EXHIBIT 10.9
EXPLORATION AND DEVELOPMENT
AGREEMENT
This Exploration and Development
Agreement (“ Agreement ”), dated and effective
the 21 st day of November, 2005 (the “
Effective Date ”), is entered into by and between Ohio
Triangle, L.P., a Texas limited partnership (“ Ohio
Triangle ”) and GEM-CBM Company f/k/a Harken Gulf
Exploration Company, a Delaware corporation (“ GEM
”). Ohio Triangle and GEM are sometimes referred to
individually as a “ Party ”, and collectively as
“ Parties. ” Ute Oil Company, d/b/a. A.C.T.
Operating Company, a Texas corporation (“ Ute Oil
”) is a party to this Agreement because it is to be
designated as Operator under the applicable operating agreement
and, therefore, will be bound by this Agreement.
RECITALS
WHEREAS , Ohio Triangle and GEM have identified a
particular area of land located in the State of Ohio, described as
the “ Triangle Prospect Area ”, which is
believed to be prospective for hydrocarbon exploration and more
particularly coalbed methane; and
WHEREAS, the Parties desire to jointly explore and
develop the Triangle Prospect Area in accordance with the terms and
provisions of this Agreement;
NOW, THEREFORE
, for and in consideration of the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged by all parties, Ohio Triangle and GEM hereby agree as
follows:
ARTICLE I.
AGREEMENT TO
PARTICIPATE
1.1 Ohio Triangle and GEM each
agrees to participate in the Triangle Prospect Area as set forth in
this Agreement, according to the terms and provisions set forth in
this Agreement, and all Exhibits hereto.
ARTICLE II.
TRIANGLE PROSPECT
AREA
2.1 The Triangle Prospect
Area . The Triangle Prospect Area consists of the lands,
located in Carroll, Jefferson, and Harrison Counties, Ohio, and
included within the red outline on the map as Exhibit A
hereto. The only depth restriction applied to the Triangle Prospect
Area shall be those, if any, contained in the applicable Leases (as
hereinafter defined), those leases acquired in Phase II (as
hereinafter defined), and in leases acquired pursuant to
Section 5.4 .
2.2 Leases . Ohio
Triangle is the current beneficial owner of certain Oil, Gas,
Coalseam Gas, and Coal Bed Methane Leases covering approximately
gross acres of land within the Triangle Prospect Area, which are
depicted in yellow on Exhibit A and which are
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more particularly described on Exhibit B
hereto. The Oil, Gas, Coalseam Gas, and Coal Bed Methane Leases
which are identified in Exhibit B are, sometimes,
collectively referred to as the
“Leases.”
ARTICLE III.
DEVELOPMENT OF THE TRIANGLE
PROSPECT AREA
3.1 Exploration Phases
. Ohio Triangle and GEM shall initially explore and develop the
Triangle Prospect Area in three (3) phases, in accordance with
the terms of this Agreement. “ Phase I ” shall
mean and refer to all the obligations and rights of all Parties in
Section 3.2 , along with the activities described
therein. “ Phase II ” shall mean and refer to
all the obligations and rights of all Parties in
Section 3.3 , along with the activities described
therein. “ Phase III ” shall mean and refer to
all the obligations and rights of all Parties in
Section 3.4 , along with the activities described
therein. Phase I, Phase II, Phase III and the Subsequent Operations
(as defined hereinafter) shall constitute the “
Project .” GEM agrees to pay to Ohio Triangle for the
purchase of GEM’s proportionate share (as set forth in
Section 4.1 below) of the Leases the total sum of Five
Hundred Thousand and No/100 Dollars ($500,000.00) which shall be
paid in three (3) installments in accordance with the terms
set forth in Sections 3.2, 3.3 and 3.4 .
3.2 Phase I. Contemporaneous
with the execution of this Agreement, GEM shall pay to Ohio
Triangle the sum of One Hundred Thousand And No/100 Dollars
($100,000.00) as the first payment of the initial Lease costs
(“ First Lease Payment ”). Said First Lease
Payment shall be via wire transfer of immediately available funds
to the banking coordinates identified, in writing by Ohio Triangle.
