Exhibit 10.1
EXPLORATION AND DEVELOPMENT
AGREEMENT
This Exploration and Development
Agreement (“ Agreement ”), dated and effective
the 1 st day of March, 2005 (the “
Effective Date ”), is entered into by and between
Indiana Posey, L.P., a Texas limited partnership (“
Indiana Posey ”) and GEM-CBM Company f/k/a Harken Gulf
Exploration Company, a Delaware corporation (“ GEM
”). Indiana Posey 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 , Indiana Posey and GEM have identified a
particular area of land located in the State of Indiana, described
as the “ Posey 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 Posey 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, Indiana Posey and GEM hereby agree as
follows:
ARTICLE I.
AGREEMENT TO
PARTICIPATE
1.1 Indiana Posey and GEM each
agrees to participate in the Posey 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.
POSEY PROSPECT
AREA
2.1 The Posey Prospect
Area . The Posey Prospect Area consists of the lands,
located in Posey, Gibson and Vanderburgh Counties, Indiana, and
included within the dotted lines on the map at Exhibit A
hereto, and consisting of approximately 400,000 acres, more or
less. The only depth restriction applied to the Posey Prospect Area
shall be those, if any, contained in the applicable Leases and
Agreements (as hereinafter defined) and in leases acquired pursuant
to Section 5.4 .
2.2 Leases and Agreements
. Indiana Posey is the current owner of a certain Option to
Lease and Drilling Agreement between Indiana Posey and Indiana
Franklin Realty, Inc., dated September 15, 2004, which provides, in
part, a five year option to acquire a coalbed methane lease
covering approximately 85,000 gross acres of land within the Posey
Prospect Area, which are depicted in yellow on Exhibit A and
which are more particularly described on Exhibit B hereto.
The Option to Lease and Drilling Agreement (“ Option
Agreement ”) and the proposed form Coal Bed Methane Lease
document (“ Lease Form ”) are identified on
Exhibit B . The Option Agreement and the Lease Form are,
sometimes, collectively referred to as the “ Leases and
Agreements .”
EXPLORATION AND DEVELOPMENT
AGREEMENT
PAGE 1
ARTICLE III.
DEVELOPMENT OF THE POSEY PROSPECT
AREA
3.1 Exploration Phases
. Indiana Posey and GEM shall initially explore and develop the
Posey 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 .”
3.2 Phase I. Contemporaneous
with the execution of this Agreement, GEM shall pay to Indiana
Posey the sum of Five Hundred Thousand And No/100 Dollars
($500,000.00) as the first payment of the initial prospect costs
(“ First Prospect Payment ”). Said payment shall
be via wire transfer of immediately available funds to the banking
coordinates identified, in writing by Indiana Posey. 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 sixty (60) days following
execution of this Agreement, GEM shall direct the Operator to
commence the drilling of three (3) core holes to be located in the
Posey Prospect Area. The three (3) 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 Posey Prospect Area. Each Phase I Core
Hole will be drilled to a depth sufficient to penetrate the #3 coal
(as determined by GEM), as seen at seven hundred three feet
(703’) in the logs of the KS Oil Kissel #10 well located in
Section 36, T4S, R12W, Vanderburgh County, Indiana, and at the
written request of GEM, may be drilled through the #1 coal member
which is believed to be the deepest known coal zone in the Posey
Prospect Area and is believed to be not more than 3,000 feet below
the surface at any location within the Posey Prospect Area. GEM may
choose to direct the Operator to drill more than three (3) 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
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 Posey Prospect
Area, the Operator and Indiana Posey shall prepare and deliver to
GEM a report detailing the Operator’s recommendations (which
shall account for environmental issues) for Phase II of the Posey
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
EXPLORATION AND DEVELOPMENT
AGREEMENT
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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 Indiana
Posey 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 Indiana Posey, written Phase I
Modifications, then the version submitted by the Operator and
Indiana Posey along with the Phase I Report Modifications shall
constitute the Phase I Report. Unless mutually agreed to by the
Indiana Posey 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 Indiana Posey, 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 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 Posey 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 Posey
Prospect. GEM must provide Indiana Posey 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, Indiana Posey 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 Indiana Posey,
within ten (10) days of receipt by Posey of GEM’s written
election to participate, the sum of Five Hundred Thousand And
No/100 Dollars ($500,000.00) as the second payment of the initial
prospect costs (“ Second Prospect Payment ”).
