, or FARMOR may
designate the purchaser of such gas under said terms. FARMEE shall notify FARMOR
in writing of each proposed sale or other disposition of the gas, which notice
shall include all the terms and conditions of each bona fide offer by a
prospective purchaser who is ready, willing and able to purchase the gas, or any
part thereof, and FARMOR shall have thirty (30) days after receiving said
written notice in which to notify FARMEE of its election either to exercise or
waive its preferential right and option. No contract for the sale or other
disposition of the gas, or any part thereof, shall ever be made by FARMEE until
FARMOR shall have first either exercised or waived in writing its herein
described preferential right and option with respect to the gas. FARMOR shall
have a continuing separate right and option with respect to each and every
proposed sale or other disposition of the gas, or part thereof. If FARMOR
exercised its option to purchase or designate a purchaser for the gas, FARMEE
agrees that, upon request, FARMEE will execute an appropriate gas sales
contract. Further, if FARMOR does not exercise its option to purchase or
designate a purchaser for the gas, FARMEE agrees that any subsequently executed
gas sales contract made by FARMEE will describe this Agreement and will indicate
that FARMEE is not authorized and does not intend to dedicate that share of the
gas production owned by FARMOR. It is understood and agreed that the right to
purchase hereby reserved may be assigned by FARMOR any time, at all times and
from time to time" without limitation. Nothing herein contained shall require
FARMOR to purchase such gas from the Farmout Acreage or to provide a purchaser
or market therefor.
19. ELECTION TO CONSTRUCT GATHERING SYSTEM: FARMOR shall have a continuing
right and election, but not the obligation, to construct any gas gathering lines
necessary to gather and transport any or all of the gas produced within the AOI.
Should FARMOR elect to construct any such gathering lines, it shall charge
FARMEE its pro-rata share of a tariff that results in an 18% rate of return
(Before Tax) on any capital which is employed to construct such gathering
system.
20. DEFAULT: In the event for any reason that actual drilling of the
Exploratory Deep Well is not commenced by the date herein provided (including
FARMEE's failure to timely drill and/or complete the exploratory deep wells in
the Dingus Prospect and Carter Prospect Farmout Agreements), or it is timely
drilled but Subsequent Well(s) provided for hereunder are not timely drilled,
the penalty to FARMEE shall be automatic termination of this Agreement and loss
of the ability to further develop the Farmout Lands and earn leasehold rights in
the Farmout Acreage not already earned by FARMEE in accordance with the terms
hereof. Except as provided herein, if FARMEE fails to comply with any provisions
of this Agreement, FARMOR may at any time notify FARMEE in writing giving the
particulars concerning such noncompliance, whereupon FARMEE will then have
thirty (30) days after receipt of such notice to satisfy FARMOR that it is in
compliance with all the terms and provisions hereof. In the event of such
failure by FARMEE to demonstrate compliance and reply to FARMOR's letter within
the thirty (30) day time period, this Agreement will
6
<PAGE>
automatically terminate in its entirety, or as to any unearned portion thereof,
provided that in so doing, FARMOR shall not waive or otherwise be precluded from
exercising any other rights or remedies, at law, or in equity, which it may have
for the breach of this Agreement by FARMEE or for FARMEE's failure to perform
under this Agreement in whole or in part.
21. NOTICE: All notices and information to be given or supplied hereunder
pursuant to the provisions of this Agreement shall be given at the following
addresses unless stipulated otherwise in Exhibit B:
FARMOR:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Contact: Lester Zitkus
Address: 1710 Pennsylvania Avenue
Charleston, WV 25302
Phone No: l-304-343-9566
Fax No: l-304-343-7133
FARMEE
HAY EXPLORATION, INC.
Contact: Monte Hay
Address: 4353 Willard Drive
Ashland, KY 41102
Phone No: 1-606-324-7971
Fax No: l-606-324-6340
22. EFFECT OF AGREEMENT: The terms, covenants and conditions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors or assigns. The said terms, covenants and
conditions contained herein shall be covenants running with the Farmout Acreage
covered hereby and with each transfer or assignment of said Farmout Acreage.
This Agreement is not intended to create and nothing contained herein shall be
construed to create an association, trust, joint venture, mining partnership, or
other partnership or entity of any kind, nor to constitute FARMEE the agent of
FARMOR.
23. APPLICATION OF LAWS: FARMEE agrees to abide by Equal Opportunity Rules
and Regulations along with all valid, applicable federal, state and local laws,
rules, orders and regulations of any duly constituted federal, state or local
regulatory body or authority having jurisdiction thereof and all development and
operations hereunder shall be conducted in conformity therewith. FARMEE also
warrants and agrees to conduct all activities under this Agreement in compliance
with all certificates, authorizations, permits or licenses issued to FARMEE or
FARMOR for activities to be performed hereunder.
24. PREFERENTIAL RIGHT TO PURCHASE / CONSENT TO ASSIGN: Should FARMEE
desire to sell or convey all or any part of its interest in and to this
Agreement, FARMEE shall first offer FARMOR the opportunity to purchase such
interest. If FARMOR elects to purchase the interest, the parties hereto agree to
negotiate in good faith for the purchase and sale of the interest. In the
event FARMOR elects not to purchase the interest, FARMEE shall have the right to
sell the interest to a third party, subject to the written consent of FARMOR.
FARMEE, when requesting consent, will provide the names and addresses of the
intended assignees and the interest to be assigned to each. Once the conveyance
of properties has been finalized, FARMEE must provide FARMOR with a recorded
copy of said conveyance within sixty (60) days of execution of said conveyance.
This Agreement shall ipso facto terminate upon any such conveyance being made
contrary to the provisions of the clause. In addition, should FARMEE decide to
sell any of its interest in this Agreement to any other party, it shall not be
free to do so until after securing the written consent of the FARMOR in advance
of such transaction.
7
<PAGE>
25. INDEMNIFICATION: All operations associated with and contemplated to be
conducted by FARMEE on the Farmout Acreage (or acreage pooled therewith)
shall be conducted at its sole risk and liability and at no cost to FARMOR.
FARMEE agrees to indemnify and hold FARMOR harmless from any claims, liability,
charges, or expense arising directly or indirectly out of any and all operations
conducted herewith.
26. CONFIDENTIALITY: Without FARMOR's prior written consent, FARMEE shall
not divulge any information obtained from operations hereunder to any third
party, other than to a party owning an interest under this Agreement or to a
governmental authority having jurisdiction, and only to the extent required by
such jurisdiction.
27. CONFLICT: In the event there is a conflict between the terms contained
in this Farmout Agreement and the terms contained in the Operating Agreement
attached hereto as Exhibit D, the terms of this Farmout Agreement shall be
controlling
28. ARBITRATION: On the request of any party hereto, whether made before or
after the institution of any legal proceeding, any action, dispute, claim, or
controversy of any kind now existing or hereafter arising between any of the
parties hereto in any way arising out of, pertaining to, or in connection with
this Agreement ("Dispute") shall be resolved by binding arbitration in
accordance with the terms hereof. Any party may, by summary proceedings, bring
an action in court to compel arbitration of any Dispute.
Any arbitration shall be administered by the American Arbitration
Association ("AAA") in accordance with the terms of this Section, the Commercial
Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal
Arbitration Act. Judgment on any award rendered by an arbitrator may be entered
in any court having jurisdiction.
Any arbitration shall be conducted before one (1) arbitrator. The
arbitrator shall be a practicing attorney licensed to practice in the State of
Kentucky who is knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot agree on an
arbitrator within thirty (30) days after the request for an arbitration, then
any party may request the AAA to select an arbitrator. The arbitrator may engage
engineers, accountants, or other consultants that the arbitrator deems necessary
to render a conclusion in the arbitration proceeding.
To the maximum extent practicable, an arbitration proceeding hereunder
shall be concluded within thirty (30) days of the filing of the Dispute with the
AAA. Arbitration proceedings shall be conducted in Kentucky. Arbitrators shall
be empowered to impose sanctions and to take such other actions as the
arbitrators deem necessary to the same extent a judge could impose sanctions or
take such other actions pursuant to the Federal Rules of Civil Procedure and
applicable law. At the conclusion of any arbitration proceeding, the arbitrator
shall make specific findings of fact and conclusions of law. The arbitrator
shall have the power to award recovery of all costs and fees to the prevailing
party. Each party agrees to keep all Disputes and arbitration proceedings
strictly confidential except for disclosure of information required by
applicable law.
All fees of the arbitrator and any engineer, accountant, or other
consultant engaged by the arbitrator, shall be paid by Buyer and Seller equally
unless otherwise awarded by the arbitrator.
This Agreement shall be governed and construed in accordance with the laws
of the State of Kentucky, without giving effect to any principles of conflicts
of laws. The validity of the various conveyances affecting the title to real
property shall be governed by and construed in accordance with the laws of the
jurisdiction in which such property is situated. The representations and
warranties contained in such conveyances and the remedies available because of a
breach of such representations and warranties shall be governed by and construed
in accordance with the laws of the State of Kentucky without giving effect to
the principles of conflicts of laws.
8
<PAGE>
29. EXECUTION OF AGREEMENT: This Agreement shall be null and void at the
option of FARMOR if one (1) fully executed copy is not returned to FARMOR
within fifteen (15) days from the date of execution below.
This Farmout Agreement shall supersede and replace that certain Farmout
Agreement entered into by Eastern States Oil & Gas, Inc., predecessor by name
change of FARMOR, and FARMEE dated February 10, 2000, except as to any
obligation of FARMEE to reimburse FARMOR for rental payments made prior to the
date of this Agreement.
Executed this 22 day of August, 2000.
EQUITABLE PRODUCTION - EASTERN STATES, INC. WITNESS
By: /s/ Lester A. Zitkus /s/ Michele L Weber
----------------------- -----------------------
Lester A. Zitkus
Attorney-In-Fact
Executed this 28 day of August, 2000.
HAY EXPLORATION, INC. WITNESS
By: /s/ Monte Hay /s/ Michele L Weber
----------------------- -----------------------
Monte Hay
President
9
<PAGE>
EXHIBIT B
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
DRILLING AND GEOLOGICAL REQUIREMENTS
Any well drilled pursuant to the terms and conditions hereinafter stated and of
the agreement to which this exhibit is attached, shall be located and drilled in
compliance with all federal and state laws, executive orders, rules and
regulations of any legally constituted regulatory body of the state in which
operations are being performed and any other governing body having jurisdiction
thereof.