Subject to Section 9.16 of this Agreement, failure by
GEM to timely make said payment shall cause this Agreement to
terminate and become null and void as between the
Parties.
(a) Within ninety (90) days
following execution of this Agreement, GEM shall direct the
Operator to commence the drilling of
core holes to be located in the Triangle Prospect Area. The
core holes (each a “ Phase I Core Hole ,” and
together with any other core holes drilled during Phase I, the
“ Phase I Core Holes ”) shall be continuous
wireline retrievable whole core holes which shall be drilled from
the shallowest to the deepest structural position on the Triangle
Prospect Area. Each Phase I Core Hole will be drilled to a depth
sufficient to penetrate the #5 coal (as determined by GEM),
,
and at the written request of GEM, may be drilled deeper. The Phase
I Core Holes will be drilled on the Leases or on such other lands
as may be acquired by the Operator, at GEM’s cost, which is
agreed to between the Parties. Commencement of the operations for
the Phase I Core Holes is expressly subject to the Operator’s
receipt of permission from all applicable federal, state and local
governmental authorities, rig and ancillary equipment availability.
GEM may choose to direct the Operator to drill more
Phase I Core Holes at a location and at a depth to be determined by
GEM, the drilling of additional Phase I Core Holes shall also be
considered to be a part of Phase I for all purposes under this
Agreement. All Phase I Core Holes shall be plugged and abandoned in
compliance with all state and federal rules, regulations and/or
procedures and in accordance with standard industry customs
and
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practices. The plugging and abandonment of all
Phase I Core Holes shall also be considered to be part of Phase I
for all purposes under this Agreement.
(b) In conjunction with the Phase I
Core Hole operations, the Operator will use its best efforts to
collect a sufficient quantity of coal samples in gas desorption
canisters. Thereafter, the Operator shall have all Phase I Core
Hole samples analyzed by a laboratory approved by the Parties. The
analysis will include, without limitation, gas content, gas and
coal qualitative analyses, and desorption isotherm determination.
The Operator shall obtain reports of such laboratory analysis and
shall deliver such reports to the Parties no later than ten
(10) days after receipt of the reports. Within thirty
(30) days of the completion of the Phase I Core Holes and the
delivery of the laboratory analysis of all samples taken in the
Triangle Prospect Area, the Operator and Ohio Triangle shall
prepare and deliver to GEM a report detailing the Operator’s
recommendations (which shall account for environmental issues) for
Phase II of the Triangle Prospect (hereinafter referred to as the
“ Phase I Report ”). The Phase I Report shall
account for all aspects of the Phase II Pilot Projects (as defined
hereinafter), which shall include, with out limiting the generality
of the foregoing, location of each pilot project, schedule for
drilling of all wells and construction of facilities, location of
each well to be drilled (including surface and bottomhole
locations, if applicable), all zones to be tested, drill depth of
each well, prognosis of drilling operations for each well, method
of drilling each well, completion procedures to be utilized for
each well, any stimulation procedures to be utilized, equipping of
each well, electrical services, production facilities, flowlines,
gathering systems and facilities, compression, dehydration and
other treating facilities, pipeline taps, transmission lines and
facilities. GEM shall have thirty (30) days after receiving
the Phase I Report from the Operator and Ohio Triangle to elect to
proceed with Phase II (the “ Phase II Election Window
”) and must make such election pursuant to the terms of
Section 3.2(d) . Within the Phase II Election Window,
GEM shall review the Phase I Report and make any modifications to
the recommendations (the “ Phase I Report
Modifications ”) set forth in the Phase I Report.
