FARMOUT AND EXPLORATION AGREEMENT KNIGHTS LANDING STARKEY SAND DEVELOPMENT PROGRAM

 

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                                                                   EXHIBIT 10.23

 

                        FARMOUT AND EXPLORATION AGREEMENT

 

                KNIGHTS LANDING STARKEY SAND DEVELOPMENT PROGRAM

 

         THIS FARMOUT AND EXPLORATION AGREEMENT ("Agreement") is made and

entered into as of the Effective Date (February 17, 2004) by and between THE

NAHABEDIAN EXPLORATION GROUP, LLC ("NEG") and IVANHOE ENERGY (USA) INC. dba USA

IVANHOE ENERGY, INC., in California ("Ivanhoe"), sometimes referred to

individually as a "Party" or collectively as the "Parties."

 

                              W I T N E S S E T H:

 

         WHEREAS, NEG, claims, without warranty of title of any kind, to be the

owner of NEG Leases as set forth on Exhibit "A", attached hereto and

incorporated herein by this reference; and holds certain other lands under

Lease, as identified in Exhibits "B-1", "B-2" and "B-3"within the AMI formed

hereby, which said Exhibit "B-3" lands are specifically excluded from this

Agreement,

 

          WHEREAS, NEG has previously drilled and completed a number of gas

wells, producing and shut-in, on the NEG Lands, as further described herein, and

 

         WHEREAS, NEG and Ivanhoe desire to construct a gas gathering system,

together with surface treatment facilities to connect NEG's existing shut-in

wells to the regional Calpine gas sales line, and, in addition, Ivanhoe desires

to acquire an interest in said shut-in wells and the gas gathering system, and;

 

         WHEREAS, Ivanhoe desires to earn an interest in the NEG Leases, subject

to the conditions hereof and the requirements and obligations to be performed by

Ivanhoe as hereinafter contained; and,

 

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         WHEREAS, the Parties desire to further explore and develop the NEG

Leases and the associated AMI Lands to the base of the Starkey Sand

stratigraphic level (as further described herein) which collectively comprise

the Knights Landing Starkey Sand Development Project, for the production of oil

and/or gas and other hydrocarbon substances, and:

 

         WHEREAS, Ivanhoe may desire to earn additional rights or interests in

the NEG Leases, below the Starkey Sand stratigraphic level; and,

 

         WHEREAS, the Parties will enter into a JOA, designating NEG as

Operator.

 

         NOW, THEREFORE, in consideration of the premises and the mutual

covenants and agreements contained herein, it is understood and agreed by and

between the Parties, as follows:

 

                                    ARTICLE 1

 

                                    DEFINITIONS

 

1.1       Actual Drilling Operations - shall be deemed to have been commenced

when a derrick, a rig, and machinery capable of drilling to a depth sufficient

to test a prospective oil and/or gas horizon have been erected, and when such

well has been spudded in and the rotary bit is rotating under power.

 

1.2       Affiliate - shall mean any company or other entity which (i) controls,

(ii) is controlled by or (iii) is under common control with one of the Parties.

For the purpose of this definition, control shall mean the ownership, directly

or indirectly, of Fifty Percent (50%) or more of the stock or other units of

ownership having the right to vote for the election of directors of such company

or other entity.

 

1.3       Area of Mutual Interest or AMI - shall have the meaning given in

Article III, 3.1

 

1.4       Casing Point- that point in time after which time Contract Depth has

been reached in a Test Well, logs have been run, and NEG as Operator shall make

a recommendation whether to complete said well as a producer, or abandon same as

a dry hole: at such

 

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time, Ivanhoe shall make an election whether or not to join in the completion

attempt of the said Test Well.

 

1.5       Contract Area - shall refer to the lands comprising the NEG Leases and

is shown outlined in red on the plat attached hereto and made a part hereof as

Exhibit "B-1."

 

1.6       Contract Depth - shall mean in the Mandatory Test Wells and the

Optional Test Wells, Three Thousand Five Hundred Feet (3,500') or a depth

sufficient to adequately test the Starkey Equivalent Sands (defined as that

interval found in the Hamar Associates "Giusti" 1 well in Section 25, T12N, R2E

MDB&M, between the drilled depths of 2200 to 3400 feet; the Base of the Starkey

Sands herein defined at 3400 feet. Contract Depth for the Deeper Exploration

Well will be total depth of 9500 feet or the Top of Basement, whichever is the

shallower.

 

1.7       Deeper Exploration Well - shall mean the exploration well that may be

drilled pursuant to Article IX of this Agreement.

 

1.8       Drillsite Spacing Unit- shall mean a 40 acre area in the shape of a

rectangle or square having as its center point the wellbore penetration at the

uppermost Starkey Sand in the subsurface, and extending vertically from the

surface of the ground to the base of the Starkey Sands.

 

1.9       NEG Overriding Royalty (ORR) - The NEG Leases and additional Leases

within the AMI shall be burdened with an overriding royalty to NEG or its

designees, proportionately reduced to the mineral interest leased. The NEG ORR

shall be borne in proportion to the working interest owned by the Parties. The

NEG ORR shall be as set forth on Exhibit A attached hereto, and shall apply to

all new Leases, extensions and renewals of the Leases in the Contract Area and

the AMI.

 

1.10      Effective Date - shall mean the effective date of this Agreement, being

the date of its signature by the Parties, viz., 1:00 p.m., Pacific Standard

Time, February 17, 2004.

 

1.11      Mandatory Test Well - shall mean any one of the ten mandatory Test

Wells to be drilled pursuant to Article VI of this Agreement.

 

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1.12      NEG Leases - shall mean those Leases listed on Exhibit "A" attached

hereto and made a part hereof and includes only those geographic portions

thereof located within the confines of the Contract Area.

 

1.13      Optional Test Well - shall mean one of the optional test wells drilled

pursuant to Article VII of this Agreement.

 

1.14      Payout - As to all Test Wells drilled hereunder, Payout shall be

computed on a well-by-well basis, and shall be that point in time when the value

(as hereinafter defined) of the oil, gas, and other hydrocarbons produced,

saved, and marketed from a well received by the Parties equals the cost of (a)

drilling, testing, completing, fracing, plugging back, reworking, and equipping

the well into the tanks or a purchaser's gas sales line; (b) the cost of

operating the Test Well up to the date of Payout; (c) severance, production,

and/or mineral ad valorem taxes measured by production from the well; (d)

royalty to the landowner/Lessor(s) under the Lease(s); (e) NEG ORR, and all

other costs chargeable to the drilling and operation of a well under the JOA,

including the Accounting Procedure attached thereto. The costs of a Substitute

Well, if drilled, shall be included with those costs of the Test Well in

determining Payout.

 

         Value shall be determined by the net proceeds (exclusive of taxes based

upon income) realized by the Parties from the sale of such production, or the

fair market value thereof at the wellhead if not sold but taken by either Party

for its own use and not used in operations within the Contract Area. Costs shall

be in accordance with the form of Accounting Procedure attached to the JOA

attached hereto as Exhibit "C".

 

         With respect to the gas pipeline which will be constructed to the

Project Gas Wells, Payout shall mean that point in time at which Ivanhoe has

recovered from gas and oil sales from the Project Gas Wells, Ivanhoe's actual

cost share (exclusive of any item of Ivanhoe's general and administrative costs)

of the construction of the gas gathering system, plus the purchase price for its

interests in the Project Gas Wells paid from the collective production stream

from all of the Project Gas Wells, net of operating costs, workover costs, ad

valorem taxes and other chargeable expenses under the JOA.

 

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1.15      Project Gas Wells - shall mean the four (4) gas wells within the

Contract Area, to wit: Hamar Associates "Mary's Lake" 5-19 (Section 19, 11N/3E),

"Armour Road" 1-7 (Section 7, 11N/3E), "MacKert" 1-1 (Section 1, 11N/2E) and

"MacKert" 1-31Section 31, 12N/3E).

 

1.16      Joint Operating Agreement or JOA - shall mean the Joint Operating

Agreement referred to in Article VIII, a form of which is attached hereto and

made a part hereof as Exhibit " C".

 

1.17      Jointly Acquired Lease(s) - shall mean Leases acquired by the Parties

pursuant to the AMI provisions of this Agreement.

 

1.18      Lease - shall mean and include any oil, gas, and mineral lease, mineral

interest, or any other instrument granting the right to explore for, drill, and

take oil, gas, and other minerals.