MINIMUM COMPLETION STANDARDS
Casing shall be properly set and the well tested and such other preparations
made as necessary to conduct satisfactory tests of the showing(s). FARMEE, or
its operator, shall properly test each prospective oil or gas horizon and, upon
encountering such horizon in the drilling of any well, shall notify FARMOR when
such horizon is to be tested to allow FARMOR sufficient time to have a
representative present when such horizon is tested. FARMEE also agrees to notify
FARMOR in ample time to have a representative present when conducting electrical
wireline surveys. If the information from any electrical wireline survey, made
either before or after contract depth has been reached, and considered by itself
or in conjunction with other indications or evidence from cuttings, cores or
showings should make the formation appear promising of being a prospective oil
or gas horizon, FARMEE shall properly test such horizon if it was not adequately
tested at the time it was penetrated.
REPORTS TO BE FORWARDED TO;
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn: Lester Zitkus & Barbara Hubbard
Address: 1710 Pennsylvania Avenue
Charleston, WV 25302
Phone: l-304-343-9566
FAX: l-304-343-7133 & l-304-343-7870
o Daily drilling reports including, but not limited to, the drilling
progress, formations encountered and tops, oil or gas shows, surveys and
tests. Reports to be verbally conveyed or faxed by 10:00 am for activity
current through 8:00 am the same day.
o Well test and stimulation reports
o Well completion and recompletion reports
o Application for AGPA well category determination
o Plug and Abandon reports
o Monthly reports filed with regulatory authority
o Monthly reports of oil and gas production
REPORTS, LOGS & SAMPLES TO BE FORWARDED TO:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn: _______________________________
Address: _______________________________
Phone: _______________________________
FAX: _______________________________ (regular pages)
_______________________________ (continuous log sections)
o Daily updated mudlog pages, when drilling through intervals being
mudlogged, to be faxed by 10:00 am
o Fax copies for all open-hole logs obtained at Total Depth
o Copies of all drill stem tests, core analyses, fluid analyses,
paleontological reports and all other tests, analyses or third party
reports, if made, on wells drilled
o Samples collected no less than every ten (10) feet from base of surface
casing to total depth, if requested by FARMOR
o Representative samples of fluid recovered on formation tests
<PAGE>
Exhibit B
Page 2
o Allow FARMOR, if requested, to examine and take chips of all cores cut and
recovered from such well
o Within twenty-four (24) hours (exclusive of weekends and holidays)
after completion of the logging, supply FARMOR with one (1) large-scale
copy of a bulk density log to the total depth of the hole and of a
resistivity log through all formations of interest
o Upon completion of any well drilled hereunder, FARMEE shall furnish FARMOR
with four (4) copies of all final wireline logs including, but not limited
to, the following:
<TABLE>
<CAPTION>
Log From (Depth) To (Depth) Scale
--- ------------ ---------- -----
<S> <C> <C> <C>
Gamma Ray Total Depth Surface 2" = 100'
Gamma Ray Density Total Depth Base Intermediate 5" = 100'
Induction-Caliper Casing
</TABLE>
o Upon FARMOR request, agree to make the hole available to FARMOR before
running production casing, and at FARMOR'S expense (including cost of
service and rig time), for its exclusive use in taking sidewall cores or
running a photo-electric (PE) survey, a velocity survey or a dipmeter
survey if FARMEE declines to run same
OTHER INFORMATION:
Upon request by FARMOR, furnish such additional information as it may reasonably
require relative to any phase of the operations conducted pursuant to this
Agreement. FARMOR shall have access to and copies of any and all geophysical
data or seismic surveys that are conducted on or across the lease acreage during
the term of this Agreement. FARMOR shall have free access during customary
business hours to all records relative to such operations.
<PAGE>
EXHIBIT C
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
INSURANCE
FARMEE shall provide, at its expense and in its name, and maintain in full force
and effect at all times during which operations are conducted by FARMEE on the
Farmout Acreage, insurance by a duly licensed insurance company or companies of
the kinds and in the minimum amounts as set forth below.
Prior to beginning any operations on the Farmout Acreage, FARMEE shall furnish
certificates of insurance by FARMEE's insurers in a form satisfactory to FARMOR
under all such policies as evidence that all such insurance is carried, and
providing that not less than ten (10) days prior, written notice of material
change in or cancellation of such insurance, or any part thereof, will be given
to FARMOR.
o Workmen's Compensation and Employer's Liability
FARMEE shall provide insurance covering FARMEE's employees engaged in
operations on the lands subject to this Agreement in compliance with the laws of
the state in which said lands are situated and Employers Liability Insurance of
not less than $1,000,000.00 for injuries or death to any one employee and
$1OO,OOO.OO for injuries or death of more than one employee resulting from any
one accident;
o General Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted
by FARMEE hereunder with bodily injury and death limit of not less than
$100,000.00 for injuries to or death of any one person resulting from any one
accident, not less than $300,000.00 for injuries or death of more than one
person resulting from any one accident, and property damage limit of not less
than $100,000.00 per accident; $300,000.00 aggregate. Provided further than
such property damage insurance shall not exclude FARMOR's liability for loss of
or damage to property of or above the surface of the earth arising from a
blowout or cratering of a gas well or an oil well; and,
o Automobile Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted
by FARMEE hereunder (including coverage on owned and non-owned automobile
equipment) with bodily injury or death limit of not less than $100,000.00 for
injuries to or death of more than one person resulting from any one accident,
and property damage limit of not less than $25,000.00 per accident.
<PAGE>
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
EXHIBIT D
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
OPERATING AGREEMENT
DATED
, 2000 ,
------------------- -------
year
OPERATOR HAY EXPLORATION, INC.
----------------------------------------------------------------------
CONTRACT AREA BURKE PROSPECT - AREA OF INTEREST
----------------------------------------------------------------
CONTAINING 4,500 GROSS ACRES, MORE OR LESS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COUNTY OR PARISH OF ELLIOTT , STATE OF KENTUCKY
----------- ----------------------
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
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
------- ----- -----
<S> <C> <C>
I. DEFINITIONS 1
II. EXHIBITS 1
III. INTERESTS OF PARTIES 2
A. OIL AND GAS INTERESTS: 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: 2
C. SUBSEQUENTLY CREATED INTERESTS: 2
IV. TITLES 2
A. TITLE EXAMINATION: 2
B. LOSS OR FAILURE OF TITLE: 3
1. Failure of Title 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due 3
3. Other Losses 3
4. Curing Title 3
V. OPERATOR 4
A. DESIGNATION AND RESPONSlBILITIES OF OPERATOR: 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: 4
I. Resignation or Removal of Operator 4
2. Selection of Successor Operator 4
3. Effect of Bankruptcy 4
C. EMPLOYEES AND CONTRACTORS: 4
D. RIGHTS AND DUTIES OF OPERATOR: 4
1. Competitive Rates and Use of Affiliates 4
2. Discharge of Joint Account Obligations 4
3. Protection from Liens 4
4. Custody of Funds 5
5. Access to Contract Area and Records 5
6 Filing and Furnishing Governmental Reports 5
7: Drilling and Testing Operations 5
8. Cost Estimates 5
9. Insurance 5
VI. DRILLING AND DEVELOPMENT 5
A. INITIAL WELL: 5
B. SUBSEQUENT OPERATIONS: 5
1. Proposed Operations 5
2. Operations by Less Than All Parties 6
3. Stand-By Costs 7
4. Deepening 8
5. Sidetracking 8
6. Order of Preference of Operations 8
7. Conformity to Spacing Pattern 9
8. Paying Wells 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: 9
1. Completion 9
2. Rework, Recomplete or Plug Back 9
D. OTHER OPERATIONS: 9
E. ABANDONMENT OF WELLS: 9
1. Abandonment of Dry Holes 9
2. Abandonment of Wells That Have Produced 10
3. Abandonment of Non-Consent Operations 10
F. TERMINATION OF OPERATIONS: 10
G. TAKING PRODUCTION IN KIND: 1O
(Option 1) Gas Balancing Agreement 1O
(Option 2) No Gas Balancing Agreement 11
VII. EXPENDITURES AND LIABILITY OF PARTIES 11
A. LIABILITY OF PARTIES: 11
B. LIENS AND SECURITY INTERESTS: 11
C. ADVANCES: 12
D. DEFAULTS AND REMEDIES: 12
1. Suspension of Rights 13
2. Suit for Damages 13
3. Deemed Non-Consent 13
4. Advance Payment 13
5. Costs and Attorneys' Fees 13
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: 13
F. TAXES 13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST 14
A. SURRENDER OF LEASES: 14
B. RENEWAL OR EXTENSION OF LEASES: 14
C. ACREAGE OR CASH CONTRIBUTIONS: 14
</TABLE>
i
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
------- ----- -----
<S> <C> <C>
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: 15
E. WAIVER OF RIGHTS TO PARTITION: 15
F. PREFERENTIAL RIGHT TO PURCHASE: 15
IX. INTERNAL REVENUE CODE ELECTION 15
X. CLAIMS AND LAWSUITS 15
XI. FORCE MAJEURE 16
XII. NOTICES 16
XIII. TERM OF AGREEMENT 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS 16
A. LAWS, REGULATIONS AND ORDERS: 16
B. GOVERNING LAW: 16
C. REGULATORY AGENCIES: 16
XV. MISCELLANEOUS 17
A. EXECUTION: 17
B. SUCCESSORS AND ASSIGNS: 17
C. COUNTERPARTS: 17
D. SEVERABILITY: 17
XVI. OTHER PROVISIONS 17
</TABLE>
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<PAGE>
A.A.P.L. FORM 61 MODEL FORM OPERATING AGREEMENT -- 1989
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between HAY EXPLORATION, 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 1.
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 as 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.
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" and "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 terms "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 front 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.
S. The term "Paying Quantities" shall mean, with respect to any well,
quantities of Oil and/or Gas production, the revenues attributable to which,
after deducting the lessor's royalty burden on such production, exceed the
well's operating expenses (not including drilling or other capital costs),
regardless of how small the margin, over a small period of time, not to exceed
12 consecutive months.