Notwithstanding the foregoing, GEM’s modifications, if any,
shall be solely limited to the technical aspects of the Phase I
Report, and shall in no manner modify or change the schedule for
the drilling or construction of facilities set forth in the Phase I
Report. If GEM does not deliver any Phase I Report Modifications
within the Phase II Election Window, it shall be deemed to have no
Phase I Report Modifications, and the Phase I Report shall stand as
it was submitted to GEM. However, if, within the Phase II Election
Window, GEM delivers to Ohio Triangle, written Phase I
Modifications, then the version submitted by the Operator and Ohio
Triangle along with the Phase I Report Modifications shall
constitute the Phase I Report. Unless mutually agreed to by the
Ohio Triangle and GEM, no Phase I Report Modifications shall have
the effect of extending the time of the Phase II Election
Window.
(c) Following the execution of this
Agreement and within ten (10) days of the receipt by GEM of
the written request by Ohio Triangle, GEM shall deliver to the
Operator, a fully executed Authority For Expenditure (“
AFE I ”) attached hereto as Exhibit C . GEM
shall pay to the Operator the total AFE I amount within thirty
(30) days from its delivery of the fully executed AFE I.
Subject to Section 9.16 of this Agreement, failure by
GEM to timely make said payment shall cause this Agreement to
terminate and become null and void as between the Parties. Subject
to the provisions of Section 3.7 below, GEM is
responsible for all of the actual
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costs incurred even if they exceed the amounts
shown in the AFE I, and all such costs actually paid or credited
shall be considered in the calculation of the Carried Interest
Amount (as defined below). All costs in excess of the AFE I shall
be billed to GEM in accordance with the provisions of the Triangle
Prospect Joint Operating Agreement and shall be paid by GEM within
fifteen (15) days of receipt of an invoice for any such costs.
At the end of operations for Phase I, any overpayment will be
returned, unless GEM elects otherwise, and any underpayment will be
paid promptly.
(d) GEM shall have the option, but
not the obligation, to elect to proceed with Phase II of the
Triangle Prospect. GEM must provide Ohio Triangle with written
notice of its election to proceed with Phase II within the Phase II
Election Window. If GEM fails to respond within the Phase II
Election Window, Ohio Triangle shall send GEM a termination notice.
If GEM fails to elect to proceed with Phase II following three
(3) business days after receipt of such termination notice,
then GEM shall be deemed to have elected not to proceed with Phase
II, and this Agreement shall terminate and be null and void as of
the date that the Phase II Election Window expired.
3.3 Phase II . If GEM
elects to participate in Phase II, it shall pay to Ohio Triangle,
within ten (10) days of receipt by Triangle of GEM’s
written election to participate, the sum of Two Hundred Thousand
And No/100 Dollars ($200,000.00) as the second payment of the
initial Lease costs (“ Second Lease Payment ”).
Said payment shall be via wire transfer of immediately available
funds to the banking coordinates identified in writing by Ohio
Triangle. Subject to Section 9.16 , GEM’s failure
to pay timely shall cause this Agreement to terminate and become
null and void as between the Parties.
(a) Within ten (10) days after
GEM’s written election to participate in Phase II, the
Operator shall submit to GEM a
AFE in the amount of Five Hundred Thousand and No/100 Dollars
($500,000.00) which will be payable by GEM to the Operator as
follows: (i) the first payment in the amount of $200,000.00
shall be paid within thirty (30) days from its receipt by GEM
of the
AFE; (ii) the second payment in the amount of $150,000.00
shall be paid to the Operator within twenty (20) days from
GEM’s receipt of written notice that the Operator has spent
seventy five percent (75%) of the first payment;
(iii) the third and final payment in the amount of $150,000.00
shall be paid within thirty (30) days from GEM’s receipt
of written notice that the Operator has spent seventy five percent
(75%) of the second payment. Subject to
Section 9.16 of this Agreement, failure by GEM to
timely make each such payment shall
4
cause this Agreement to terminate and become
null and void as between the Parties. Subject to the provisions of
Section 3.7 below, GEM is responsible for all of the
costs incurred in accordance with the provisions of this
Section 3.3(a) , even if they exceed the amounts shown
in
AFE, and all such costs actually paid or credited shall be
considered in the calculation of the Carried Interest Amount. At
the end of operations for Phase II, any overpayment will be
returned, unless GEM elects otherwise, and any underpayment will be
paid
promptly.
