EXHIBIT 10.2
EXPLORATION AND DEVELOPMENT
AGREEMENT
EAGLEFORD SHALE AREA
REOSTAR ENERGY CORPORATION
AND
ZAZA ENERGY, LLC
EXPLORATION AND DEVELOPMENT AGREEMENT
This Exploration
and Development Agreement is entered into this 20th day of May,
2009 by and among ReoStar Energy Corporation ("ReoStar") and ZaZa
Energy, LLC ("ZaZa") as follows. ReoStar and ZaZa will sometimes
hereinafter be referred to individually as a "Party" and
collectively as the "Parties".
I. Recitals
1.1.
The Parties have
identified certain geographic areas located in South Texas
available for conducting exploration activities thereon, with
subsequent leasing, exploration and production operations, to be
known as the Eagleford Shale Area, all as further described on the
sketch and list of Texas counties attached as Exhibit A.
1.2.
The Parties have
agreed upon the relative contributions, responsibilities, rights
and duties in connection with the Eagleford Shale Area, all in
accordance with the terms and conditions hereinafter contained.
NOW, THEREFORE, in
consideration of the mutual covenants set forth below and other
good and valuable consideration, the Parties agree as
follows:
II.
Definitions
The following terms
when used in this Agreement will have the following meanings:
2.1.
"After Payout
Working Interest" means a reversionary leasehold estate and
working interest in and to the Subject Leases equal to a Twenty
Percent (20%) Working Interest, vesting in possession and use after
Prospect Payout has been reached. This Twenty Percent (20%) After
Payout Working Interest is reserved in favor of ZaZa in all
leasehold obtained with respect to this Agreement but it will be
proportionately reduced in any leasehold to which the Parties to
this Agreement own less than One Hundred Percent (100%) of the
Working Interest.
2.2.
"Agreement"
means this Agreement and all exhibits attached hereto.
2.3.
"Area" ,
"Prospect Area" and "Eagleford Shale Area" all mean the lands
generally described on Exhibit A.
2.4.
"Contract Operator" means the entity that operates the
Hackberry Creek Prospect through the functions and responsibilities
defined in the Joint Operating Agreement ("JOA") and related
documents executed on its behalf, defined herein as
REOS.
2.5.
"Existing
Burdens" means (i) any royalty, overriding royalty, production
payment, and other similar burdens on production which burden the
Subject Leases at the time of acquisition, and (ii) the Reserved
Overriding Royalty Interest.
2.6.
"Exploration Program" means the operations to be conducted
by Parties in the Area using 3-D seismic and other exploration
technologies to explore for subsurface geological formations and
anomalies indicative of the existence of oil, gas and other
hydrocarbons, along with all necessary processing, review and
analysis of such data, including without limitation acquisition of
new geophysical data or the reprocessing of existing available
geophysical data covering some or all of the Project Area or across
other areas if the data will contribute to the evaluation of the
Project Area and the subsequent leasing of prospective areas.
2.7.
"JOA" means the operating agreement referred to in Article V
herein.
2.8.
"Operator of Record" means the entity that is a registered
operator with the Railroad Commission of the State of Texas ("RRC")
and files the necessary information with the RRC as it relates to
the operation and reporting of the Hackberry Creek Prospect on its
behalf for the benefit of all working interest and royalty owners
in the same, defined herein as ZAZA.
2.9.
"Prospect" means
a single, or set of, geologic or geophysical leads or ideas within
the Area identified by the Exploration Program thought to be
productive of oil or gas, together with the offsetting acreage
necessary to protect the geological structure or structures, if
productive, from competitive drainage, as agreed by the Parties
from time to time and not to exceed Twenty Thousand (20,000)
acres.
2.10.
"Prospect Payout" means, separately as to each of the
mutually agreed to Prospect that point in time when the cumulative
Proceeds received from the Wells drilled on such distinct Prospect
Area equal the cumulative Acquisition Costs, Seismic Costs,
Exploration and Development Costs, and Operating Costs attributable
to all such Wells incurred and paid pursuant to that distinct
Prospect.
For purposes
hereof, the following terms will have the meaning set out below,
determined separately as to each of the agreed to Phases,
respectively:
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a.
"Proceeds" means the sum of (a) the proceeds realized from
the sale of production from all Wells, after excluding the Existing
Burdens attributable thereto, (b) any sales proceeds realized from
the sale or other disposition of part, or all, of an interest in
the Wells, or the Subject Leases, (c) any insurance proceeds
received in respect of loss or damage to Wells, or the Subject
Leases, and (d) proceeds received in respect of damages pursuant to
any settlement or judgment in legal proceedings affecting the
Wells, Subject Leases or operations thereon.
b.
"Exploration and Development Costs" of the Wells means all
actual third party direct costs and expenses incurred or paid with
respect thereto, including but not limited to (a) costs of
drilling, re-entering, logging, testing, completing, and
equipping
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such Well(s)
for production, (b) that portion of drilling rate overhead charges
allocated to such Well(s) under the applicable JOA, and (c) costs
of plugging and abandoning and surface restoration for any such
well completed as a dryhole.
c.