 

1.19      Paying Quantities - shall mean production of hydrocarbon substances in

quantities sufficient to yield a reasonable return in excess of producing and

operating a well over and above all payable royalties, overriding royalties, and

payments out of production (other than those created by a party which are not

specifically described in this agreement).

 

1.20      Test Well - shall mean any one of the Initial Test Well, Mandatory Test

Wells, Optional Test Wells or Deeper Exploration Well. A Substitute Well for any

of the foregoing shall be deemed to be part of the well for which it is a

substitute.

 

                                   ARTICLE II

 

                                    EXHIBITS

 

2.1       Exhibits - The following exhibits, attached hereto, are incorporated

herein and made a part hereof for all purposes, to-wit:

 

        Exhibit "A"      NEG Leases

        Exhibit "B-1"    Map showing the Contract Area

        Exhibit "B-2"    Map showing the AMI

 

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        Exhibit "B-3"    Map and list showing NEG Leases excluded from Agreement.

        Exhibit "C"      JOA Form

        Exhibit "D"      Geological Requirements

        Exhibit "E"      Well Program and AFE

        Exhibit "F"      List of Mandatory Test Wells

 

                                   ARTICLE III

 

                             AREA OF MUTUAL INTEREST

 

3.1       Area of Mutual Interest (AMI) - NEG and Ivanhoe by execution hereof

establish an Area of Mutual Interest covering the Contract Area and additional

lands located within the area outlined in red on the plat attached hereto and

made a part hereof as Exhibit "B-2". The AMI specifically excludes NEG's

currently producing wells, their drillsites and pooled producing units, as set

forth on Exhibit "B-3" hereto, except as otherwise provided herein. The AMI

shall continue in effect as long as the Parties jointly own Leases within the

AMI and shall continue in effect under the JOA until the JOA terminates. The

participation interest of each Party in the AMI shall be NEG, Fifty Percent

(50%) and Ivanhoe Fifty Percent (50%).

 

3.2       Acquisition/Option - Should any Party acquire, directly or indirectly,

a Lease covering any lands located, fully or partially, within the AMI, and

outside the Contract Area, such Party (the "Acquiring Party") shall immediately

give written notice thereof to the other Party (the "Non-Acquiring Party"),

together with all pertinent details and information, including copies of all

instruments of conveyance (including but not limited to, copies of Leases,

assignments, subleases, farmouts, and other contracts affecting the Lease

acquired), copies of paid drafts or checks and itemized invoices of the actual

costs incurred by the Acquiring Party, including any bonus, administrative fees,

brokerage, legal and recording costs, and any other direct costs (said actual

costs are referred to as "Acquisition Costs"). The Non-Acquiring Party shall

have Thirty (30) Days, or Forty-Eight (48) Hours if a rig capable of performing

an operation is on location, from receipt of such notice to elect in writing to

acquire its proportionate interest in the Lease by paying its proportionate

share of the Acquisition Costs and assuming its proportionate share of the Lease

obligations. Failure to respond by the deadlines stated herein shall be deemed

an election not to participate in the acquisition as described in

 

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said notice. Failure to pay said proportionate share of Acquisition Costs within

Thirty (30) Days following an election to participate shall result in a

forfeiture of the Non-Acquiring Party's interest with the same effect as if said

Party had initially elected not to participate. If less than all Parties elect

to participate in said acquisition, the lands and/or depths covered by any such

Lease acquired shall be excluded from the AMI and the Lease acquired shall not

be subject to this Agreement. Ivanhoe agrees it shall not acquire any interests

within the Contract Area, except by assignment from NEG under this Agreement,

until after it has satisfied and fulfilled the earning requirements hereunder.

 

3.3       Payment/Assignment - If the Non Acquiring Party elects to participate

in such Lease acquisition it shall pay to the Acquiring Party its proportionate

share of the Acquisition Costs for such interest, within Thirty (30) Days after

receipt of an invoice for said costs. Upon receipt of said payment, the

Acquiring Party shall execute and deliver to the Non-Acquiring Party an

assignment of the interest due the Non-Acquiring Party, pursuant to which the

Non-Acquiring Party shall bear and assume its proportionate share of all

obligations, covenants, conditions, requirements, and terms associated with the

acquisition. The preceding sentence is solely for the benefit of the Parties to

this Agreement and does not benefit any third party and shall not apply to any

obligations, covenants, conditions, requirements or terms which were known to

the Acquiring Party and not disclosed to the Non-Acquiring Party.

 

3.4       Encumbrances - Any assignment made pursuant to this Article III shall

be free and clear of any encumbrances placed on the assigned Lease in favor of

or by the Acquiring Party, except for the NEG ORR, but otherwise shall be made

without warranty of title, either express or implied, except by, through, and

under the Acquiring Party. The assignment shall be made and accepted subject to,

and assignee shall expressly assume its proportionate share of all of the

obligations of the assignor pertaining to the assigned Lease, including the NEG

ORR.

 

3.5       Merger - The provisions of this Article III shall not be applicable to

acquisitions of leases resulting from mergers, consolidations or reorganizations

involving all or substantially all of the properties or assets of the Party.

 

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3.6       NEG Leases - NEG has acquired certain oil and gas Leases within the AMI

and these are identified on Exhibit "A." The lands covered by the NEG Leases

together comprise the Contract Area.

 

3.7       Prospect Fee- Ivanhoe shall pay to NEG the sum of One Hundred

Twenty-Five Thousand Dollars ($125,000) as a Prospect Generation Fee, which

shall be inclusive of all land costs incurred with respect to the Contract Area

to January 1, 2004. The entire Prospect Generation Fee shall be paid to NEG upon

execution hereof.

 

3.8       Performance Requirement- Notwithstanding any other provision herein,

neither Party may propose the drilling of a well on the AMI Lands outside of the

Contract Area until such time as Ivanhoe has completed the Mandatory Well

Drilling Program as described in Article VI hereof.

 

                                   ARTICLE IV

 

                    CONSTRUCTION OF THE GAS GATHERING SYSTEM

 

4.1        Existing Shut-in Gas Wells- NEG has previously drilled, completed and

tested the Project Gas Wells that are currently shut-in without hook-up to a gas

sales outlet. NEG has obtained permits and rights-of ways for the construction

of a gas sales line system, together with surface treatment facilities and

meters, to connect said wells to the Calpine gas gathering system. The Estimated

Cost of the new gas line and facilities is Six Hundred Thousand Dollars

($600,000). Ivanhoe hereby agrees to fund the construction of said system, up to

a maximum cost of Six Hundred Thousand ($600,000). Any costs in excess of Six

Hundred Thousand Dollars ($600,000) shall be borne by Ivanhoe as to 50% and NEG

as to 50%. Upon execution hereof, Ivanhoe shall pay to NEG the sum of Three

Hundred Thousand Dollars ($300,000) as a first installment towards its cost

share of the system. NEG shall provide copies of its bids for such construction

and copies of the contracts signed for the performance of such work. NEG shall

then promptly begin purchase of materials and contract the construction thereof.

From time to time, NEG shall Invoice Ivanhoe for the remaining funds necessary

to complete construction and testing of the system, and Ivanhoe shall, within

Ten (10) Business Days from receipt of said invoices, pay said sums to NEG.

Ivanhoe's costs shall be limited to actual costs incurred by NEG; NEG shall

receive no cost compensation for its services related to the

 

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construction thereof, and NEG shall provide Ivanhoe with suitable accounting,

including copies of third party invoices, to verify said costs.

 

4.2       Recoupment of Costs- Upon completion of the gas gathering system and

commencement of gas sales from the Project Gas Wells, Ivanhoe shall be entitled

to receive from gas sales revenues an amount equal to Sixty-Five Percent (65%)

of the net working interest revenue (defined as that revenue remaining after

deduction of landowner's and overriding royalties totaling Twenty-Five Percent

(25%), operating costs, workover and redrill costs, and provision for severance,

production and/or ad valorem taxes) from each of said wells, until Ivanhoe shall

have received reimbursement of its full costs incurred in Article 4.1 above,

plus One Million Dollars ($1,000,000) as recoupment of Ivanhoe's purchase price

for a working interest in the Project Gas Wells as set forth in Article 5.1

below, but in no case shall Ivanhoe's recoupment prior to Payout be greater than

One Million Six Hundred Thousand Dollars ($1,600,000). Ivanhoe shall bear

Sixty-Five Percent (65%) of operating costs, recompletion,and workover costs

prior to Payout. Upon Payout, Ivanhoe shall be assigned a Fifty Percent (50%)

working interest in and to each of the Project Gas Wells that are, at that time,

still capable of production, together with their Drillsite Spacing Units,

limited in depth to the base of the Starkey Sands, as herein defined. Ivanhoe

shall additionally be assigned at that time a Fifty Percent (50%) ownership

interest in and to the new gas pipeline system and facilities which are

connected to the Project Gas Wells. Ivanhoe's interests shall be subject to the

terms and conditions of the JOA, attached hereto as Exhibit"C".