Phase II shall be considered by the Parties as completed upon the
acquisition of Additional Acreage covering
acres
,
or two hundred forty (240) days after Ohio Triangle’s
receipt of the Second Lease Payment, whichever is the first to
occur.
(b) Within sixty (60) days of
the completion of the lease acquisition portion of Phase II, the
Operator shall commence operations for Phase II which will consist
of
pilot projects. The first pilot project (the “ First Pilot
Project ”) shall be at a location in the general vicinity
of a Phase I Core Hole and will consist of five (5) wells in a
“five-spot” pattern spaced on 40 acres, more or less,
per well. The second pilot project (the “ Second Pilot
Project ”; together with the First Pilot Project,
referred to as the “ Phase II Pilot Projects ”)
shall be located in the general vicinity of where a Phase I Core
Hole (but a different Phase I Core Hole than chosen for the First
Pilot Project) and will consist of five (5) wells in a
“five-spot” pattern spaced on 40 acres, more or less,
per well. The purpose of Phase II will be to determine the
commercial viability of actual producing wells in the Triangle
Prospect Area. The Parties agree to market and sell, to the extent
commercially viable, all liquid and gaseous hydrocarbons produced
and save from Phase II wells. The Operator, within ninety
(90) days after completion of the Phase II Pilot Projects, or
other such time as may be mutually agreed between GEM and Ohio
Triangle not to exceed one hundred eighty (180) days after
completion of the Phase II Pilot Projects, shall prepare and
deliver to Ohio Triangle and GEM a report detailing the
Operator’s recommendations (which shall account for, among
other things, environmental issues, if any) for Phase III of the
Triangle Prospect (hereinafter referred to as the “ Phase
II Report ”). The Phase II Report shall account for all
aspects of the development drilling of the Triangle Prospect Area,
which shall include a development plan scheduling the drilling and
development of the Triangle Prospect Area, which shall include
without limiting the generality of the foregoing, a schedule for
drilling of all wells, a schedule for the construction of
gathering, production, and treatment facilities, location of all
wells to be drilled (including surface and bottomhole locations, if
applicable), all zones to be tested, drill depth of each well,
prognosis of drilling operations for each well, method of drilling
each well, completion procedures to be utilized for each well, any
stimulation procedures to be utilized, equipping of each well,
electrical services, production facilities, flowlines, gathering
systems and facilities, compression, dehydration and other treating
facilities, pipeline taps, transmission lines and facilities and
any other operations necessary to the development of the Triangle
Prospect Area. GEM shall have thirty (30) days after receiving
the Phase II Report from the Operator and Ohio Triangle to elect to
proceed with Phase III (the “ Phase III Election
Window ”) and must make the election pursuant to the
terms of Section 3.3(b) . Within the Phase III Election
Window, GEM shall review the Phase II Report and make any
modifications to the recommendations (the “ Phase II
Report Modifications ”) set forth in the Phase II Report.
Notwithstanding the foregoing, GEM’s modifications, if any,
shall be
5
solely limited to technical aspects of the Phase
II Report, and shall in no way modify or change the schedule for
the drilling of wells or construction of production, gathering, or
treating facilities as set forth in the Phase II Report. If GEM
does not deliver the Phase II Report Modifications within the Phase
III Election Window, then GEM shall be deemed to have no
modifications to the Phase II Report, and the Phase II Report shall
stand as it was submitted to GEM. However, if, within the Phase III
Election Window, GEM delivers to Ohio Triangle written Phase II
Report Modifications, then the version submitted by the Operator
along with GEM’s Phase II Report Modifications shall
constitute the Phase II Report. . Unless mutually agreed to by the
Ohio Triangle and GEM, no Phase II Report Modifications shall have
the effect of extending the time of the Phase III Election
Window.