T. The term "Commercial Quantities" shall mean, with respect to any well,
quantities of Oil and/or Gas production, the revenues attributable to which,
after deducting all burdens on such production, including without limitation,
the lessor's royalty burden, overriding royalties, and production payment, make
the well profitable, taking into account the total costs associated with the
well over its entire life, including, without limitation, drilling costs and
other capital costs and operating expenses.
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. It shall also mean legal entities such as corporations,
partnerships, joint ventures, sole proprietorships, etc.
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.
B. Exhibit "B," Form of Lease.
---
X C. Exhibit "C," Accounting Procedure.
---
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A.A.P.L. FORM 61 MODEL FORM OPERATING AGREEMENT -- 1989
X D. Exhibit "D," Insurance.
---
X E. Exhibit "E," Gas Balancing Agreement.
---
X F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
--- Facilities.
G. Exhibit "G," Tax Partnership.
---
X H. Other: Well Information Requirements.
---
- 2 -
<PAGE>
If any provision or 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.
ARTICLE III.
INTEREST OF PARTIES
B. INTEREST 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 Contact 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 Contact 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.
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
interest in said Leaseholds shall be deemed separate leasehold interests for the
purpose 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."
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 Subsequent Created
Interest.
ARTICLE IV.
TITLES
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 Driling 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 interest 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.
Operator 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
communization 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."
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT T- 1989
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
3. LOSSES: All loses of Leases or Interests committed to this agreement,
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.
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<PAGE>
A.A.P.L. FORM 610 MODEL FORM OPERATING AGREEMENT -- 1989
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
HAY EXPLORATION, 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. *Good Cause shall mean the failure or refusal on the part of the
Operator to carry out its duties hereunder as acts or omissions committed by
Operator that constitute gross negligence or willful misconduct.
Subject to Article VII.D.I., 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 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". In the event Operator plans to file for
bankruptcy, Operator agrees to notify all Non-Operators by mail at least ten
(10) days in advance of that filing. Failure of Operator to so notify the
Non-Operators as stated above shall cause this agreement to automatically
terminate.
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 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, the cost of which shall be billed
to the Joint Account, shall be performed or supplied at competitive rates.
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.
3. Protection from Liens: Operator shall pay, or cause to be paid, as and
when they become due and payable, all accounts
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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
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<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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. Nothing in this paragraph shall require the
maintenance by Operator of separate accounts for the funds of Non-Operators and
Operator shall have the right to comingle such funds with its own funds.
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.
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
party 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
B. Subsequent Operations:
1. Proposed Operations: If any party hereto should desire to drill any well
on the Contract Area, 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 by AFE of the proposed operation to the
parties who have not otherwise relinquished their interest in such objective
Zone
<PAGE>
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.
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) Relinguishment 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,
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREMENT - 1989
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.I. 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) 100% 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) 300% 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.
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 300% 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.
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,
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A.A.P.L. FORM 610 MODEL FORM OPERATING AGREEMENT - 1989
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"
beans 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 operating 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 Non-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.
(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, than 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-Content 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: No party may participate in a proposed Sidetracking
operation that does not own an interest in the affected wellbore.
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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
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 Sidetrack shall include:
[ ] 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.
[X] 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 in 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 Part 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
participate 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 Plugged 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.
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Ten Thousand Dollars ($10,000.00) 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.
Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project costing in excess of Ten Thousand Dollars
($10,000.00). 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 Article VI.B.1. or VI.C.1. Option No. 2,
which shall be governed exclusively by 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 51% of the interest 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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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 and is capable of producing, even if such well has never in fact
produced, 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.
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 an 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 to 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
Contracts 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 the 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 51% 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:
[ X ] OPTION NO. 1: GAS BALANCING AGREEMENT ATTACHED
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
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MODEL A.A.P.L. FORM 610 - DEL FORM OPERATING AGREEMENT - 1989
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 proportionate 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.
[ ] 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.
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 the 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.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
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.
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
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
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 pursuant to the terms of the Farmout
Agreement to which this Operating Agreement is attached. 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.
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."
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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.
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. NEW, RENEWAL OR EXTENSION OF LEASES:
THE TERMS OF THIS PARAGRAPH ARE GOVERNED BY THE TERMS AS CONTAINED IN THE
FARMOUT AGREEMENT TO WHICH THIS OPERATING AGREEMENT IS ATTACHED.
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.
- 14 -
<PAGE>
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.
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.) THE TERMS OF THIS PARAGRAPH ARE GOVERNED
BY THE TERMS AS CONTAINED IN THE FARMOUT AGREEMENT TO WHICH THIS OPERATING
AGREEMENT IS ATTACHED.
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 I, 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 SS. 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 I, 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 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 at 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.
- 15 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
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 particular concerning it; thereupon, the obligations of the party giving
the notice, so for 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.
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 to 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.
[ ] 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.
[X] 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 90 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 90 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.
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
Kentucky 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
-16-
<PAGE>
orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on
targeting 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 owning 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.
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
A. In the event there is a conflict between any provision of this Article XVI
and any provision contained within that farmout agreement to which this
agreement is attached, the provisions of the farmout agreement shall be
controlling.
B. If any provision of this agreement is declared to be unlawful or
unenforceable by a court of competent jurisdiction, this agreement shall be
deemed to be amended, as of the effective date of this agreement, to delete
the unlawful or unenforceable provision, and this agreements shall
nevertheless remain binding as so amended. If such court's ruling is
subsequently reversed or set aside by such court or by a higher court, this
agreement shall be deemed to be amended, as of the effective date of this
agreement, to reinstate such provision, and this agreement shall be deemed
binding as so amended.
C. PRIORITY OF OPERATIONS:
Whenever there is more than one proposal in connection with any well subject
to this agreement, such proposal shall be considered and disposed of in the
following order of priority:
1. Drilling the well to its authorized depth or attempting a completion
including testing and logging of such well at such depth shall have first
priority over all operations and proposals;
2. A proposal to plug back a well shall prevail over a proposal to deepen
or to sidetrack such well; if there is more than one proposal to plug
back, the proposal to plug back to the next deepest prospective interval
shall have priority over proposal(s) to plug back to shallower prospective
intervals;
3. A proposal to sidetrack a well in order to reach the authorized depth
shall prevail over a proposal to deepen;
4. A proposal to deepen a well shall have last priority;
5. Proposals of the same type and to the same depth shall be given
precedence in the order in which they were made.
d. LIMITATION ON WELL PROPOSALS
Notwithstanding anything in this Agreement in the contrary, no more than one
(1) well may be proposed for drilling, reworking, deepening or plugging back
at any single time, and, until the preceding has been completed, no
subsequent operation may be proposed under this agreement; provided,
however, that this provision shall not apply to obligatory operations
provided for herein.
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<PAGE>
A.A.P.L. FORM 610 MODEL FORM OPERATING AGREEMENT -- 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the ______ day
of ____________, 2000.
EQUITABLE PRODUCTION - EASTERN STATES INC., who has prepared and circulated
this form for execution, represents and warrants that the form was printed from
and, with the exception listed below, is identical to the AAPL Form 610-1989
Model Form Operating Agreement, as published in computerized form by Forms
On-A-Disk, Inc. No changes, alterations, or modifications, other than those
made by strikethrough and/or type-over and that are clearly recognizable have
been made to the form.
<TABLE>
<S> <C>
WITNESS: OPERATOR
HAY EXPLORATION, INC. _____________
______________________________ By ________________________________
______________________________ MONTE HAY _________________________
Type or print name
Title - PRESIDENT _________________
Date ______________________________
Tax ID or S.S. No. ________________
NON-OPERATORS
EQUITABLE PRODUCTION - EASTERN STATES, INC. ____________
______________________________ By ________________________________
______________________________ LESTER A. ZITKUS __________________
Type or print name
Title - ATTORNEY-IN-FACT __________
Date ______________________________
Tax ID or S.S. No. ________________
</TABLE>
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<PAGE>
A.A.P.L. FORM 610 MODEL FORM OPERATING AGREEMENT -- 1989
- 19 -
<PAGE>
EXHIBIT A
To Operating Agreement dated _________________________, 2000
1. DESCRIPTION OF LANDS SUBJECT TO THIS AGREEMENT
The Contract Area shall be the lands described in and covered by that Farmout
Agreement dated August 22, 2000, to which this agreement is attached as
Exhibit D.
2. RESTRICTIONS AS TO DEPTHS, FORMATIONS, OR SUBSTANCES
This agreement is limited to the depths and formations as specified in that
Farmout Agreement dated August 22, 2000, to which this agreement is attached
as Exhibit D.
3. PARTIES TO AGREEMENT WITH ADDRESS, TELEPHONE AND FAX NUMBERS
Equitable Production -- Eastern States, Inc. Phone: 1-304-343-9566
Attn: Lester A. Zitkus FAX: 1-304-343-7133
1710 Pennsylvania Avenue
Charleston, WV 25302
Hay Exploration, Inc. Phone: 1-606-324-7971
Attn: Monte Hay FAX: 1-606-324-6340
4353 Willard Drive
Ashland, KY 41102
4. PERCENTAGE OR FRACTIONAL INTERESTS SUBJECT TO THIS AGREEMENT
The interest of the Parties is set out in the Farmout Agreement, to which this
agreement is attached as Exhibit D.
5. OIL AND GAS LEASES SUBJECT TO THIS AGREEMENT
All properties identified on Exhibit A to the Farmout Agreement, to which this
agreement is attached as Exhibit D.
6. BURDENS ON PRODUCTION
None
<PAGE>
Kraftbilt 601-95 Box 800 TULSA, OK 74101
Council of Petroleum Accountants Societies COPAS
EXHIBIT "C"
Attached to and made a part of that certain Operations Agreement dated
___________, 2000 between Hay Exploration, Inc. and Equitable Production -
Eastern States, Inc.
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 activities required to handle specific
operating conditions and problems for the exploration, development,
production, protection, maintenance, abandonment, and restoration 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 that are to be
shared by the Parties.
"Operator" shall mean the Party designated to conduct the Joint Operations.
"Non-Operator" shall mean the Parties to this agreement other than the
Operator.
"Material" shall mean personal property, equipment, supplies, or
consumables acquired or held for use on the Joint Property.