"Operating Costs" of a Well means all costs incurred in
producing such Well and disposing of such production including, but
not limited to:
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(i)
Labor and other
services necessary for the maintenance and operations of such
Well;
(ii)
Materials, supplies, transportation, repairs, and replacements used
in the maintenance and operation of such Well, including
replacements for all parts of machinery, equipment, tanks, or other
equipment to replace and/or repair original Well and/or lease
equipment;
(iii) Reworking
or re-equipping such Well;
(iv)
Gathering, treating,
processing, transporting, and marketing of production from such
Well; and ad valorem, severance, gathering, windfall profits, or
other applicable taxes; and
(v) That
portion allocated to such Well in accordance with the usual and
customary accounting practices of all other costs (including, but
not limited to, overhead costs of the Contract Operator as set out
in the JOA) which, pursuant to such accounting practices, are
determined to be Operating Costs.
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d.
"Acquisition Costs" means the sum of all costs incurred and
paid that are associated with acquiring Subject Leases, including
land brokerage, title and curative costs, and all delay rentals
paid.
e. "Seismic
Costs" means all costs incurred and paid in connection with the
Exploration Program, including without limitation costs of
acquiring seismic permits, options and licenses attributable to the
Area.
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2.11.
"ReoStar Energy Corporation ("ReoStar")" has the meaning
ascribed in the preamble to this Agreement, with a mailing address
of 3880 Hulen St., Suite 500, Fort Worth, Texas 76107.
2.12.
"Reserved Overriding
Royalty Interest" means an overriding royalty interest in and
to the Subject Leases equal to the positive difference between (a)
Twenty-Five Percent (25%) of 8/8ths and (b) the lessor's royalty
burden, determined on a lease by lease basis; in no event, however,
to never be less than Three Percent (3%) of 8/8ths. ZaZa will
deliver a Seventy-Five Percent (75%) to Seventy-Two Percent (72%)
NRI in the Subject Leases using the above parameters. This Reserved
Overriding Royalty Interest is to be reserved in favor of ZaZa in
all leasehold obtained with respect to this agreement, but it will
be proportionately reduced in any leasehold to which the parties to
this Agreement own less than One Hundred Percent (100%) of the
Working Interest.
2.13.
"Seismic Data" means, with respect to each separate and
distinct seismic operation on the Prospect Areas, the final gained
and ungained migrated three dimensional survey (or two dimensional)
stack data obtained in connection with the Exploration Program.
2.14.
"Subject Leases"
means the Oil, Gas and Mineral Leases covering portions of the
Prospect Areas acquired or to be acquired in connection with
exploration efforts identified pursuant to this Agreement.
Assignments to the Subject Leases shall be made to the Parties
prior to or in conjunction with their sale to a third party.
2.15.
"Wells" means all
wells drilled on the Subject Leases, and completed either as a
producer or plugged and abandoned as a dry hole.
2.16.
"Working Interest" means the cost-bearing leasehold estate
and working interest in and to the Subject Leases held by the
Parties, subject to applicable participation elections:
2.17.
"ZaZa Energy, LLC ("ZaZa")" has the meaning ascribed
in the preamble to this Agreement, with a mailing address of 600
Leopard St., Suite 2100, Corpus Christi, Texas 78473.
III. Program Operations and
Costs
3.1.
Exploration
Program . ZaZa as Operator of Record will conduct the
Exploration Program across the Prospect Areas and REOS, as Contract
Operator, will conduct operations on the Hackberry Creek Project.
As compensation for ZaZa's efforts and expertise, ReoStar shall
issue to ZaZa Twelve Million (12,000,000) shares of ReoStar common
stock (the "Shares"), with the certificate evidencing the Shares
registered in the name of ZaZa on the books and records of ReoStar,
and pay ZaZa an overhead payment of One Million Five Hundred
Thousand Dollars ($1,500,000) per year for three (3) years payable
at Three Hundred Seventy-Five Thousand ($375,000) per quarter with
the first payment due upon Closing as payment for the second
quarter of 2009. This Exploration and Development Agreement can be
extended beyond the three year period by mutual written consent of
the Parties.
All Exploration and
Development costs for the Prospect Areas after acquisition of the
Subject Leases shall be paid by Parties in accordance with their
respective Working Interests. The Contract Operator shall invoice
or AFE the Parties in accordance with the JOA.
3.2.
"ZaZa Energy LLC" shall use its best efforts to (a) obtain
oil and gas leases within the various Prospect Areas which Prospect
Areas will be more particularly defined with future Exhibit "B's
attached hereto and made a part hereof. ZAZA will use proceeds from
an independent land bank to obtain oil and gas leases within the
various Prospect Areas.
3.3.