(i) Within ten (10) days after
the written request of Ohio Triangle, following GEM’s written
election to participate in Phase II, GEM shall execute and deliver
to the Operator the Authority For Expenditure II (“ AFE
II ”) for 100% of the estimated costs for the First Pilot
Project which is attached hereto as Exhibit D. AFE II may be
modified by the Operator to account for any increase or reduction
in third party services prices that may have incurred prior to the
execution of the AFE II. In the event AFE II is modified Ohio
Triangle shall submit the modified AFE II along with the request.
GEM shall pay to the Operator the 100% of AFE amounts for tangible
and intangible costs within thirty (30) days from its delivery
of the fully executed AFE. That portion of the AFE attributable to
field facilities cost shall be paid within five (5) business
days of GEM’s receipt of a written request from the Operator.
Subject to Section 9.16 of this Agreement, failure by
GEM to timely execute and deliver AFE II or make said payment shall
cause this Agreement to terminate and become null and void as
between the Parties.
(ii) After the fifth well in the
First Pilot Project has been spudded, the Operator shall submit an
additional AFE (“ AFE III ”) for 100% of the
estimated costs for the Second Pilot Project. GEM shall deliver a
fully executed AFE III to the Operator within ten (10) days
after the receipt of AFE III from the Operator. GEM shall pay to
the Operator the 100% of the AFE amounts for tangible and
intangible costs within thirty (30) days from its delivery of
the fully executed AFE III. Should GEM elect not to proceed with
the Second Pilot Project or, if GEM fails to return the executed
AFE III to the Operator within the specified time, then Ohio
Triangle shall send GEM a written termination notice. If GEM fails
to deliver the executed AFE III within three (3) business days
after receipt of a termination notice, then GEM shall be deemed to
have elected not to proceed with the Second Pilot Project and with
Phase III and this Agreement shall terminate and be null and void
except, with respect to the wells drilled in the First Pilot
Project. GEM shall earn an assignment of a forty (40) acre
production unit, as to all depths, surrounding each well drilled
and completed in the First Pilot Project. Said forty (40) acre
production unit shall be the closest quarter (1/4) quarter
(1/4) section of land surrounding each such well.
(iii) Subject to the provisions of
Section 3.7 below, GEM is responsible for
all
6
of the costs incurred even if they
exceed the amounts shown in AFE II or AFE III, and all such costs
actually paid or credited shall be considered in the calculation of
the Carried Interest Amount. At the end of operations for Phase II,
any overpayment will be returned, unless GEM elects otherwise, and
any underpayment will be paid promptly.
(c) GEM shall have the option, but
not the obligation, to elect to proceed with Phase III of the
Triangle Prospect. GEM must provide Ohio Triangle with written
notice of its election to proceed with Phase III within the Phase
III Election Window. If GEM fails to respond within the Phase III
Election Window, then Ohio Triangle shall send GEM a written
termination notice. If GEM fails to elect to proceed within three
(3) days after receipt of a termination notice, then GEM shall
be deemed to have elected not to proceed with Phase III and this
Agreement shall terminate and be null and void as of the date that
the Phase III Election Window expired except, with respect to the
wells drilled in Phase II, as to a forty (40) acre production
unit, as to all depths, for each well drilled and completed in the
Triangle Prospect Area in Phase II. Said forty (40) acre
production unit shall be the closest quarter (1/4) quarter
(1/4) section of land surrounding each such well.
3.4 Phase III . If GEM
elects to participate in Phase III, it shall pay to Ohio Triangle,
within ten (10) days of receipt by Ohio Triangle of
GEM’s written election to participate, the sum of Two Hundred
Thousand And No/100 Dollars ($200,000.00) as the third and final
payment of the initial Lease costs (“ Third Lease
Payment ”). Said payment shall be via wire transfer of
immediately available funds to the banking coordinates identified,
in writing by Ohio Triangle. Subject to Section 9.16 ,
GEM’s failure to pay timely shall cause this Agreement to
terminate and become null and void as between the
Parties.