"Controllable Material" shall mean Material that at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies (COPAS).
"Parties" shall mean legal entities signatory to the agreement, or their
successors or assigns, to which this Accounting Procedure is attached.
"Affiliate" shall mean, with respect to the Operator, any party directly
or indirectly controlling, controlled by, or under common control with the
Operator.
2. STATEMENTS AND BILLINGS
The Operator shall bill Non-Operators on or before the last day of the
month for their proportionate share of the Joint Account for the preceding
month. Such bills shall be accompanied by statements that identify the
authority for expenditure, lease or facility, and all charges and credits
summarized by appropriate categories of investment and expense.
Controllable Material shall be summarized by major Material
classifications, Intangible drilling costs and audit exceptions shall be
separately and clearly identified.
3. ADVANCES AND PAYMENTS BY NON-OPERATORS
A. If gross expenditures for the Joint Account are expected to exceed
$5,000.00 in the next succeeding month's operations, the Operator may
require the Non-Operators to advance their share of the estimated
cash outlay for the month's operations. Unless otherwise provided in
the agreement, any billing for such advance shall be payable within
15 days after receipt of the advance request or by the first day of
the month for which the advance is required, whichever is later. The
Operator shall adjust each monthly billing to reflect advances
received from the Non-Operator for such month.
B. Each Non-Operator shall pay its proportion of all bills within 15
days of receipt date. If payment is not made within such time, the
unpaid balance shall bear interest compounded monthly using the U.S.
Treasury three-month discount rate plus 3% in effect on the first day
of the month for each month that the payment is delinquent 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. Interest shall
begin accruing on the first day of the month in which the payment was
due.
4. ADJUSTMENTS
A. Payment of any such bills shall not prejudice the right of any
Non-Operator to protest or question the correctness thereof; however,
all bills and statements (including payout status statements) related
to expenditures rendered to Non-Operators by the Operator during any
calendar year shall conclusively be presumed to be true and correct
after 24 months following the end of any such calendar year, unless
within the said period a Non-Operator takes specific detailed written
exception thereto and makes claim on the Operator for adjustment.
Copyright (C) 1995 by the Council of Petroleum Accountants Societies.
1
<PAGE>
B. All adjustments initiated by the Operator except those described in (1)
through (4) below are limited to the 24-month period following the end of
the calendar year in which the original charge appeared or should have
appeared on the Joint Account statement or payout status statement.
Adjustments made beyond the 24-month period are limited to the following:
(1) a physical inventory of Controllable Material as provided for in
Section VII
(2) an offsetting entry (whether in whole or in part), which is the direct
result of a specific joint interest audit exception granted by the Operator
relating to another property
(3) a government/regulatory audit
(4) working interest ownership adjustments
5. EXPENDITURE AUDITS
A. A Non-Operator, upon notice in writing to the Operator and other
Non-Operators, shall have the right to audit the Operator's accounts and
records relating to the Joint Account for any calendar year within the
24-month period following the end of such calendar year; however,
conducting an audit shall not extend the time for the taking of written
exception to and the adjustment of accounts as provided for in Paragraph 4
of this Section 1. Where there are two or more Non-Operators, the
Non-Operators shall make every reasonable effort to conduct a joint audit
in a manner that will result in a minimum of inconvenience to the Operator.
The 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
the Operator, except upon the resignation or removal of the Operator, and
shall be made at the expense of those Non-Operators approving such audit.
The lead audit company's audit report shall be issued within 180 days after
completion of the audit field work; however, the 180-day time period shall
not extend the 24-month requirement for taking specific detailed written
exception as required in Paragraph 4.A. above. All claims shall be
supported with sufficient documentation. Failure to issue the report within
the prescribed time will preclude the Non-Operator from taking exception to
any charge billed within the time period audited.
A timely filed audit report or any timely submitted response thereto shall
suspend the running of any applicable statute of limitations regarding
claims made in the audit report. While any audit claim is being resolved,
the applicable statute of limitations will be suspended; however, the
failure to comply with the deadlines provided herein shall cause the
statute to commence running again.
B. The Operator shall allow or deny all exceptions in writing to an audit
report within 180 days after receipt of such report. Denied exceptions
should be accompanied by a substantive response. Failure to respond to an
exception with substantive information on denials within the time provided
will result in the Operator paying interest on that exception, if
ultimately granted, from the date of the audit report. The interest charged
shall be calculated in the same manner as used in Section 1, Paragraph 3.B.
C. The lead audit company shall reply to the Operator's response to an
audit report within 90 days of receipt, and the Operator shall reply to
the lead audit company's follow-up response within 90 days of receipt. If
the lead audit company does not provide a substantive response to an
exception within 90 days, that unresolved audit exception will be
disallowed. If the Operator does not provide a substantive response to the
lead auditor's follow-up response within 90 days, that unresolved audit
exception will be allowed and credit given the Joint Account.
D. The lead audit company or Operator may call an audit resolution
conference for the purpose of resolving audit issues/exceptions that are
outstanding at least 18 months after the date of the audit report. The
meeting will require one month's written notice to the Operator and all
audit participants, be held at the Operator's office or other mutually
agreed upon location, and require the attendance of representatives of the
Operator and each audit participant responsible for the area(s) in which
the exceptions are based and who have authority to resolve issues on behalf
of their company. Any Party who fails to attend the resolution conference
shall be bound by any resolution reached at the conference. The lead audit
company will coordinate the response/position of the Non-Operators and
continue to maintain its traditional role throughout the audit resolution
process.
Attendees will make good faith efforts to resolve outstanding issues, and
each Party will be required to present substantive information supporting
its position. An audit resolution conference may be held as often as agreed
to by the Parties. Issues unresolved at one conference can be discussed at
subsequent conferences until each such issue is resolved.
6. AFFILIATES
Charges to the Joint Account for any services or Materials provided by an
Affiliate shall not exceed average commercial rates for such services or
Materials.
Unless otherwise indicated below, Affiliates performing services or providing
Materials for Joint Operations shall provide the Operator with written agreement
to make their records relating to the work performed for the Joint Account
available for audit upon request by a Non-Operator under this Accounting
Procedure. These records shall include, but not be limited to, invoices, field
work tickets, equipment use records, employee time reports, and payroll
summaries relating to the work performed for the Joint Account. All audits will
be conducted pursuant to Section 1, Paragraph 5.
2
<PAGE>
EXHIBIT "H"
TO OPERATING AGREEMENT DATED ____________________, 2000.
WELL INFORMATION REQUIREMENTS
NOTIFICATIONS
Non-Operator(s) will be notified of the following operational activities:
a) Intent to spud - 48 hours before drilling operations commence
b) Logging, coring or drill stem testing - 24 hours prior to commencement
c) Casing point elections - As per Operating Agreement
REGULATORY INFORMATION
One copy of all regulatory filings submitted to any state or federal agency will
be forwarded to Non-Operator(s) by US Mail at the time they are submitted. These
data will include, but are not limited to the following:
a) drilling/completion permit
b) survey/location plat
c) daily drilling/completion report
d) completion reports/monthly production data
e) MWD logging data
f) directional survey data
Two copies of all field prints and three copies of all final prints of the
following data will be provided to Non-Operator(s) as soon as it becomes
available to the operator:
a) open hole logs/surveys
b) geological prognosis (prior to spud)
c) DST, formation test data
d) core description/analyses
e) velocity or seismic surveys
f) bottom hole pressure or production tests
g) PVT analyses; oil, gas, water analyses
h) computed logs (if routinely performed)
Upon written request prior to spud, the Operator will acquire drill cuttings as
specified by Non-Operator(s). Samples of said cuttings will be kept on location
until drilling operations are completed.
Non-Operator(s), or its authorized representatives, shall, at times and at their
own risk, have access to the derrick floor, and to any and all information
obtained or acquired in the course of, or as a result of drilling any well
subject to this agreement.
When drilling on air, operator will take gas checks, in accordance with current
industry practices, within 100 feet after drilling through any formation known
to be productive of oil or gas within a two-mile radius of the drilling
location. All other gas shows encountered during drilling process will be gauged
immediately.
The minimum logging suite will consist of resistivity, bulk density, neutron
porosity, gamma ray, and temperature (air holes only) from base of surface
casing to TD. Detail logs will be acquired over zones of interest at the request
of Non-Operator(s).
COMMUNICATIONS
The correspondence and data transmission required herein will be directed as
follows:
Mailing Address: Equitable Production - Eastern States, Inc.
Attn: Lester A. Zitkus
17 10 Pennsylvania Avenue
Charleston, WV 25302
Telephone: (304) 343-9566 (office)
FAX: ( ) _______ (fax for regulatory and geological items)
FAX: ( ) _______ (fax for continuous feed for logs)
<PAGE>
EXHIBIT A3
FARMOUT AGREEMENT
BURKE PROSPECT AREA OF INTEREST
ELLIOTT COUNTY, KENTUCKY
THIS AGREEMENT, made and entered into this, 22 day of August by and between
EQUITABLE PRODUCTION - EASTERN STATES, INC., with an address of 1710
Pennsylvania Avenue, Charleston, West Virginia, 25302, hereinafter referred to
as FARMOR, and HAY EXPLORATION, INC., with an address of 4353 Willard Drive,
Ashland, Kentucky, 41102, hereinafter referred to as FARMEE,
WITNESSETH THAT:
WHEREAS, FARMOR is the owner of certain leasehold rights in the Oil and Gas
Leases that are depicted on Exhibit A, estimated to contain 4,500 gross acres,
more or less, located in Elliott County, Kentucky, attached hereto and by
reference made a part hereof; and
WHEREAS, FARMOR has agreed to farmout the Oil and Gas Leases or portions
thereof as shown on Exhibit A to FARMOR subject to the terms and conditions
contained herein; and
WHEREAS, the parties hereto wish to establish a contract area within which
such leases are located. FARMEE shall operate said contract area which shall be
identified as the AREA OF INTEREST (AOI). Such AOI shall be all of the land area
and leaseholds situate within the Carter Coordinate Sections depicted on Exhibit
A. The AOI shall further be defined as all existing leases and lands and future
leases and lands that fall within the following Carter Coordinates:
<Table>
<Caption>
Carter Coordinate Sections
----------------- --------
<S> <C>
T-77 11 (S/2) & 20
T-78 l(W/2), 2, 3, 4, 7, 8, 9 l0(W/2), ll(W/2), 12, 13,
14, 15(S/2), 16, 17, 18 & 19
U-78 2l(SW/4), 22(S/2) & 23(S/2)
</Table>
All of the lease and lands within such AOI shall hereinafter be known as
the Farmout Acreage.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, it is agreed by and between the parties hereto as follows:
1. TITLES: FARMOR does not warrant the title to the Farmout Acreage but
it shall, upon request, make available to FARMEE for review, such abstracts and
all other pertinent title documents, without warranty or liability, as it has in
its files. There shall be no obligation on the part of FARMOR to secure new or
supplemental abstracts nor secure any curative instruments in connection with
the title to the Farmout Acreage. Furthermore, FARMEE shall promptly furnish to
FARMOR free of all costs, copies of all abstracts or title opinions FARMEE
acquires on the Farmout Acreage.