 

                                    ARTICLE V

 

                  PURCHASE OF INTEREST IN FOUR SHUT-IN GAS WELLS

 

5.1       Ivanhoe shall, upon execution hereof, pay to NEG, in addition to other

payments required hereunder, the sum of One Million Dollars ($1,000,000) to

purchase a Fifty Percent (50%) working interest in and to each of the four

Project Gas Wells described in Section 4.1 above, together with their respective

Drillsite Spacing Units. Said interest shall bear its proportionate share of

landowners and overriding royalties totaling Twenty-Five Percent (25%),

including the NEG ORR Said interest shall be subject to the terms and conditions

of the JOA, attached hereto as Exhibit "C". Notwithstanding the foregoing, prior

to Payout, Ivanhoe shall be entitled to receive Sixty-Five Percent (65%) of

 

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the net working interest proceeds from oil and gas sales from the Project Gas

Wells, as set forth in Section 4.2 above.

 

                                   ARTICLE VI

 

                    MANDATORY TEN TEST WELL DRILLING PROGRAM

 

6.1       Initial Test Well - On or before May 1, 2004, and subject to rig

availability and weather conditions, the securing of all requisite permits and

any necessary consents of third Parties, NEG, as Operator, shall commence or

cause to be commenced, Actual Drilling Operations (as herein defined), of a well

("Initial Test Well") at a legal location, such location shall be mutually

agreed upon by the Parties hereto. The Initial Test Well shall be drilled to the

Contract Depth. Such Initial Test Well shall be drilled at the Parties' joint

cost, risk, and expense as set forth herein with due diligence and in a good,

continuous, and workmanlike manner. At such time as the Initial Test Well shall

have reached Contract Depth and all logs, surveys, and other tests have been run

and made, the Parties shall complete the well as a producer of hydrocarbons or

plug and abandon same as a dry hole. The initial cost sharing of the Parties

shall be as follows:

 

         To Casing Point (or through abandonment, including site restoration,)

if dry:

 

                            Ivanhoe          One Hundred Percent (100%)

 

         After Casing Point:

 

                            Ivanhoe          One Hundred   Percent (100%)

 

Prior to commencement of Actual Drilling Operations on the Initial Test Well,

Ivanhoe shall pay to NEG One Hundred Percent (100%) of the estimated costs of

drilling the Initial Test Well to Casing Point, as set forth on the Well Program

and AFE, attached hereto and made a part hereof, as Exhibit "E".

 

At Casing Point on the Initial Test Well, NEG shall advise Ivanhoe of its

decision to complete the well as a potential producer, either in the Starkey

Sands as defined, or in a shallower stratigraphic interval, or abandon same as a

dry hole. NEG shall prepare and submit to Ivanhoe for such purpose a completion

program and AFE for the proposed

 

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operations. Ivanhoe shall, within forty-eight (48) hours, advise NEG in writing

of its intent to join in or not to join in the completion of said well. If, at

Casing Point, Ivanhoe does not elect to join in a completion attempt proposed by

NEG, or fails to timely respond to NEG's completion recommendation, then Ivanhoe

shall have no interest or rights in the Initial Test Well, and its Drillsite

Spacing Unit, and NEG may then elect to complete the well at its sole cost and

risk. In the event NEG elects to complete the well, the Drillsite Spacing Unit

and all production therefrom shall be owned solely by NEG and Ivanhoe shall have

no further interest or rights thereto, and NEG shall be responsible for future

plugging and abandonment of such well. If Ivanhoe shall make a positive

completion election at Casing Point, it shall promptly pay to NEG One Hundred

Percent (100%) of the estimated completion AFE costs. Ivanhoe shall further bear

One Hundred Percent (100%) of the cost of tying said well into a gas sales line,

including surface facilities.

 

6.2       Additional Mandatory Test Wells- Immediately after the Initial Test

Well is drilled and completed or abandoned as a dry hole, as the case may be,

NEG shall commence or cause to be commenced the drilling, in seriatim, of nine

(9) additional Mandatory Test Wells, to test the Starkey Sands at locations

mutually agreeable to NEG and Ivanhoe, in the Contract Area. Cost sharing for

the nine Mandatory Test Wells shall be the same as the Initial Test Well,

including gas sales lines and facilities. The nine (9) Mandatory Test Wells

shall be drilled in seriatim, using one (1) string of tools, and Ivanhoe shall

make a separate completion election at Casing Point for each of said wells. The

rights and obligations of each Party with respect to the completion elections

and their interests and cost sharing shall be the same for each of the Mandatory

Test Wells as for the Initial Test Well. NEG shall invoice Ivanhoe for its full

cost share to Casing Point of each of the Mandatory Test Wells at such time as

required under the operative drilling contract and, furthermore, as each

Mandatory Test Well reaches Casing Point NEG shall invoice Ivanhoe by AFE for

its share of completions costs. Ivanhoe shall promptly pay in full each of said

invoices to NEG. Upon reaching Casing Point on each Mandatory Test Well, Ivanhoe

shall make a completion election and payment as in the Initial Test Well, based

on AFE's prepared by NEG and the rights and obligations of each of Ivanhoe and

NEG with respect thereto, shall be the same as for the Initial Test Well as set

forth above. It is understood by both Parties that promptly after completion of

each AFE, NEG will provide Ivanhoe with an accounting of costs incurred for each

Mandatory Test Well as required

 

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by Exhibit "C" of the JOA and that NEG will either invoice Ivanhoe for costs

incurred in excess of the approved AFE amount or refund to Ivanhoe those amounts

advanced by Ivanhoe and not spent on the AFE.

 

6.3       Substitute Test Well - If, because of encountering impenetrable

substances or because of other conditions making further drilling impracticable

NEG discontinues drilling any Mandatory Test Well before the Contract Depth

requirement therefor is satisfied, NEG and Ivanhoe shall mutually agree to drill

a Substitute Well, at any legal location selected by NEG and Ivanhoe within the

Contract Area, provided the actual drilling of said Substitute Well is commenced

no later than Thirty (30) Days after the abandonment of the Mandatory Test Well

(or such later date, not to exceed Ninety (90) Days, as NEG, acting with

reasonable diligence and prudence is able to secure a rig and all necessary

permits and consents). In such case, Ivanhoe shall have the right to participate

in the drilling of the Substitute Well, and each said additional Substitute

Well, paying the same share of costs and bearing the same risk as in the

Mandatory Test Well; provided, however, Ivanhoe shall not be obligated to

participate in drilling more than one Substitute Well with respect to any

Mandatory Test Well. Such Substitute Well shall be drilled in a manner and to

the Contract Depth specified for the Mandatory Test Well. If a Substitute Well

is commenced and drilled, as herein provided, and Ivanhoe shall have

participated in each said Mandatory Test Well and Substitute Well, then Ivanhoe

shall have complied with this Agreement with respect to that well, to the same

extent as if the Mandatory Test Well had been commenced and drilled in

accordance herewith. Each reference herein to a Test Well shall include any

Substitute Well therefor. If the first Substitute Well is discontinued because

of encountering impenetrable substance or because of other conditions making

further drilling impracticable, NEG and Ivanhoe shall mutually agree to drill a

second and subsequent Substitute Well and Ivanhoe shall have the right to

participate therein under the same terms and conditions as provided herein. Each

reference herein to a Mandatory Test Well shall include any Substitute Well

therefor.