(a) Notwithstanding the operator
replacement provisions in the Triangle Prospect Operating
Agreement, GEM shall have the option at any time, after GEM makes
the Third Lease Payment and after consultation with Ohio Triangle,
to become the contract operator or to appoint a designee as
contract operator. For the purposes of this Agreement the term
“Contract Operator” shall mean GEM, if it elects to
become the contract operator or its designee contract operator and
shall not be interchanged with the term “Operator” as
hereinafter defined. If GEM elects to become the Contract Operator,
then Ohio Triangle and the Operator shall be obligated to take all
reasonably necessary actions to make GEM or a designee the contract
operator for the Triangle Prospect Area for the purposes of this
Agreement; such contract operating agreement shall be consistent
with industry standards, have a term of one year (and may be
renewable, unless terminated earlier by Ohio Triangle pursuant to
Section 3.4(c) hereinbelow), provide that all Overhead
charges under the Triangle Prospect Operating Agreement shall be
paid to the Contract Operator, but shall provide for distribution
of production revenues by the Contract Operator only if the first
purchaser of production who is not a Party, refuses to distribute
directly to the Parties. If GEM elects to become the Contract
Operator or elects a designee to be the Contract Operator, neither
GEM nor its designee shall in any manner change or modify the
scheduling or implementation of the Phase II Report or change or
modify any AFE previously submitted to GEM pursuant to the terms of
this Agreement.
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(b) Within ninety (90) days of
Ohio Triangle’s receipt of the Third Lease Payment, the
Operator shall commence operations for Phase III, in accordance
with the Phase II Report. The Phase III operations will begin the
development drilling of the Triangle Prospect Area. Phase III will
end at the point in time when GEM has met the Carried Interest
Amount as defined in Section 3.5 below.
(c) In addition to the payment of
the Third Lease Payment, GEM shall pay all of the costs for all
operations to be conducted in Phase III until GEM has paid the
Carried Interest Amount. Subject to the provisions of
Section 3.7 , GEM shall pay 100% of the actual costs
incurred for Phase III until GEM has paid the Carried Interest
Amount. Within ten (10) days after Ohio Triangle’s
receipt of the Third Lease Payment, the Operator shall submit to
GEM an AFE for 100% of the estimated costs for all operations to be
conducted pursuant to the Phase II Report for the first calendar
quarter. GEM shall pay to the Operator the total AFE amount within
thirty (30) days from its receipt of the AFE and shall
contemporaneously deliver a fully executed AFE. Thereafter the
Operator shall submit to GEM at least thirty (30) days prior
to the next calendar quarter an AFE for 100% of the estimated costs
for all operations to be conducted pursuant to the Phase II Report
for the next calendar quarter. GEM shall pay to the Operator the
total AFE amount within thirty (30) days from its receipt of
the AFE and shall deliver an executed AFE with its payment. The
Operator shall continue to submit AFE’s on a quarterly basis
until such time as the Carried Interest Amount has been reached.
Once the Carried Interest Amount is met, then Phase III shall end.
Subject to Section 9.16 of this Agreement, failure by
GEM to timely pay the full amount of each AFE submitted by the
Operator for the Phase III costs shall cause the Agreement to
terminate and become null and void as between the Parties. GEM
shall only be entitled to an assignment of a forty (40) acre
production unit, as to all depths, surrounding each well drilled.
Said forty (40) acre production unit shall be the closest
quarter (1/4) quarter (1/4) section of land surrounding
each such well.
3.5 Ohio Triangle’s
Carried Interest . Notwithstanding anything to the contrary
contained herein, GEM hereby agrees to pay for or carry Ohio
Triangle’s interest in all operations conducted in Phases I,
II, and III in the Triangle Prospect Area until such time as GEM
has expended a total amount of Seven Million Five Hundred Thousand
And No/100 Dollars ($7,500,000.00) in the Triangle Prospect Area
(the “ Carried Interest Amount ”),
without