2. PRIOR TO DRILLING: Prior to the date that any well is commenced under
this Agreement, FARMEE shall furnish FARMOR with 1) a copy of the related
drilling permit, 2) its accompanying location plat 3) copies of title opinions
and curative if needed and 4) copies of any state regulatory proceedings if
applicable. FARMEE shall also inform FARMOR 1) when the location for said well
is staked, 2) when the material for the drilling thereof is moved to the
location, 3) of the expected time of spud [at least twenty-four (24) hours in
advance of such spud] and 4) when the well is actually spud. After actual
drilling has been commenced, FARMEE shall furnish FARMOR with drilling and
geological information as more fully set forth in Exhibit "B", attached hereto
and by reference made a part hereof.
<PAGE>
3. EXPLORATORY DEEP WELL: FARMEE agrees to spud an Exploratory Deep Well
to a depth sufficient to penetrate the Tomstown Carbonate bed near the base of
the Rome sequence (Contract Depth), in search of oil and/or gas on or before six
(6) months after the completion date of the exploratory deep well FARMEE is
obligated to drill under that certain Farmout Agreement dated August 22, and
referred to as the "Carter Prospect Farmout Agreement". The Exploratory Deep
Well shall be drilled at a legal location of FARMEE's choice on Farmout Acreage.
FARMEE shall complete the drilling of the Exploratory Deep Well within sixty
(60) days after commencement, and shall operate with due diligence and in a good
and workmanlike manner in the conduct of the operations.
The Exploratory Deep Well to be drilled by FARMEE as hereinabove provided,
as well as all operations incident thereto, shall be at the sole risk, cost and
expense of FARMEE. FARMOR shall not be subject to any obligation or liability
whatsoever in connection therewith, however, FARMOR shall own a 7.5% Carried
Working Interest, (as defined below), through Completion (as defined below) of
said Exploratory Deep Well. For the purposes of this Agreement, a Carried
Working Interest shall be defined as a cost-free Working Interest in which the
FARMEE shall bear FARMOR's proportionate share of costs and expenses. The term
Completion shall be defined as such time when a well has been completed, turned
in line and any commercial hydrocarbon is flowing to the gathering line or to
the tanks.
If the Exploratory Deep Well proves to be capable of producing oil or gas
in commercial quantities at Contract Depth, it shall be equipped for production
by FARMEE in a diligent and workmanlike manner.
If the Exploratory Deep Well does not encounter commercially producible
quantities of hydrocarbons at Contract Depth, but encounters potentially
commercial quantities of hydrocarbons at some shallower depth, FARMEE shall have
the option, but not the obligation, to test and thereafter complete the well if
it proves capable of producing commercial quantities of gas at such shallower
depth.
If the Exploratory Deep Well proves to be incapable of producing oil or gas
in commercial quantities at Contract Depth or at any shallower depth, FARMEE
shall plug and abandon said well(s), within ninety (90) days after commencement
of same, in accordance with the rules and regulations of any regulatory body
having jurisdiction, but not until FARMOR has had the option to take over the
well, as more fully described herein FARMEE shall be responsible for restoring
the premises to its original condition as nearly as practicable and settle and
dispose of all claims for damage to the surface of the Farmout Acreage.
FARMEE shall independently undertake to secure any and all rights of access
and surface rights at the drillsite location and along all of its proposed
pipeline right of ways upon the Farmout Acreage. FARMEE additionally agrees to
hold harmless FARMOR from any claims for damage or negligence that may arise as
a result of FARMEE's conduct of operations upon any severed mineral tracts upon
the Farmout Acreage.
FARMEE agrees to indemnify and hold harmless FARMOR from any claim(s) or
lien(s) asserted by any person or persons as a direct or indirect result of
FARMEE's operations and to pay promptly all invoices for labor, materials and
other items as they occur. FARMEE agrees to carry, or require any contractor to
carry, insurance as more fully set forth on Exhibit "C".
4. SUBSTITUTE WELL: In the event the Exploratory Deep Well, while being
drilled to Contract Depth, encounters impenetrable substances or other hole
conditions which make further drilling impractical, FARMEE may discontinue
drilling the Exploratory Deep Well before the Contract Depth requirement
therefor is satisfied. In such event, FARMEE shall have the right, but not the
obligation, to drill another well ("Substitute Well") at a location of FARMEE's
choice on the Farmout Acreage, provided the actual drilling of said Substitute
Well is commenced not later than sixty (60) days after operations cease on the
Exploratory Deep Well and such Substitute Well is drilled
2
<PAGE>
within the same unit as for the Exploratory Deep Well. Such Substitute Well
shall be drilled in the manner and to the depth specified for the Exploratory
Deep Well it is to replace and must be drilled with due diligence. If a
Substitute Well is commenced, drilled, and completed as herein provided, it
shall be deemed for the purposes of this Agreement to be the Exploratory Deep
Well to the same extent as if the Exploratory Deep Well had been commenced,
drilled, and completed in accordance herewith.
5. SUBSEQUENT WELLS: By virtue of drilling the Exploratory Deep Well
and/or Substitute Well to Contract Depth as hereinbefore specified, FARMEE shall
earn the right and option to drill Subsequent Wells within the AOI on the
Farmout Acreage provided no more than nine (9) months elapse between the release
of the drilling rig on the previous well and the spudding of a Subsequent Well
on the Farmout Acreage.
If the Exploratory Deep Well was drilled and completed in a formation
shallower than Contract Depth, FARMEE shall drill Subsequent Wells to test
Contract Depth. However, if FARMEE wishes to drill and complete Subsequent Wells
targeting formations shallower than Contract Depth, prior written consent of
FARMOR is required.
Any time after the Exploratory Deep Well has been drilled, Subsequent Wells
may be proposed by either FARMOR or FARMEE on the Farmout Acreage subject to and
under the same terms and conditions and time constraints as for the Exploratory
Deep Well and in accordance with the provisions of Article V1.B. of Exhibit "D"
attached hereto. If such Subsequent Wells are drilled in compliance with this
Agreement (and Exhibit "D"), and result in a well(s) capable of producing oil
and/or gas, FARMEE shall earn assignments of leasehold rights in the manner and
under the same terms and conditions as provided for herein under Provision 13.
In the event such Subsequent Well(s) are completed as dry holes or wells which
did not reach Contract Depth, the time between wells will be limited to the time
constraints governing the Substitute Wells as provided above. Failure by FARMEE
to continuously drill the Farmout Acreage as provided herein will result in
FARMEE forfeiting the right to further develop the Farmout Lands and to earn
further Assignments under this Agreement and a reversion to FARMOR of all
Farmout Acreage not previously earned by FARMEE pursuant to this Agreement shall
automatically occur.
6. PARTICIPATION RIGHTS: FARMOR reserves the right and option to
participate for a 30% Working Interest in each Subsequent Well proposed within
the AOI. FARMOR shall notify FARMEE by AFE and Well Location Plat, at least
thirty (30) days prior to the spudding of any Subsequent Well, and FARMOR shall
have thirty (30) days after receipt of such notice to make its participation
election in the subject well(s). The joint participation in the drilling and
completion of each such well shall be subject to the terms of that certain
Operating Agreement attached hereto as Exhibit "D". FARMOR shall have the right
to operate any wells in which FARMOR elects to participate. If FARMOR elects to
operate any wells, FARMOR shall be subject to the same terms and conditions as
contained in Exhibit D, attached hereto, attributable to Operator therein.
If FARMOR elects not to participate in a Subsequent Well, FARMOR shall,
through completion and turn in line through tanks, retain a 7.5% Carried Working
Interest in each such well.
7. OPTION TO TAKE OVER WELLS: If at any time FARMEE desires to plug and
abandon any well drilled on the Farmout Acreage, FARMEE shall notify FARMOR in
writing. FARMOR shall have ten (10) days after receipt of such notice within
which to advise FARMEE in writing whether or not FARMOR elects to take over
operations as to said well for such further operations as it may wish to
conduct; provided, however, if a rig is on location, then FARMOR shall have
forty-eight (48) hours (exclusive of Saturdays, Sundays, and holidays) within
which to advise of such election. The time allowed for FARMOR's election shall
not commence until FARMEE has properly notified FARMOR that FARMEE intends to
plug and abandon such well and copies of all logs of prospective pay sections in
such well, together with all other
3
<PAGE>
information required herein, have been received by FARMOR. Failure of FARMOR to
exercise the option to take over any such well as aforesaid shall be
conclusively deemed an election not to take over such well and FARMEE shall plug
and abandon such well at its sole cost, risk and expense.
In the event FARMOR elects to take over any such well, FARMEE shall
immediately assign to FARMOR such well and all materials and equipment placed
therein and thereon by FARMEE, together with any interest in the well and
production therefrom and all interest in the leases comprising the unit around
the well. FARMOR shall pay FARMEE the salvage value of any material and
equipment associated with the well, net of estimated costs of salvaging. Such
well shall be owned by FARMOR free and clear of any burdens, encumbrances, or
assignments by, through, or under FARMEE or its successors in interest. FARMEE
shall, upon request of FARMOR, execute all documents necessary or useful to
fully effectuate assignment of such well, materials, equipment, production and
leases to FARMOR. All costs and expenses in connection with such well takeover
shall be borne and paid by FARMOR. For purposes of FARMEE's earning the right to
drill another well under this Agreement, however, the well which has been taken
over shall be considered a dry hole.