 

6.4       Completion of the Mandatory Test Well Program- Upon completion or

abandonment of the tenth (10th) Mandatory Test Well, provided Ivanhoe shall have

made all positive elections and payments theretofore required hereunder, Ivanhoe

shall be deemed to have earned its interests, as further set forth in Article

VIII, in and to each

 

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Mandatory Test Well drilled and completed as a producer of oil and/or gas in

paying quantities, together with its Drillsite Spacing Unit; and shall have

earned the right to make an election to participate in the Optional Test Well

Program Should Ivanhoe fail, for any reason, to complete its obligations with

respect to the Mandatory Test Well Program, it shall not earn any interest in

any of the Mandatory Test Wells theretofore drilled, their Drillsite Spacing

Units, or the Contract Area and the NEG leaseholds, except that Ivanhoe shall

retain its interests in the gas pipeline and four Project Gas Wells and their

spacing units as described in Articles 4.1 and 5.1 hereof. In such case, Ivanhoe

shall have no further rights to drill within the Contract Area, to participate

in the Optional Test Well Program, or to participate in a Deeper Exploration

Well. Ivanhoe shall, however, retain its full interests and rights with respect

to its other interests within the AMI, outside of the Contract Area.

 

                                   ARTICLE VII

 

                         TEN OPTIONAL TEST WELL PROGRAM

 

7.1       Optional Test Wells- When the Mandatory Ten Test Well Program has been

completed and Ivanhoe has completed all of its obligations relative thereto (but

in no event later than Thirty (30) Days subsequent to the cementing of casing or

abandonment of the last well drilled thereunder), Ivanhoe shall make an election

in writing whether or not to participate in the Optional Test Well Program. In

the event Ivanhoe shall make a positive election, it shall be bound to

participate in the drilling of each of the ten Optional Test Wells to Casing

Point, and to pay its proportional cost shares thereof as shown below, based on

AFEs prepared and submitted by NEG for each well, and NEG, as Operator, shall

commence or cause to be commenced the drilling in seriatim of said Optional Test

Wells, using one (1) string of tools, at mutually agreeable locations in the

Contract Area, to depths sufficient to test the Starkey sands (Contract Depth)

as previously defined herein. NEG shall invoice Ivanhoe for Ivanhoe's full cost

share of the Optional Test Wells and Ivanhoe shall pay its full cost share, in

the same manner as for the Mandatory Test Wells. The cost and risk sharing of

the Optional Test Wells to the Parties shall be as follows:

 

  To Casing Point

 

                 NEG          Thirty-Three and One- third Percent (33-1/3%)

               Ivanhoe        Sixty-Six and Two-Thirds Percent (66-2/3%)

 

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After Casing Point:

 

                 NEG          Thirty-Three and one Third Percent (33-13%)

               Ivanhoe        Sixty-Six and Two Thirds Percent   (66-2/3%)

 

Upon reaching Casing Point on each of said Optional Test Wells, NEG as Operator

shall advise Ivanhoe of its recommendation to plug and abandon or complete same

as a potential producer. Each Party shall, within forty-eight (48) hours, make

its separate completion election in writing. In the event one Party elects to

complete and the other party does not, then the Completing Party shall assume

the full cost and risk of the completion attempt including abandonment of the

well and site clean-up and/or installation of a gas sales line and surface

facilities appurtenant thereto. In such case, the Completing Party shall own the

well and its Drillsite Spacing Unit, gas sales line, and the production

therefrom, and the non-participating Party shall have no further ownership,

rights or interests therein or thereto. NEG shall prepare an AFE and invoice for

any proposed completion, and, if Ivanhoe shall make a positive completion

election, it shall promptly pay to NEG its full cost share of the invoiced

completion costs. Cost sharing of gas pipelines and facilities for each of the

Optional Test Wells, which are completed by both Parties, shall be shared NEG as

to Thirty-Three and One-Third Percent (33-1/3%) and Ivanhoe Sixty-Six and

Two-Thirds Percent (66-2/3%). It is understood by both Parties that promptly

after completion of each AFE, NEG will provide Ivanhoe with an accounting of

costs incurred for each Optional Test Well as required by Exhibit "C" of the JOA

and that NEG will either invoice Ivanhoe for costs incurred in excess of the

approved AFE amount or refund to Ivanhoe those amounts advanced by Ivanhoe and

not spent on the AFE.

 

If Ivanhoe does not join in the drilling of any Optional Test Well for any

reason, or fails to timely pay its proportionate cost share thereof if it joins

in the completion of the well, Ivanhoe shall have no rights or interest in and

to the Contract Area, the NEG Lands or other Leases within the Contract Area, or

any wells or Drillsite Spacing Units, other than the interests (i) previously

earned by Ivanhoe in each of the Mandatory Test Wells, as set forth in Article

VII hereof and (ii) the Project Gas Wells set forth in Article IV hereof.

 

                                    Page 14

<PAGE>

 

                                  ARTICLE VIII

 

                               EARNING CONDITIONS

 

8.1       Interests earned For Each of the Mandatory Test Wells - If, (a) after

NEG, as Operator, has drilled a Mandatory Test Well to Contract Depth, and (b)

Ivanhoe has paid its full share of well costs of said well to Casing Point, and

(c) if Ivanhoe shall at Casing Point have made an election to complete same as a

potential producer, and (d) Ivanhoe has subsequently paid its full share of

costs incurred in the completion and testing of the Mandatory Test Well, and (e)

if NEG, as Operator, completes the well as a well capable of producing

hydrocarbons in paying quantities (at Contract Depth or a lesser depth), then

Ivanhoe shall earn an assignment of its interests hereunder from NEG. Ivanhoe's

assignment shall be a Sixty Percent (60%) Working Interest in the Mandatory Test

Well and Leases attributable to its Drillsite Spacing Unit. Upon Payout of each

of the ten (10) Mandatory Test Wells, Ivanhoe's interest in each Mandatory Test

Well and its Drillsite Spacing Unit and the gas sales line and facilities shall

be reduced to Fifty Percent (50%). In the event a Mandatory Test Well is

abandoned as a dry hole, Ivanhoe shall have earned no interest in that Mandatory

Test Well or its Drillsite Spacing Unit. In the event Ivanhoe shall earn an

interest in the Contract Area, NEG shall retain all rights of drill through and

pass through and shall retain full and unrestricted ownership of mineral rights

not earned by and assigned to Ivanhoe, and shall retain surface and subsurface

usage rights to drill for and produce oil and gas from the Contract Area and

adjacent lands. When all ten Mandatory Test Wells have been drilled and

completed, or abandoned as the case may be, NEG shall prepare and deliver to

Ivanhoe an assignment of its interests previously earned.

 

8.2       Interests earned in Optional Test Wells - If Ivanhoe has made a

positive election to participate in the Optional Test Well Program and made all

necessary subsequent positive elections, including completion elections, and

paid all amounts due to NEG for each of the additional Optional Test Wells and

their associated gas sales lines and facilities, Ivanhoe shall be assigned, on a

well by well basis, a Sixty Six and Two-Thirds Percent (66-2/3%) working

interest in each Optional Test Well and the Leases attributable to its Drillsite

Spacing Unit. Upon Payout of each of the Optional Test Wells, Ivanhoe's interest

in said wells, their Drillsite Spacing Unit and the gas sales line and

appurtenant facilities shall be reduced to Fifty Percent (50%).

 

                                    Page 15

<PAGE>

 

8.3       Earning for Entire Contract Area- When the last of the Mandatory Test

Wells, and the last of the Optional Test Wells have been drilled and completed

as a producer or abandoned as a dry hole, and provided Ivanhoe has complied with

all requirements hereunder, including timely payment of all sums due hereunder,

Ivanhoe shall be deemed to have earned a Fifty Percent (50%) working interest in

and to the remainder of the Leases within the Contract Area, limited in depth to

the base of the Starkey Sands, (as well as those wells and Drillsite Spacing

Units previously earned) and NEG shall promptly convey to Ivanhoe its assignment

of interests thereto. Should Ivanhoe fail to complete any of its obligations

with respect to the Mandatory Test Wells and all Optional Test Wells, then it

shall not earn interests in the entire Contract area, but its interests shall be

limited in such case to the Test Wells previously drilled and completed, and

their respective Drillsite Spacing Units.

 

8.4       Subsequent Operations on the AMI Lands- Neither Party may propose the

drilling of a Test Well on the AMI Lands outside of the Contract Area until all

ten Mandatory Test Wells have been drilled and completed or abandoned. In the

event that Ivanhoe shall make a positive election to drill the Optional Test

Wells, no Party shall propose a Test Well on the AMI Lands outside of the

Contract Area until such time as the last of the Optional Test Wells has been

drilled.

 

8.5       Proportionate Reduction - If any of the Leases subject to or

contributed to this Agreement are less than the full Lessee's interest therein,

then the NEG ORR, and the Working Interests shall be reduced proportionately to

the actual interests owned. In the event any of the Leases cover less than the

entire mineral estate, the NEG ORR, and the Working Interest assigned shall be

reduced proportionately to the actual interest leased under the Leases.