Said payment shall be via wire transfer of immediately available
funds to the banking coordinates identified in writing by Indiana
Posey. 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.
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(a) Within sixty (60) days of
Indiana Posey’s receipt of the Second Prospect Payment, the
Operator shall commence operations for Phase II which will consist
of two (2) 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 Posey
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 Indiana Posey not to
exceed one hundred eighty (180) days after completion of the Phase
II Pilot Projects, shall prepare and deliver to Indiana Posey 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 Posey Prospect (hereinafter referred to
as the “ Phase II Report ”). The Phase II Report
shall account for all aspects of the development drilling of the
Posey Prospect Area, which shall include a development plan
scheduling the drilling and development of the Posey 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 Posey Prospect Area. GEM shall
have thirty (30) days after receiving the Phase II Report from the
Operator and Indiana Posey 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 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 Indiana Posey
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 Indiana Posey 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 Indiana Posey, following GEM’s written
election to participate in Phase II, GEM shall execute and deliver
to the
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Operator the Authority For
Expenditure II (“ AFE II ”) for 100% of the
estimated costs for the Firs Pilot Project which is attached hereto
as Exhibit D. AFE II maybe 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 Indiana Posey 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 the GEM’s
receipt of a written request from the Operator. 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.
(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. 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 Indiana Posey 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 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.
(b) GEM shall have the option, but
not the obligation, to elect to proceed with Phase III of the Posey
Prospect. GEM must provide Indiana Posey 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 Indiana Posey 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 Posey 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.
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3.4 Phase III . If GEM
elects to participate in Phase III, it shall pay to Indiana Posey,
within ten (10) days of receipt by Indiana Posey of GEM’s
written election to participate, the sum of Five Hundred Thousand
And No/100 Dollars ($500,000.00) as the third and final payment of
the initial prospect costs (“ Third Prospect Payment
”). Said payment shall be via wire transfer of immediately
available funds to the banking coordinates identified, in writing
by Indiana Posey. 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 Posey Prospect Operating Agreement,
GEM shall have the option at any time, after GEM makes the Third
Prospect Payment and after consultation with Indiana Posey, 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 Indiana Posey and the Operator shall be obligated to take all
reasonably necessary actions to make GEM or a designee the contract
operator for the Posey 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 Indiana Posey pursuant to
Section 3.4(c) hereinbelow), provide that all Overhead
charges under the Posey 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.
(b) Within ninety (90) days of
Indiana Posey’s receipt of the Third Prospect 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 Posey 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 Prospect 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 Indiana Posey’s receipt of the Third Prospect
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
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AGREEMENT
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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 Indiana Posey’s
Carried Interest .
(a) Notwithstanding anything to the
contrary contained herein, GEM hereby agrees to pay for or carry
Indiana Posey’s interest in all operations conducted in
Phases I, II, and III in the Posey 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 Posey Prospect
Area (the “ Carried Interest Amount ”), without
regard to any production proceeds or other income received by GEM
with respect to the Posey Prospect. For the purposes of calculating
the total amount expended by GEM, the sum shall include the First,
Second, and Third Prospect Payments, all costs expended in Phase I,
II and III, that portion, if any, of the actual costs reimbursed to
25-25 Corp. for management fees and expenses paid to Oso Energy
Resources Corp. (“Oso Fees”) as determined by GEM
pursuant to the terms of that certain Coalbed Methane Master
Exploration Agreement dated March 1, 2005 by and between 25-25
Corp. and GEM, any costs under the indemnity provisions of
Section 8.2 and Section 8.3 , all actual costs
(including salaries and benefits per COPAS guidelines) incurred and
paid by GEM for