8. INFORMATION CONCERNING WELLS: FARMEE shall furnish FARMOR all
information, and shall follow the procedures as described in the attached
Drilling and Geological Requirements Exhibit "B" for wells it drills on the
Farmout Acreage. All well(s) drilled on the Farmout Acreage shall be at regular
and legal locations, and shall conform to the spacing guidelines governed by the
state for wells drilled hereunder, unless otherwise agreed to by FARMOR and
FARMEE.
9. PROTECTION OF LEASES: FARMEE agrees to preserve and protect the
leasehold estate to be assigned to FARMEE hereunder, in full compliance with the
express and implied terms, conditions and covenants thereof, and give to FARMOR
the full right, if it so desires, to enforce all of the terms and conditions of
said lease(s), both express and implied, either alone or in conjunction with the
mineral owners FARMEE agrees to protect and preserve said estate from any and
all liens, judgments and any other claims whatsoever. Should FARMEE fail to
comply with any of the terms and provisions of this paragraph, it will be
subject to the default provisions contained herein.
10. FUTURE PURCHASE OF LEASES: It is contemplated by both FARMOR and
FARMEE that additional oil and gas leasing will be necessary from time to time
in order to secure sufficient leasehold portions to comprise drilling units. In
the event leasing becomes necessary, FARMEE shall be solely responsible for all
such leasing activity and the costs related thereto. Any such leases acquired by
FARMEE will be owned 100% by FARMEE.
11. SURRENDER, EXPIRATION OR ABANDONMENT: In the event FARMEE, or its
successors or assigns, after having earned an assignment under this Agreement,
desires to surrender, let expire or abandon all or any portion of the Farmout
Acreage, FARMEE agrees to give FARMOR at least sixty (60) days notice in writing
of its intention to so surrender, let expire or abandon and shall, if requested
to do so by FARMOR, reassign said Farmout Acreage insofar as it covers the
portion being surrendered, expiring or abandoned to FARMOR free of any
encumbrances suffered by, through or under FARMEE, in which event FARMOR shall
have the option if it so desires to purchase any casing and other equipment in
any well or wells that may be situated thereon at the prevailing market price
for second hand material of like quality and kind.
12. LEASE DELAY RENTAL PAYMENTS: In the event delay rental payments are
necessary to maintain all or a part of the leases comprising the Farmout
Acreage, FARMOR will make such payment and FARMEE agrees to reimburse FARMOR for
100% of such rentals within twenty (20) days after receiving an invoice. It is
agreed however, that FARMOR will not be liable to FARMEE in the event through
error or oversight the rental(s) are not timely or correctly paid. FARMEE's
responsibility
4
<PAGE>
for payment shall commence with any delay rentals coming due after the date of
this Agreement.
In the event, prior to or after the delivery of an assignment by FARMOR to
FARMEE hereunder, any shut-in payments are necessary to maintain any lease(s)
comprising the Farmout Acreage in force and effect as a result of FARMEE's
operations, FARMEE shall make such payments and advise FARMOR promptly in
writing that such payments have been made. Following delivery of any
assignment(s) provided for herein, FARMEE agrees to make all payments resulting
from its operations, including royalties to maintain the lease(s) comprising the
acreage earned by FARMEE hereunder.
13. ASSIGNMENTS: In the event FARMEE completes a well as capable of
producing oil and/or gas at Contract Depth, has provided evidence of such
completion to FARMOR and has -further faithfully performed all the other terms
and conditions contained in this Agreement, FARMOR shall deliver to FARMEE
without warranty of title express or implied, an assignment of their
proportionate interest in so much of the Farmout Acreage as is included in a one
hundred sixty (160) acre square around each productive well, limited as to all
depths and formations from the surface to One Hundred (100) feet below the total
depth penetrated by FARMEE in such well drilled and logged.
If FARMEE completes a well capable of producing oil and or gas in a zone or
formation above the Contract Depth such that the well will not fall within the
"Deep Well" category as defined by the Commonwealth of Kentucky Department of
Mines and Minerals statutes, FARMOR shall assign to FARMEE a proportionate
interest in so much of the Farmout Acreage as is included in a one hundred (100)
acre square around each productive well, limited as to all depths and formations
from the surface to One Hundred (100) feet below the total depth penetrated by
such well.
14. POOLING: All wells drilled hereunder shall conform with the existing
spacing pattern established for drilling to Contract Depth within the AOI which
is presently on a one hundred sixty (160) acre square grid. Any proposed
alteration to such spacing pattern must be approved by FARMOR in advance and
thereafter presented by FARMEE to the state for final approval.
15. FORCE POOLING PROCEEDINGS: In the event FARMEE finds it necessary to
pursue force pooling for any unit around any well drilled hereunder, FARMEE
shall undertake to prepare the forms, submit the application to the state and
attend the state force pool proceeding in preparation of securing the permit for
such well. If a force pooling proceeding is necessary for any well unit in which
FARMOR has elected to take a 30% working interest, FARMOR agrees to pay its
proportionate 30% share of the costs associated with such undertaking after
receiving an invoice therefor. If, however, FARMOR has elected to take a 7.5%
Carried Working Interest in that unit which is the subject of a force pooling
application, FARMEE shall bear the full cost of the entire undertaking and at no
cost, risk or expense to FARMOR.
16. FORMATIONS NOT SUBJECT TO THIS AGREEMENT: FARMOR shall, at all times,
have the right of ingress and egress to any and all depths and formations not
expressly covered by this Agreement, including the right to utilize in such
operations any roadways or plugged and abandoned wells situated on the Farmout
Acreage and to store, handle, transport and market production therefrom, as well
as any and all other rights incident to or appertaining to FARMOR's ownership of
same. FARMOR shall also have the right to use, free of all costs, any roads or
locations built by FARMEE on the Farmout Acreage for its operations, relative
to the depths and formations retained by FARMOR. FARMOR also agrees that during
the term of its use of any road or location built by FARMEE, to maintain same in
good condition as may be reasonably practical and to not interfere with any
shared use by FARMEE.
17. SEISMIC DATA: FARMOR agrees to make available to FARMEE any seismic
data which FARMOR owns relating to the subject AOI. Such seismic data may be
viewed by FARMEE in FARMOR's office during normal business hours but none of
5
<PAGE>
the data shall be copied or retained by FARMEE. FARMOR or FARMEE may propose to
undertake additional seismic prospecting within the AOI throughout the term of
this Agreement. No annual acquisition of greater than 20 miles of seismic shall
be conducted without the consent of the other party. The party who proposes to
secure such seismic shall be the owner of, and have ultimate control of the
data. The non-proposing party shall have the election to pay 50% of all seismic
acquisition costs, including processing and interpretive costs in order to own a
joint share in the data. Should the non-proposing party elect to go non-consent
in the seismic acquisition, that party shall forfeit all drilling participation
rights related to wells which may be proposed within 5,000 feet of any seismic
line acquired under the proposal. The non-consenting party may earn the right to
participate in wells within the above stated distance from any seismic line
provided that party reimburses the consenting party 100% of the actual
acquisition, processing and interpretive costs incurred in such seismic program.
18. PREFERENTIAL RIGHT TO PURCHASE AND/OR MARKET GAS: FARMOR, or its
designee, shall have the preferential right and option to purchase and/or market
all or any part of the gas produced from or allocated to the Farmout Acreage
upon the same terms (or on terms the monetary equivalent thereof) as those under
which FARMEE proposes to sell or otherwise dispose of same, or FARMOR may
designate the purchaser of such gas under said terms. FARMEE shall notify FARMOR
in writing of each proposed sale or other disposition of the gas, which notice
shall include all the terms and conditions of each bona fide offer by a
prospective purchaser who is ready, willing and able to purchase the gas, or any
part thereof, and FARMOR shall have thirty (30) days after receiving said
written notice in which to notify FARMEE of its election either to exercise or
waive its preferential right and option. No contract for the sale or other
disposition of the gas, or any part thereof, shall ever be made by FARMEE until
FARMOR shall have first either exercised or waived in writing its herein
described preferential right and option with respect to the gas. FARMOR shall
have a continuing separate right and option with respect to each and every
proposed sale or other disposition of the gas, or part thereof. If FARMOR
exercised its option to purchase or designate a purchaser for the gas, FARMEE
agrees that, upon request, FARMEE will execute an appropriate gas sales
contract. Further, if FARMOR does not exercise its option to purchase or
designate a purchaser for the gas, FARMEE agrees that any subsequently executed
gas sales contract made by FARMEE will describe this Agreement and will indicate
that FARMEE is not authorized and does not intend to dedicate that share of the
gas production owned by FARMOR. It is understood and agreed that the right to
purchase hereby reserved may be assigned by FARMOR any time, at all times and
from time to time-without limitation. Nothing herein contained shall require
FARMOR to purchase such gas from the Farmout Acreage or to provide a purchaser
or market therefor.
19. ELECTION TO CONSTRUCT GATHERING SYSTEM: FARMOR shall have a continuing
right and election, but not the obligation, to construct any gas gathering lines
necessary to gather and transport any or all of the gas produced within the AOI.
Should FARMOR elect to construct any such gathering lines, it shall charge
FARMEE its pro-rata share of a tariff that results in an 18% rate of return
(Before Tax) on any capital which is employed to construct such gathering
system.
20. DEFAULT: In the event for any reason that actual drilling of the
Exploratory Deep Well is not commenced by the date herein provided (including
FARMEE's failure to timely drill and/or complete the exploratory deep wells in
the Dingus Prospect and Carter Prospect Farmout Agreements), or it is timely
drilled but Subsequent Well(s) provided for hereunder are not timely drilled,
the penalty to FARMEE shall be automatic termination of this Agreement and loss
of the ability to further develop the Farmout Lands and earn leasehold rights
in the Farmout Acreage not already earned by FARMEE in accordance with the terms
hereof. Except as provided herein, if FARMEE fails to comply with any provisions
of this Agreement, FARMOR may at any time notify FARMEE in writing giving the
particulars concerning such noncompliance, whereupon FARMEE will then have
thirty (30) days after receipt of such notice to satisfy FARMOR that it is in
compliance with all the terms and provisions hereof. In the event of such
failure by FARMEE to demonstrate compliance and reply to FARMOR's letter within
the thirty (30) day time period, this Agreement will
<PAGE>
automatically terminate in its entirety, or as to any unearned portion thereof,
provided that in so doing, FARMOR shall not waive or otherwise be precluded from
exercising any other rights or remedies, at law, or in equity, which it may have
for the breach of this Agreement by FARMEE or for FARMEE's failure to perform
under this Agreement in whole or in part.