 

                                    ARTICLE IX

 

                          DEEPER POOL TEST AND EARNING

 

9.1       Deeper Exploration Well- When Ivanhoe has completed its obligations

hereunder for completing or abandoning the ten Mandatory Test Wells, and

completed all of its requirements and obligations relative thereto, including

payment of all sums due

 

                                    Page 16

<PAGE>

 

hereunder, within Thirty (30) Days, Ivanhoe shall make an election, in writing,

whether or not to participate in the drilling of a Deeper Exploration Well,

which shall be drilled at a legal location in the Southwest Quarter of Section

25, T12N/R2E, M.D.B.&M, to a total depth of 9500 feet or the Top of Basement,

whichever is the shallower. In the event of Ivanhoe's positive election, NEG, as

Operator, will promptly drill or cause to be drilled the subject well, and

Ivanhoe shall in such case bear One Hundred Percent(100%) of the costs and risk

of drilling the well to Casing Point (including the setting of intermediate

casing as necessary). At Casing Point, Ivanhoe shall make an election upon

receiving forty-eight (48) hours notice, whether to complete or abandon same,

pursuant to a recommendation which will be made by NEG. In the event it elects

to complete, Ivanhoe shall bear One Hundred Per Cent (100%) of the cost of

completing, testing and equipping the Deeper Exploration Well, including the gas

sales line and surface facilities appurtenant thereto. In the event the Deeper

Exploration Well is drilled and completed as a producer and Ivanhoe has elected

to complete same and paid all amounts due hereunder, then Ivanhoe shall be

deemed to have earned, and NEG shall promptly assign to Ivanhoe, a Sixty-Six and

Two-Thirds Percent (66-2/3%) interest in and to the well, the Drillsite Spacing

Unit Leases (which in such case shall be a regular 160 acre quarter section,

having the well as its center point, extending vertically from the surface of

the ground to 100 feet below the surface of the Basement Complex) and a 50%

interest in the balance of the Contract Area, limited in depth to those horizons

lying between the base of the Starkey Sands and One Hundred Feet (100') below

the Top of the Basement Complex. Upon Payout of the Deeper Exploration Well, as

hereinabove defined, NEG and Ivanhoe will each own a Fifty Percent (50%)

interest in and to the well and its Drillsite Spacing Unit Leases. In the event

Ivanhoe shall either (a) elect not to drill the Deeper Exploration Well, or (b)

elect to drill said well, but having drilled said well but subsequently fails to

join in a proposed completion attempt, if so recommended by NEG; then in such

case, Ivanhoe shall have no interest or rights with respect to the Contract

Area, except as to those shallow rights previously earned hereunder.

 

                                     Page 17

<PAGE>

 

                                    ARTICLE X

 

                             ASSIGNMENT OF INTERESTS

 

10.1      Delivery of Assignment - Unless otherwise provided herein, any

assignment due either Party, shall be delivered in a form suitable for recording

within Fifteen (15) Days of the occurrence of any earning event.

 

                                   ARTICLE XII

 

                                  DELAY RENTALS

 

11.1      Rentals due under Contract Area- Notwithstanding any other provision

herein, Ivanhoe shall bear, and reimburse NEG, as rentals become due, Fifty

Percent (50%) of all NEG Lease rentals accruing from the January 1, 2004, which

share shall not exceed Fifteen Thousand Dollars ($15,000) per month. NEG shall

furnish Ivanhoe with a monthly invoice, with copies of rental checks paid to

lessors. Ivanhoe shall also bear Fifty Percent (50%) of all costs of renewals

and rentals throughout the term of this Agreement, until such time as it has

earned its full interests hereunder.

 

11.2      Payment of Delay Rentals - Subject to the terms and provisions of this

Agreement, the Party who contributed a Lease (e.g., NEG, in the case of the NEG

Leases, and the Acquiring Party, in the case of the Lease acquired pursuant to

the AMI) (hereinafter the "Administering Party") shall be responsible for and

shall make a diligent effort to pay each delay rental or other Lease maintenance

payment for such Lease as to the portion thereof within the AMI. The

Administering Party shall not be liable to the other Party for any loss

resulting from an inadvertent failure to timely make said payments. After such

time as Ivanhoe has earned the right to receive an assignable interest

hereunder, which is subject to the terms of this Agreement and the terms of the

JOA, in the case of a conflict between the JOA and this Article, the terms of

the JOA shall prevail.

 

                                    Page 18

<PAGE>

 

11.3      Other Party Elections - The other Party shall have Fourteen (14) Days

after receipt of an invoice from the Administering Party of a delay rental or

other Lease maintenance payment, or a notice of a delay rental or other Lease

maintenance payment coming due within which to notify the Administering Party,

in writing, of its election to pay its share of such payment. If it elects to

pay its share, the other Party shall pay the Administering Party its share of

such payment within Thirty (30) Days after the Administering Party's receipt of

such election. In the event the other Party elects not to pay its share and the

Administering Party makes the payment, the other Party shall, upon the written

request of the Administering Party, assign to the Administering Party such

portions of the other Party's interest in the Lease as would be maintained by

such payment.

 

11.4      Administering Party's Election not to Pay - Should the Administering

Party elect not to pay its share of any delay rental or other Lease maintenance

payment, such Party shall notify the other Party at least Thirty (30) Days prior

to the date on which such payment is due. The other Party shall have Fourteen

(14) Days after receipt of said notice within which to notify the Administering

Party of its election to pay the full amount of such payment. In the event the

other Party elects to make the full payment, unless otherwise agreed, the

Administering Party shall make the payment on behalf of the other Party, and the

other Party shall reimburse the Administering Party and the Administering Party

shall assign to the other Party such portion of the Administering Party's

interest in the Lease as would be maintained by such payment. Failure to make an

election shall be an election to agree to not pay.

 

                                   ARTICLE XII

 

                            JOINT OPERATING AGREEMENT

 

12.1      Operations - Except as otherwise provided herein, or in the JOA, the

costs, risk, and expenses shall be based on each Party's Working Interest. All

operations hereunder shall be governed in accordance with the terms and

conditions of the JOA attached hereto as Exhibit "C" and made a part hereof. The

Parties shall execute the JOA simultaneously with the execution hereof. NEG

shall be designated Operator under the

 

                                    Page 19

<PAGE>

 

JOA. In the event of a conflict between the terms and conditions of this

Agreement and the JOA, the terms and conditions of this Agreement shall prevail.

 

                                  ARTICLE XIII

 

                         INFORMATION, TESTS, AND NOTICES

 

13.1      Furnishing of Data - Ivanhoe's authorized representatives shall, at all

times, and at its sole risk, have full and free access to the rig floor. NEG

shall obtain and furnish to Ivanhoe all information on the each Test Well,

consistent with common industry practice. NEG, with the consent of Ivanhoe,

shall, at its discretion, test any oil and/or gas shows encountered which they

jointly judge warrant testing. NEG shall keep an accurate and detailed log of

each well drilled hereunder, and shall comply with all the requirements set out

in Exhibit "E", entitled "Geological Requirements", attached hereto. In

addition, Ivanhoe shall have access to NEG's seismic data in NEG's office

covering the AMI.

 

                                   ARTICLE XIV

 

                        CONDUCT OF OPERATIONS/ABANDONMENT

 

14.1      Diligent Operations and Abandonment - For any Test Well, NEG shall

conduct all operations hereunder at the Parties' joint cost, risk, and expense

in the proportions provided herein. All such operations shall be prosecuted with

due diligence, in a good and workmanlike manner, and without unreasonable

delays. When the Test Well reaches the Contract Depth and has been tested as

herein provided, NEG, as Operator, shall either complete the same as a producer,

or plug and abandon the same, in accordance with all applicable laws and

regulations and the provisions of this Agreement; provided however, that if NEG

desires to abandon any well as a dry hole, NEG shall so notify Ivanhoe and

Ivanhoe shall then have forty-eight (48) hours to elect to take over such well

and attempt to complete it at Ivanhoe's sole cost, risk, and expense. Should

Ivanhoe take over the well, NEG shall relinquish all rights thereto, including

the materials and equipment used in connection therewith, free and clear of all

liens and encumbrances not existing as of the date of this Agreement. Ivanhoe

shall pay to NEG the fair market value of such material and of the salvageable

in-hole equipment, less the estimated cost of salvage (only in the event NEG has

paid for any part of the well), and Ivanhoe shall

 

                                    Page 20

<PAGE>

 

become responsible for the rig time costs. Upon any such takeover, all rights

and ownership of NEG pertaining to the well and its Drillsite Spacing Unit

(limited to those depths lying above the deepest producing interval open in the

well) shall automatically terminate and Ivanhoe shall be solely responsible for

the completion and abandonment of the well and shall indemnify and hold NEG

harmless from any cost or loss relating thereto. The conditions described

hereinabove shall also apply to NEG if it desires to take over a well that

Ivanhoe desires to abandon.