"ReoStar Energy Corporation" shall have the right but not
the obligation to acquire interests in the Subject Leases for up to
Ninety-Nine Percent (99%) Working Interest, subject, however, to
ZaZa's right (but not the obligation) to participate in up to a 50%
working interest in the Subject Leases. ZaZa will retain not less
than a One Percent (1%) Working Interest
in each Prospect Area. Leasehold
costs are set at a prearranged per acre cost to ReoStar of Eight
Hundred Fifty Dollars ($850). As lease costs increase in the
Project Area this prearranged cost per acre shall be increased upon
mutual consent. In no circumstance shall acreage be delivered for
less than the actual lease bonus cost. ZaZa shall identify areas
available for lease and if for any reason ZaZa offers ReoStar
acreage and ReoStar declines to participate ZaZa shall be free to
pursue said acreage for its own account.
3.4.
Confidentiality . The Parties agree to keep the information
obtained from the Exploration Program strictly confidential and
agree that no Party shall disclose, in whole or in part, any such
information to any third party without the other's prior written
consent. It is agreed that the Parties may disclose the information
to the following persons only to the extent necessary to evaluate
the participation in acquiring leases and drilling a well or wells
thereon: (a) the Parties' (and their affiliates' and nominees')
employees, officers and directors who need to examine the
information for purposes of evaluation; (b) any professional
consultant retained for the purpose of evaluating the information;
(c) their respective partner(s) (or prospective partners) in a
Prospect area or non-consent acreage; or (d) any lender financing
the Parties' participation in the potential acquisition or
drilling, including any professional consultant retained by the
lender for purposes of evaluating the information. In any event,
the disclosing party shall be responsible for ensuring that any
party to whom the information is disclosed shall keep the
information confidential in accordance with this provision. ReoStar
recognizes that ZaZa has prior activities, leases, and AMIs as of
the date of this Agreement in the Eagleford Shale Area and that
ZaZa has ongoing projects to sell in the Area. Therefore, ReoStar
agrees to release ZaZa from the confidentiality provisions of this
Agreement to the extent necessary to allow ZaZa to perform its
normal business activities with regard to these pre-existing
prospects.
3.5.
Prospect
Area . The Parties acknowledge that opportunities to expand the
confines of the Prospect Area beyond that depicted on Exhibit "A"
may be presented as the Exploration Program progresses as provided
in Section 4.1 below. In connection therewith, if and to the
extent the Parties agree at any time to expand the definition of
the Prospect Area so as to include lands contiguous to, or in the
vicinity of, the lands outlined and depicted on Exhibit "A", the
Parties further agree to amend, modify and supplement this
Agreement by replacing Exhibit "A" with one or more revised
exhibits reflecting such expanded Area.
3.6.
Seismic Rights Acquired . The Parties agree that any lease,
seismic option, seismic permit, farmout agreement, shoot-to-earn
agreement, or other contractual rights to shoot seismic surveys
over the Prospect Areas that are acquired by any Party hereafter,
directly or indirectly (through any individual or entity associated
or affiliated with such party) during the period commencing with
the date of this Agreement and ending when all Seismic Data has
been received, shall be subject to and become a part of the subject
matter covered by this Agreement. In that regard, the ownership
interests in the acquired interest or rights, and responsibility
for the acquisition costs thereof shall be determined in accordance
with the remainder of this Agreement.
3.7.
Existing AMI Areas . The Parties acknowledge that they have
existing AMI areas within the Exploration Program area with third
parties. The Parties agree these areas are exempt from the
provisions of Section 3 otherwise applicable to the lands
covered by this Agreement. Furthermore, the Parties agree that this
Exploration Program is intended to explore and exploit
the newly developing Eagleford Shale
Trend and not other potential targets in the Project Area. The
Parties shall be free to explore and exploit all other existing
trends within the Project Area.
IV. Prospect Areas and
Wells
4.1.
Prospect
Identification . For a period commencing from the date of this
Agreement ending three (3) years from the date hereof, the Parties
shall identify separate "Prospect Areas" within the Eagleford Shale
Area from the data obtained for the joint benefit of the Parties.
For purposes hereof. Prospect Area means a defined geographic area
covering a Prospect identified hereunder. Each Party will have the
option to participate in acquiring Subject Leases covering the
Prospect Area in accordance to Section 2.6 and subject to
Section 4.2 below. The Parties electing to participate in a
Prospect Area agree to execute a separate Operating Agreement in
the form of Exhibit "C", as to such Prospect Area.
4.2.
Area of Mutual
Interest . The Parties agree to create an Area of Mutual
Interest ("AMI") comprising all of the lands identified as a
separate Prospect Area under the terms of Section 4.1 above,
which shall be memorialized by separate agreement and included
within the provisions of a separate JOA for each separate Prospect
Area. The term of the AMI as to each separate Prospect Area shall
expire three (3) years from the date of such separate agreement or
when all leases owned by any of the Parties expire within the AMI
boundary, whichever is longer. During the term of the AMI and
within the AMI, if any party hereto (the "Acquiring Party")
acquires any oil and gas leasehold interest, unleased mineral
interest, or the right to earn any such interest, directly or
indirectly (through any individual or entity associated or
affiliated with such party), the Acquiring Party shall, within
fifteen (15) days following such acquisition, notify the other
parties to this AMI provision, or a counterpart thereof (the
"Offerees") of such acquisition. The notice from the Acquiring
Party to the Offerees shall include a copy of