21. NOTICE: All notices and information to be given or supplied hereunder
pursuant to the provisions of this Agreement shall be given at the following
addresses unless stipulated otherwise in Exhibit B:
FARMOR:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Contact: Lester Zitkus
Address: 17 10 Pennsylvania Avenue
Charleston, WV 25302
Phone No: l-304-343-9566
Fax No: l-304-343-7133
FARMEE
HAY EXPLORATION, INC.
Contact: Monte Hay
Address: 4353 Willard Drive
Ashland, KY 41102
Phone No: l-606-324-7971
Fax No: l-606-324-6340
22. EFFECT OF AGREEMENT: The terms, covenants and conditions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors or assigns. The said terms, covenants and
conditions contained herein shall be covenants running with the Farmout Acreage
covered hereby and with each transfer or assignment of said Farmout Acreage.
This Agreement is not intended to create and nothing contained herein shall be
construed to create an association, trust, joint venture, mining partnership, or
other partnership or entity of any kind, nor to constitute FARMEE the agent of
FARMOR.
23. APPLICATION OF LAWS: FARMEE agrees to abide by Equal Opportunity Rules
and Regulations along with all valid, applicable federal, state and local laws,
rules, orders and regulations of any duly constituted federal, state or local
regulatory body or authority having jurisdiction thereof and all development and
operations hereunder shall be conducted in conformity therewith. FARMEE also
warrants and agrees to conduct all activities under this Agreement in compliance
with all certificates, authorizations, permits or licenses issued to FARMEE or
FARMOR for activities to be performed hereunder.
24. PREFERENTIAL RIGHT TO PURCHASE/CONSENT TO ASSIGN: Should FARMEE desire
to sell or convey all or any part of its interest in and to this Agreement,
FARMEE shall first offer FARMOR the opportunity to purchase such interest. If
FARMOR elects to purchase the interest, the parties hereto agree to negotiate in
good faith for the purchase and sale of the interest. In the event FARMOR elects
not to purchase the interest, FARMEE shall have the right to sell the interest
to a third party, subject to the written consent of FARMOR. FARMEE, when
requesting consent, will provide the names and addresses of the intended
assignees and the interest to be assigned to each. Once the conveyance of
properties has been finalized, FARMEE must provide FARMOR with a recorded copy
of said conveyance within sixty (60) days of execution of said conveyance. This
Agreement shall ipso facto terminate upon any such conveyance being made
contrary to the provisions of the clause. In addition, should FARMEE decide to
sell any of its interest in this Agreement to any other party, it shall not be
free to do so until after securing the written consent of the FARMOR in advance
of such transaction
<PAGE>
25. INDEMNIFICATION: All operations associated with and contemplated to be
conducted by FARMEE on the Farmout Acreage (or acreage pooled therewith) shall
be conducted at its sole risk and liability and at no cost to FARMOR. FARMEE
agrees to indemnify and hold FARMOR harmless from any claims, liability,
charges, or expense arising directly or indirectly out of any and all operations
conducted herewith.
26. CONFIDENTIALITY: Without FARMOR's prior written consent, FARMEE shall
not divulge any information obtained from operations hereunder to any third
party, other than to a party owning an interest under this Agreement or to a
governmental authority having jurisdiction, and only to the extent required by
such jurisdiction.
27. CONFLICT: In the event there is a conflict between the terms contained
in this Farmout Agreement and the terms contained in the Operating Agreement
attached hereto as Exhibit D, the terms of this Farmout Agreement shall be
controlling
28. ARBITRATION: On the request of any party hereto, whether made before
or after the institution of any legal proceeding, any action, dispute, claim, or
controversy of any kind now existing or hereafter arising between any of the
parties hereto in any way arising out of, pertaining to, or in connection with
this Agreement ("Dispute") shall be resolved by binding arbitration in
accordance with the terms hereof. Any party may, by summary proceedings, bring
an action in court to compel arbitration of any Dispute.
Any arbitration shall be administered by the American Arbitration
Association ("AAA") in accordance with the terms of this Section, the Commercial
Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal
Arbitration Act. Judgment on any award rendered by an arbitrator may be entered
in any court having jurisdiction.
Any arbitration shall be conducted before one (1) arbitrator. The
arbitrator shall be a practicing attorney licensed to practice in the State of
Kentucky who is knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot agree on an
arbitrator within thirty (30) days after the request for an arbitration, then
any party may request the AAA to select an arbitrator. The arbitrator may engage
engineers, accountants, or other consultants that the arbitrator deems necessary
to render a conclusion in the arbitration proceeding.
To the maximum extent practicable, an arbitration proceeding hereunder
shall be concluded within thirty (30) days of the filing of the Dispute with the
AAA. Arbitration proceedings shall be conducted in Kentucky. Arbitrators shall
be empowered to impose sanctions and to take such other actions as the
arbitrators deem necessary to the same extent a judge could impose sanctions or
take such other actions pursuant to the Federal Rules of Civil Procedure and
applicable law. At the conclusion OF any arbitration proceeding, the arbitrator
shall make specific findings of fact and conclusions of law. The arbitrator
shall have the power to award recovery of all costs and fees to the prevailing
party. Each party agrees to keep all Disputes and arbitration proceedings
strictly confidential except for disclosure of information required by
applicable law.
All fees of the arbitrator and any engineer, accountant, or other
consultant engaged by the arbitrator, shall be paid by Buyer and Seller equally
unless otherwise awarded by the arbitrator.
This Agreement shall be governed and construed in accordance with the laws
of the State of Kentucky, without giving effect to any principles of conflicts
of laws. The validity of the various conveyances affecting the title to real
property shall be governed by and construed in accordance with the laws of the
jurisdiction in which such property is situated. The representations and
warranties contained in such conveyances and the remedies available because of a
breach of such representations and warranties shall be governed by and construed
in accordance with the laws of the State of Kentucky without giving effect to
the principles of conflicts of laws.
<PAGE>
29. EXECUTION OF AGREEMENT: This Agreement shall be null and void at the
option of FARMOR if one (1) fully executed copy is not returned to FARMOR within
fifteen (15) days from the date of execution below.
This Farmout Agreement shall supersede and replace that certain Farmout
Agreement entered into by Eastern States Oil & Gas, Inc., predecessor by name
change of FARMOR, and FARMEE dated February 10, 2000, except as to any
obligation of FARMEE to reimburse FARMOR for rental payments made prior to the
date of this Agreement.
Executed this 22 day of August, 2000.
EQUITABLE PRODUCTION - EASTERN STATES, INC. WITNESS
By: /s/ Lester A. Zitkus /s/ Michele L. Weber
---------------------------------------- ------------------------------
Lester A. Zitkus
Attorney-In-Fact
Executed this 28 day of August, 2000.
HAY EXPLORATION, INC. WITNESS
By: /s/ Monte Hay /s/ Michele L. Weber
---------------------------------------- ------------------------------
Monte Hay
President
<PAGE>
EXHIBIT B
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
DRILLING AND GEOLOGICAL REQUIREMENTS
Any well drilled pursuant to the terms and conditions hereinafter stated and of
the agreement to which this exhibit is attached, shall be located and drilled in
compliance with all federal and state laws, executive orders, rules and
regulations of any legally constituted regulatory body of the state in which
operations are being performed and any other governing body having jurisdiction
thereof.
MINIMUM COMPLETION STANDARDS
Casing shall be properly set and the well tested and such other preparations
made as necessary to conduct satisfactory tests of the showing(s). FARMEE, or
its operator, shall properly test each prospective oil or gas horizon and, upon
encountering such horizon in the drilling of any well, shall notify FARMOR when
such horizon is to be tested to allow FARMOR sufficient time to have a
representative present when such horizon is tested. FARMEE also agrees to notify
FARMOR in ample time to have a representative present when conducting electrical
wireline surveys. If the information from any electrical wireline survey, made
either before or after contract depth has been reached, and considered by itself
or in conjunction with other indications or evidence from cuttings, cores or
showings should make the formation appear promising of being a prospective oil
or gas horizon, FARMEE shall properly test such horizon if it was not adequately
tested at the time it was penetrated.
REPORTS TO BE FORWARDED TO;
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn: Lester Zitkus & Barbara Hubbard
Address: 17 10 Pennsylvania Avenue
Charleston, WV 25302
Phone: l-304-343-9566
FAX: I-304-343-7133 & l-304-343-7870
o Daily drilling reports including, but not limited to, the drilling
progress, formations encountered and tops, oil or gas shows, surveys and
tests. Reports to be verbally conveyed or faxed by 1O:OO am for activity
current through 8:00 am the same day.
o Well test and stimulation reports
o Well completion and recompletion reports
o Application for AGPA well category determination
o Plug and Abandon reports
o Monthly reports filed with regulatory authority
o Monthly reports of oil and gas production
REPORTS, LOGS & SAMPLES TO BE FORWARDED TO:
EQUITABLE PRODUCTION - EASTERN STATES, INC.