 

                                   ARTICLE XV

 

                                 TITLE WARRANTY

 

15.1      Titles and Curative Work - NEG does not warrant title of any kind,

express or implied, with respect to the NEG Leases and NEG shall not be

obligated to perform any curative work, or to furnish any materials with respect

thereto, other than copies of such title opinions and other relevant documents

as Ivanhoe may have in its possession. Nevertheless, during the term of this

Agreement or the JOA, any curative work by NEG or Ivanhoe shall inure to the

benefit of the other Party who shall be promptly furnished with copies of all

opinions and curative instruments pertaining to the Leases. NEG shall make

available to Ivanhoe, upon request, all of NEG's records and Lease files

pertaining to the Leases. To the extent that title to one or more of the Leases

included in the Drillsite Spacing Unit for well, is such that a reasonable and

prudent Operator would require curative action to be taken, NEG may undertake

such curative action, in which case, the time in which NEG has to commence the

drilling of a well shall be extended by the period of time necessary for NEG to

complete such curative work.

 

                                   ARTICLE XVI

 

                              RELATIONSHIP/TAXATION

 

16.1      Relationship of the Parties - This Agreement does not create, and shall

not be construed to create, a partnership, association, joint venture or

fiduciary relationship of any kind or character between the Parties, and shall

not be construed to impose any duty, obligation or liability arising from such a

relationship by or with respect to any Party. Notwithstanding any provisions

herein that the rights and liabilities hereunder are several and not joint or

 

                                    Page 21

<PAGE>

 

collective or that the Agreement and the operations hereunder shall not

constitute a partnership, each Party elects to be excluded from the application

of all or any part of the provisions of Subchapter "K", Chapter 1, Subtitle "A",

Internal Revenue Code of 1986, as amended, or similar provisions of applicable

state laws.

 

                                  ARTICLE XVII

 

                                  FORCE MAJEURE

 

17.1      Force Majeure - If either Party is rendered unable, wholly or in part,

by Force Majeure, to carry out its obligations under this Agreement, other than

the obligations to pay money, that Party shall give the other Party 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 the continuance of the

Force Majeure, and such additional time thereafter as the affected Party

reasonably requires under the circumstances to carry out its obligations. The

affected Party shall use all reasonable diligence to remove the Force Majeure

situation and resume the performance of its obligations 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 Parties involved, contrary to its wishes; how all

such difficulties shall be handled shall be entirely within the discretion of

the Party concerned.

 

         The term "Force Majeure" shall mean an act of God, strike, lockout or

other industrial disturbance, act of the public enemy, war, blockade, public

riot, lightning, fire, storm, flood, explosion, governmental delay, restraint or

inaction, unavailability of equipment, terrorist acts, 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.

 

                                    Page 22

<PAGE>

 

                                  ARTICLE XVIII

 

                                    ASSIGNMENTS

 

18.1      Right to Assign Agreement - Neither NEG nor Ivanhoe shall have the

         right to assign part or all of its rights, interests, and obligations

         under this Agreement without the written consent of the other Party.

         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 heirs, successors, and permitted assigns; and said terms,

         covenants, and conditions shall be covenants running with the lands

         covered hereby and the leasehold estates therein, and with each

         transfer or assignment of said lands or leasehold estates. NEG or

         Ivanhoe shall assign no rights hereunder without the prior written

         consent of the other Party, promptly notifying the other Party of the

         assignment, the name and address of such assignee and the contact

         person of such assignee, which consent shall not be unreasonably

         delayed or withheld. NEG or Ivanhoe may delegate any of its duties, or

         assign any of its interests under this Agreement to one or more of its

         Affiliates, including the right to delegate to an Affiliate the

         Operatorship under this Agreement and the JOA. Ivanhoe will provide NEG

         with a recordable acquittance of any rights of Ivanhoe hereunder, which

         have lapsed or terminated, within 5 days after NEG's therefor.

 

                                   ARTICLE XIX

 

                                    INSURANCE

 

19.1      Insurance Requirements - Before commencing any operations within the

         Contract Area, pursuant to this Agreement, NEG shall procure and shall

         thereafter maintain in force during the term of this Agreement, at the

         Operator's expense, the insurance hereinafter described, covering all

         of the operations to be performed hereunder by NEG:

 

                                    Page 23

<PAGE>

 

         (a)       Workers' Compensation and Occupational Disease Insurance,

         satisfying the legal requirements of the State of California and

         Employers Liability Insurance with a minimum of at least One Million

         Dollars ($1,000,000) per occurrence.

 

          No other insurance shall be carried by Operator for the benefit of the

         Joint Account; however, the Operator and each Non-Operator shall

         provide and maintain in force the following minimum limits of

         insurance, at its sole expense and for its own benefit, covering

         operations on lands subject to this Agreement.

 

         (b)       Commercial General Liability Insurance, including sudden and

         accidental pollution liability and personal injury blanket contractual

         liability and property damage, with coverage of at least One Million

         Dollars ($1,000,000) combined single limit or the equivalent;

         Comprehensive Automobile Liability Insurance, including personal injury

         and property damage, with coverage of at least One Million Dollars

         ($1,000,000) combined single limit or equivalent; and Products

         Liability and Completed Operations coverage of at least One Million

         Dollars ($1,000,000) combined single limit or the equivalent.

 

         (c)       Umbrella Liability Insurance, with at least Ten Million

         Dollars ($10,000.000) combined and single limit per occurrence.

 

         (d)       Control of well seepage and pollution, and well

         Restoration/Redrill Insurance with a combined single limit of at least

         Three Million Dollars ($3,000,000) per occurrence for each of the

         Mandatory Test Well and Optional Test Wells and $Five Million Dollars

         ($5,000,000) for the Deeper Exploration Well.

 

         (e)       Each and every Policy required in (b), (c) and (d) above shall

         name the other Party as an additional insured with a waiver of

         subrogation to the extent permitted by the issuer.

 

                  Before commencing any work hereunder, each Party shall furnish

         to the other Party Certificates of Insurance evidencing the issuance of

         the policies of insurance providing the types of coverage and limits of

         liability prescribed above,

 

                                     Page 24

<PAGE>

 

         and certifying that the other Party shall be given not less than Thirty

         (30) Days written notice prior to any material change, substitution or

         cancellation prior to the normal expiration dates. Both Parties agree

         to mutually waive subrogation in favor of each other on all insurances

         carried by each Party and/or obtain such waiver from the insurance

         carrier if so required by the insurance contract. If such waiver is not

         obtained, the Party failing to do so shall indemnify the other Party

         for any claim by an insurance carrier arising out of subrogation.

         (O.K.)

 

                  NEG shall require all contractors and subcontractors working

         or performing services hereunder to comply with the Worker's

         Compensation and Employer's Liability laws, both State and Federal, and

         to carry Commercial General Liability and such other insurance in

         accordance with industry standards.

 

                                    ARTCLE XX

 

                                     DEFAULT

 

20.1      Failure to Comply - If Ivanhoe or NEG, as the case may be, fails to

comply with any of the provisions of this Agreement, the other Party at its

option, may terminate this Agreement by giving the defaulting Party Fifteen (15)

Days written notice specifying in detail the cause for termination, in which

case the defaulting Party may within Ten (10) Days of its actual receipt of such

notice commence to cure the cause or causes specified in the notice. If the

defaulting Party , acting with reasonable prudence and dispatch cures the cause

or causes, this Agreement shall not terminate. If the defaulting Party does not

commence and actually cure such cause, this Agreement shall terminate; provided

that in so doing, the non-defaulting Party shall not waive or otherwise be

precluded from exercising any other rights or remedies, at law or in equity,

which it may have for breach of this Agreement, or failure to perform this

Agreement in whole or in part.

 

                                   ARTICLE XXI

 

                                     NOTICES

 

21.1      Notices - All notices between the Parties authorized or required by any

of the provisions of this Agreement, unless otherwise specifically provided,

shall be given in writing and delivered in person, by mail, e-mail, courier

service or telegram, postage or

 

                                    Page 25

<PAGE>

 

charges prepaid or by telex or telecopier and addressed to the Party to whom the

notice is given as follows.

 

         NEG:                        THE NAHABEDIAN EXPLORATION GROUP, LLC

 

         Street Address:             214 West Aliso Street

                                    Ojai, CA 93023

 

          Attention:                  Mark Nahabedian

 

         Telephone:                  805-646-4276

 

         Facsimile:                  805-646-3476

 

         IVANHOE:                    IVANHOE ENERGY (USA) INC.

 

         Street Address:             1200 Discovery Drive, Suite 301

                                    Bakersfield, CA 93309

 

         Mailing Address:            P.O. Box 9279

                                    Bakersfield, CA 93389-9279

 

         Attention:                  Michael Stark

                                     Exploration Department

 

         Telephone:                  661-869-8312

 

         Facsimile:                  661-325-2961

 

         E-mail:                     mstark@ivanhoeenergy.com

 

         The originating notice given under any provision hereof shall be deemed

given only when received by the Party to whom such notice is directed, and the

time for such Party to give any notice in response thereto shall run from the

date the originating notice is received. The second or any responsive notice

shall be deemed given when deposited in the mail or with the courier service,

with postage or charges prepaid, or upon transmission by facsimile or

telecopier. Each Party shall have the right to change its address at any time,

and from time to time by giving written notice thereof to the other Party.

 

                                    Page 26

<PAGE>

 

                                  ARTICLE XXII

 

                   ADDITIONAL TERMS, PROVISIONS, AND COVENANTS

 

22.1      Time and Specific Performance of Essence - Time and specific

performance are of the essence of this Agreement. Where this Agreement provides

that certain periods of time are to commence upon the completion or abandonment

of a well, such completion or abandonment shall be deemed to occur when the rig

then on such well is released therefrom.

 

22.2      Laws and Regulations; Applicable Law - NEG shall comply with and

conduct its operations hereunder in accordance with all applicable laws,

ordinances, rules, and regulations. This Agreement shall be construed and

interpreted under and in accordance with the laws of the State of California.

 

22.3      Headings - The underlined headings used throughout this Agreement are

for administrative convenience only and shall be disregarded for purposes of

construing this Agreement.

 

22.4      Waiver - Any of the terms, provisions, covenants, representations or

conditions hereof may be waived only by a written instrument executed by the

Party waiving compliance. The failure of any Party at any time or times to

require performance of any provisions hereof shall in no manner affect the right

to enforce the same. No waiver by any Party of any condition or of the breach of

any term, provision, covenant, representation or warranty contained in this

Agreement, whether by conduct or otherwise, in any one or more instances, shall

be deemed to be or construed as a further or continuing waiver of any such

condition or breach, or a waiver of any other condition or of the breach of any

other term, provision, covenant, representation or warranty.

 

22.5      Press Releases - No Party shall distribute any information or

photographs concerning operations hereunder to the press or other media without

the approval of the other Party. In the event of a requirement by a regulatory

agency [including the Securities Exchange Commission of the U.S. or regulatory

authorities of Canada, or any stock exchange on which the securities of a Party

or its Affiliate (to the extent the Affiliate either owns a majority interest in

a Party, or a Party owns a majority interest in

 

                                    Page 27

<PAGE>

 

the Affiliate) are listed, or of an emergency involving extensive property

damage, operations failure, loss of human life or other clear emergency, the

Parties are deemed authorized to furnish such minimum, strictly factual

information as is necessary to satisfy requirements of appropriate regulatory

authorities, or the legitimate public interest on the part of the press, other

media, and duly constituted authorities if time does not permit the obtaining of

prior approval by the other Party, but the Party furnishing such information

shall promptly advise the other Party of the information so furnished.

 

22.6      Amendments - This Agreement may be amended, modified, changed, altered

or supplemented only by written instrument duly executed by the Parties

specifically for such purpose and which specifically refers to this Agreement.

 

22.7      Conflicts - In the event of a conflict between provisions of this

Agreement and those contained in any of the agreements attached hereto, the

provisions of this Agreement shall prevail.

 

22.8      Arbitration - Any disputes, claims or controversies connected with,

arising out of or related to this Agreement and the rights and obligations

created herein, or the breach, validity, existence or termination hereof, which

cannot be resolved amicably, shall be settled by binding Arbitration to be

conducted in accordance with the Commercial Rules of Arbitration of the American

Arbitration Association, except as such Commercial Rules may be changed by the

Section 9.14. The disputes, claims or controversies shall be decided by three

(3) independent arbitrators (that is, arbitrators having no substantial economic

or other material relationship with the Parties), one (1) to be appointed by

each of the Parties hereto within Fourteen (14) Days following the date that one

Party notifies the other Party in writing that it is electing to commence

arbitration proceedings, and the third to be appointed by the two (2) so

appointed within Five (5) Days following the appointment of such two (2)

arbitrators. Should either Party refuse or neglect to join in the timely

appointment of the arbitrators, the other Party shall be entitled to select both

arbitrators. The arbitrators shall have Ninety (90) Days after the selection of

the third arbitrator within which to allow discovery, hear evidence, and issue

their decision or award and shall in good faith attempt to comply with such time

limits; provided, however, if two (2) of the three (3) arbitrators believe

additional time is necessary to reach a

 

                                    Page 28

<PAGE>

 

decision, they may notify the Parties and extend the time to reach a decision in

thirty (30) Day increments, but in no event to exceed an additional Ninety (90)

Days. The decision or award of the arbitrators shall be in writing and shall

state their detailed reasoning for the award. Discovery of evidence shall be

conducted expeditiously by the Parties, bearing in mind the Parties desire to

limit discovery and to expedite the decision or award of the arbitrators at the

most reasonable cost and expense of the Parties. Judgment upon an award rendered

pursuant to such Arbitration may be entered in any court having jurisdiction or

application may be made to such court for a judicial acceptance of the award,

and an order of enforcement, as the case may be. The place of Arbitration shall

be Bakersfield, California. All questions arising out of this Agreement and

their rights and obligations created herein, or its validity, existence,

interpretation, performance or breach shall be governed by the laws of the State

of California, without regard to conflict of laws principles. The arbitrators

shall not award consequential or punitive damages to either Party. The costs and

expenses of the arbitration proceeding, including the fees of the arbitrators

and all costs and expenses, including legal fees and witness fees, incurred by

the prevailing Party, shall be borne by the losing Party.

 

22.9      Limitations On Liability - In no event will any Party be liable to the

other Party for any indirect, consequential, exemplary or punitive damages.

 

22.10     Entire Agreement - When executed by the duly authorized representatives

of NEG and Ivanhoe this Agreement shall constitute the entire agreement between

the Parties regarding the drilling of the test wells, the NEG Leases, and the

Area of Mutual Interest and shall supersede and replace any and all other

writings, understandings or memoranda of understanding entered into or discussed

prior to the execution date hereof.

 

22.11     Savings Clause - If any part or portion of this Agreement is held to be

invalid, such invalidity of any such part or portion shall not affect any

remaining part or portion hereof.

 

22.12     Corporate Authority - The Parties represent that, as of the date of the

execution hereof, they are corporations or limited liability companies duly

authorized, validly existing, and in good standing under the laws of the states

of their incorporation and are

 

                                    Page 29

 

<PAGE>

 

qualified and authorized to do business in the State of California and that all

requisite corporate power and authority to execute, deliver, and effectuate this

Agreement have been duly obtained.

 

22.13     Further Assurances - Each Party shall promptly execute, acknowledge,

and deliver to the other Party such other instruments and take such other action

as may be necessary or convenient in order to effect the transactions

contemplated in this Agreement.

 

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be

effective as of the Effective Date.

 

                                   IVANHOE ENERGY (USA) INC.