Attn: __________________________________
Address: __________________________________
__________________________________
Phone: __________________________________
FAX: __________________________________ (regular pages)
__________________________________ (continuous log sections)
o Daily updated mudlog pages, when drilling through intervals being
mudlogged, to be faxed by 10:00 am
o Fax copies for all open-hole logs obtained at Total Depth
o Copies of all drill stem tests, core analyses, fluid analyses,
paleontological reports and all other tests, analyses or third party
reports, if made, on wells drilled
o Samples collected no less than every ten (10) feet from base of surface
casing to total depth, if requested by FARMOR
o Representative samples of fluid recovered on formation tests
<PAGE>
Exhibit B
Page 2
o Allow FARMOR, if requested, to examine and take chips of all cores cut and
recovered from such well
o Within twenty-four (24) hours (exclusive of weekends and holidays) after
completion of the logging, supply FARMOR with one (1) large-scale copy of a
bulk density log to the total depth of the hole and of a resistivity log
through all formations of interest
o Upon completion of any well drilled hereunder, FARMEE shall furnish FARMOR
with four (4) copies of all final wireline logs including, but not limited
to, the following:
Log From (Depth) To (Depth) Scale
--- ------------ ---------- -----
Gamma Ray Total Depth Surface 2" = 100'
Gamma Ray Density Total Depth Base Intermediate 5" = 100'
Induction-Caliper Casing
o Upon FARMOR request, agree to make the hole available to FARMOR before
running production casing, and at FARMOR'S expense (including cost of
service and rig time), for its exclusive use in taking sidewall cores or
running a photo-electric (PE) survey, a velocity survey or a dipmeter
survey if FARMEE declines to run same
OTHER INFORMATION:
Upon request by FARMOR, furnish such additional information as it may
reasonably require relative to any phase of the operations conducted pursuant to
this Agreement. FARMOR shall have access to and copies of any and all
geophysical data or seismic surveys that are conducted on or across the lease
acreage during the term of this Agreement. FARMOR shall have free access during
customary business hours to all records relative to such operations.
<PAGE>
EXHIBIT C
TO FARMOUT AGREEMENT DATED AUGUST 22, 2000
INSURANCE
FARMEE shall provide, at its expense and in its name, and maintain in full force
and effect at all times during which operations are conducted by FARMEE on the
Farmout Acreage, insurance by a duly licensed insurance company or companies of
the kinds and in the minimum amounts as set forth below.
Prior to beginning any operations on the Farmout Acreage, FARMEE shall furnish
certificates of insurance by FARMEE's insurers in a form satisfactory to FARMOR
under all such policies as evidence that all such insurance is carried, and
providing that not less than ten (10) days prior, written notice of material
change in or cancellation of such insurance, or any part thereof, will be given
to FARMOR.
o Workmen's Compensation and Employer's Liability
FARMEE shall provide insurance covering FARMEE's employees engaged in
operations on the lands subject to this Agreement in compliance with the laws of
the state in which said lands are situated and Employers Liability Insurance of
not less than $1,000,000.00 for injuries or death to any one employee and
$100,000.00 for injuries or death of more than one employee resulting from any
one accident;
o General Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted
by FARMEE hereunder with bodily injury and death limit of not less than
$100,000.00 for injuries to or death of any one person resulting from any one
accident, not less than $300,000.00 for injuries or death of more than one
person resulting from any one accident, and property damage limit of not less
than $100,000.00 per accident; $300,000.00 aggregate. Provided further than such
property damage insurance shall not exclude FARMOR's liability for loss of or
damage to property of or above the surface of the earth arising from a blowout
or cratering of a gas well or an oil well; and,
o Automobile Public Liability and Property Damage Insurance
FARMEE shall provide insurance in connection with all operations conducted
by FARMEE hereunder (including coverage on owned and non-owned automobile
equipment) with bodily injury or death limit of not less than $100,000.00 for
injuries to or death of more than one person resulting from any one accident,
and property damage limit of not less than $25,000.00 per accident.
<PAGE>
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
EXHIBIT D
TO FARMOUT AGREEMENT DATED AUGUST 2, 2000
OPERATING AGREEMENT
DATED
____________________, 2000,
year
OPERATOR HAY EXPLORATION, INC.
-----------------------------------------------------------------
CONTRACT AREA BURKE PROSPECT - AREA OF INTEREST
-----------------------------------------------------------------
CONTAINING 4,500 GROSS ACRES, MORE OR LESS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COUNTY OR PARISH OF ELLIOTT, STATE OF KENTUCKY
COPYRIGHT 1989 - ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS, 76 137, APPROVED FORM.
A.A.P.L. NO. 610 - 1989
<PAGE>
TABLE OF CONTENTS
Article Title Page
------- ----- ----
I. DEFINITIONS..........................................................1
II. EXHIBITS.............................................................1
III. INTERESTS OF PARTIES.................................................3
A. OIL AND GAS INTERESTS:..........................................9
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION....................2
C. SUBSEQUENTLY CREATED INTERESTS..................................9
IV. TITLES...............................................................2
A. TITLE EXAMINATION...............................................9
B. LOSS OR FAILURE OF TITLE........................................3
1. Failure of Title...........................................3
2. Loss by Non-Payment or Erroneous Payment of Amount Due.....3
3. Other Losses...............................................3
4. Curing Title...............................................3
V. OPERATOR.............................................................4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR....................4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:..4
1. Resignation or Removal of Operator.........................4
2. Selection of Successor Operator............................4
3. Effect of Bankruptcy.......................................4
C. EMPLOYEES AND CONTRACTORS:......................................4
D. RIGHTS AND DUTIES OF OPERATOR:..................................4
1. Competitive Rates and Use of Affiliates....................4
2. Discharge of Joint Account Obligations.....................4
3. Protection from Liens......................................4
4. Custody of Funds...........................................5
5. Access to Contract Area and Records........................5
6. Filing and Furnishing Governmental Reports.................5
7. Drilling and Testing Operations............................5
8. Cost Estimates.............................................5
9. Insurance..................................................5
VI. DRILLING AND DEVELOPMENT.............................................5
A. INITIAL WELL....................................................5
B. SUBSEQUENT OPERATIONS:..........................................5
1. Proposed Operations........................................5
2. Operations by Less Than All Parties........................6
3. Stand-By Costs.............................................7
4. Deepening..................................................8
5. Sidetracking...............................................8
6. Order of Preference of Operations..........................8
7. Conformity to Spacing Pattern..............................9
8. Paying Wells...............................................9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK................9
1. Completion.................................................9
2. Rework, Recomplete or Plug Back............................9
D. OTHER OPERATIONS................................................9
E. ABANDONMENT OF WELLS............................................9
1. Abandonment of Dry Holes...................................9
2. Abandonment of Wells That Have Produced...................10
3. Abandonment of Non-Consent Operations.....................10
F. TERMINATION OF OPERATIONS......................................10
G. TAKING PRODUCTION IN KIND......................................10
(Option 1) Gas Balancing Agreement.............................10
(Option 2) No Gas Balancing Agreement..........................11
VII. EXPENDITURES AND LIABILITY OF PARTIES...............................11
A. LIABILITY OF PARTIES:..........................................11
B. LIENS AND SECURITY INTERESTS...................................11
C. ADVANCES.......................................................12
D. DEFAULTS AND REMEDIES..........................................12
1. Suspension of Rights......................................13
2. Suit for Damages..........................................13
3. Deemed Non-Consent........................................13
4. Advance Payment...........................................13
5. Costs and Attorneys' Fees.................................13
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES...........13
F. TAXES..........................................................13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST....................14
A. SURRENDER OF LEASES............................................14
B. RENEWAL OR EXTENSION OF LEASES.................................14
C. ACREAGE OR CASH CONTRIBUTIONS..................................14
<PAGE>
TABLE OF CONTENTS
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:...................15
E. WAIVER OF RIGHTS TO PARTITION*.................................15
F. PREFERENTIAL RIGHT TO PURCHASE.................................15
IX. INTERNAL REVENUE CODE ELECTION......................................15
X. CLAIMS AND LAWSUITS.................................................15
XI. FORCE MAJEURE.......................................................16
XII. NOTICES.............................................................16
XIII. TERM OF AGREEMENT...................................................16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS................................16
A. LAWS, REGULATIONS AND ORDERS...................................16
B. GOVERNING LAW..................................................16
C. REGULATORY AGENCIES............................................16
XV. MISCELLANEOUS.......................................................17
A. EXECUTION:.....................................................17
B. SUCCESSORS AND ASSIGNS*........................................17
C. COUNTERPARTS...................................................17
D. SEVERABILITY...................................................17
XVI. OTHER PROVISIONS....................................................17
<PAGE>
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between HAY EXPLORATION, 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.
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.
S. The term "Paying Quantities" shall mean, with respect to any well,
quantities of Oil and/or Gas production, the revenues attributable to which,
after deducting the lessor's royalty burden on such production, exceed the
well's operating expenses (not including drilling or other capital costs),
regardless of how small the margin, over a small period of time, not to exceed
12 consecutive months.
T. The term "Commercial Quantities" shall mean, with respect to any well,
quantities of Oil and/or Gas production, the revenues attributable to which,
after deducting all burdens on such production including without limitation,
the lessor's royalty burden, overriding royalties, and production payment, make
the well profitable, taking into account the total costs associated with the
well over its entire life, including, without limitation, drilling costs and
other capital costs and operating expenses.
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 singu1ar, and any gender includes the masculine,
feminine, and neuter. It shall also mean legal entities such as corporations,
partnerships, joint ventures, sole proprietorships, etc.
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.
B. Exhibit "B," Form of Lease.
-------
X C. Exhibit "C," Accounting Procedure.
-------
-1-
<PAGE>
X D. Exhibit "D," Insurance.
-------
X E. Exhibit "E," Gas Balancing Agreement.
-------
X F. Exhibit "F," Non-Discrimination and Certification of
------- Non-Segregated Facilities.
G. Exhibit "G," Tax Partnership.
-------
X H. Other: WELL INFORMATION REQUIREMENTS
-------
-2-
<PAGE>
If any provision, any exhibit, except Exhibits "E," "F" and "G," is,
consistent with any provision contained in the body of this agreement, revisions
in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
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.
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."
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.
Operator 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."
-2-
<PAGE>
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
Losses: All losses of Leases or Interests committed to this agreement,
shall be joint Bosses 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.
-3-
<PAGE>
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
HAY EXPLORATION, 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. Good Cause shall mean the failure or refusal on the part of the
Operator to carry out its duties hereunder as acts or omissions committed by
Operator that constitute gross negligence or willful misconduct.
Subject to Article VII.D.I., 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 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." in the event operator plans to file for
bankruptcy, Operator agrees to notify all Non-Operators by mail at least ten
(10) days in advance of that filing. Failure of Operator to so notify the
Non-Operators as stated above shall cause this agreement to automatically
terminate.
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 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, the cost of which shall be billed
to the Joint Account, shall be performed or supplied at competitive rates.
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.
3. Protection from Liens: Operator shall pay, or cause to be paid, as and
when they become due and payable, all accounts
<PAGE>
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
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