 

                                   BY: /s/ Michael P. Stark

                                        ----------------------------------------

                                           Michael P. Stark

                                           Vice President, Exploration and Land

 

                                   THE NAHABEDIAN EXPLORATION

                                   GROUP, LLC

 

                                   BY: /s/ Mark A. Nahabedian

                                      -----------------------------------------

                                             Mark A. Nahabedian

                                            Managing Member

 

                                    Page 30

<PAGE>

 

                                   EXHIBIT "A"

 

         TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17,

2004 MAD BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP LCC AND IVANHOE ENERGY

(USA) INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

 

<TABLE>

<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------

                                                                TERM/

              LESSOR                LESSEE LEASE NO. LEASE DATE    YRS    LOR   RECORDING INFO.   COUNTY   EXPIRES

------------------------------------------------------------------------------------------------------------------------------------

<S>                                 <C>     <C>        <C>          <C>     <C>   <C>               <C>      <C>       <C>

    Ray Massoni & Marie Estelle     Hamar     SU-1        5/10/01      3     20%   7/24/01 #13084    Sutter   5/10/04

  Massoni, as Trustees of the Ray

  and Marie Massoni Family Trust

        dated July 24,1990

------------------------------------------------------------------------------------------------------------------------------------

  Heidrick & McGinnis Properties,    Hamar     SU-2       5/10/01      3     20%   7/24/01 #13093    Sutter   5/10/04

    L.P. a California Limited

Partnership, By Edith I. Heidrick

  and Gloria J. McGinnis, Trustees

  of the Gloria J. McGinnis Trust,

       its General Partner

------------------------------------------------------------------------------------------------------------------------------------

  William P. Dougherty & Carol D.    Hamar     SU-3a      4/03/01      5     1/5   7/24/01 #13079    Sutter   4/3/06     the SE4NE4 and the

   Doughterty, Trustees of the                                                                                    NE4SW4 of Sec.

William P. and Carol D. Dougherty                                                                                 31-12N-3E will be

  Trust dated November 30. 1993                                                                                 burdened with a 25%

                                                                                                                total royalty, the

                                                                                                              balance of the acreage

                                                                                                               will be burdened with

                                                                                                               a 23% total royalty

------------------------------------------------------------------------------------------------------------------------------------

John B, Gorin, Joseph P. Gorin, &   Hamar     SU-3b      3/12/01      5     1/5   7/24/01 #13080    Sutter   3/12/06     the SE4NE4 and the

  Mary Amelia Gorin, Mary Amelia                                                                                    NE4SW4 of Sec.

  Gorin, as Trustee of the Mary                                                                                   31-12N-3E will be

    Amelia Gorin Skip Trust as                                                                                    burdened with a 25%

  established under the Joan D.                                                                                  total royalty, the

   Gorin 1991 Trust, Joseph P.                                                                                  balance of the acreage

  Gorin, as Trustee of the Joseph                                                                                will be burdened with

      P. Gorin Skip Trust as                                                                                      a 23% total royalty

  established under the Joan D.

  Gorin 1991 Trust, Mary Amelia

    Gorin, as Trustee of Mary

  Amelia's Skip Trust under the

Will of Henry J. Gorin, deceased,

  Joseph P. Gorin, as Trustee of

  Joseph's Skip Trust under the

    Will of Henry J. Gorin,

    deceased,John B. Gorin, as

Trustee of the John B. Gorin Skip

  Trust as established under the

  Joan D. Gorin 1991 Trust, and

  John B.. Gorin, as Trustee of

    John's Skip Trust under the

  Will of Henry J. Gorin, deceased

------------------------------------------------------------------------------------------------------------------------------------

  Jeffrey S. Norton, as Trustee of   Hamar     SU-4       5/10/01      3     20%   7/24/01 #13094    Sutter   5/10/04

  the Jeffrey S. Norton Revocable

    Trust dated April 8, 1996

------------------------------------------------------------------------------------------------------------------------------------

  David L Richter. & Kimberly M.    Hamar     SU-5       5/16/01      3     1/5   7/24/01 #13085    Sutter   5/16/04

         Richter

------------------------------------------------------------------------------------------------------------------------------------

    Bryan Fairlee and Marjorie      Hamar     SU-6       3/16/01      5     1/6   7/24/01 #13078    Sutter   3/16/06

  Fairlee as Trustees of the Brian

and Marjorie Fairlee Trust, dated

      October 21, 1986

------------------------------------------------------------------------------------------------------------------------------------

  Dougherty Bros., a partnership    Hamar     SU-7       5/10/01      3     1/5   7/24/01 #13086    Sutter   5/10/04

------------------------------------------------------------------------------------------------------------------------------------

Joe's Girls, a California Limited   Hamar     SU-8       5/10/01      3     1/5   7/24/01 #13087    Sutter   5/10/04

      Partnership, Joseph J.

  Schreiner and Cleo N. Schreiner

   as Trustees of the Restated

  Schreiner Family Trust, dated

       April 13,1989

------------------------------------------------------------------------------------------------------------------------------------

  Bernard Furlan and Sandra          Hamar     SU-9       6/11/01      5     1/5   7/24/01 #13099    Sutter   6/11/06

          Furlan

------------------------------------------------------------------------------------------------------------------------------------

    Bryan Fairlee and Marjorie      Hamar     SU-12      4/30/01       5     1/6   7/24/01 #13082    Sutter   4/30/06

  Fairlee as Trustees of the Brian

and Marjorie Fairlee Trust, dated

October 21, 1986 as subsequently

  restated on April 27, 1993

------------------------------------------------------------------------------------------------------------------------------------

Fairlee Family Ranch,a California   Hamar     SU-13      4/05/01      5     1/6   7/24/01 #13083    Sutter   4/5/06       25% total royalty

Limited Partnership                                                                                                     burden

------------------------------------------------------------------------------------------------------------------------------------

  Elizabeth A. Hatcher, Trustee of   Hamar     SU-14       6/5/01      5     1/6   7/24/01 #13096    Sutter   6/5/06

  the Elizabeth A. Hatcher 1989

        Irrevocable Trust

------------------------------------------------------------------------------------------------------------------------------------

  Mary Margaret Simonson,             Hamar     SU-14      12/7/01                 1/9/02 #00598

         Trustee

------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

                                    Page 1 of 5

<PAGE>

 

                                   EXHIBIT "A"

 

         TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17,

2004 MAD BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP LCC AND IVANHOE ENERGY

(USA) INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

 

<TABLE>

<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------

                                                                TERM/

               LESSOR                LESSEE LEASE NO. LEASE DATE    YRS    LOR   RECORDING INFO.   COUNTY   EXPIRES

------------------------------------------------------------------------------------------------------------------------------------

<S>                                  <C>     <C>        <C>          <C>     <C>   <C>               <C>      <C>         <C>

  Mark H. Richter, Marie P. Gogin,   Hamar     SU-15      5/16/01      3      1/5   7/24/01 #13102   Sutter   5/16/04      25% total royalty

  Jane Richter Rozof, John L.                 SU-16                              thru #13107                              burden

  Richter, David Lee Richter,

Marilee Marsh, Carol Cunningham,

     and Paula Susan Cornia

------------------------------------------------------------------------------------------------------------------------------------

Henry D. Richter Jr. and Amelia     Hamar     SU-17      5/16/01      3      1/5   7/24/01 #13091   Sutter   5/16/04

Richter, Lee W. Richter and Mary

       Ruth Richter

------------------------------------------------------------------------------------------------------------------------------------

      Jane Shelley Bennett          Hamar     SU-18a     9/19/01      5      1/5   10/18/01 #19105 Sutter   9/19/06

------------------------------------------------------------------------------------------------------------------------------------

       Michael J. Shelley           Hamar     SU-18b      9/7/01      5      1/5   10/18/01 #19106 Sutter   9/7/06

------------------------------------------------------------------------------------------------------------------------------------

  Transamerica Minerals              Hamar     SU-19      4/11/01      3     17-23 7/24/01 #13081   Sutter   4/11/04

        Company

------------------------------------------------------------------------------------------------------------------------------------

  Norma A. Giusti, as Trustee of     Hamar     SU-21a     6/12/01      5      1/5   7/24/01 #13100   Sutter   6/12/06

  the Guisti Family Revocable

   Trust, Norma A. Giusti, as

  Trustee of the Guisti Family

  Residual Trust, and Norma A.

Giusti, as Trustee of the Guisti

      Family Marital Trust

------------------------------------------------------------------------------------------------------------------------------------

Richard Giusti and Sandra Giusti    Hamar     SU-21b     10/22/01     5      1/5   12/4/01 #22242   Sutter   10/22/06

------------------------------------------------------------------------------------------------------------------------------------

      Linda Guisti Delbar            Hamar     SU-21c     10/15/01     5      1/5   12/4/01 #22243   Sutter   10/15/06

------------------------------------------------------------------------------------------------------------------------------------

Henry D. Richter Jr. and Amelia     Hamar     SU-22     5/16/01       3      1/5   7/24/01 #13098   Sutter   5-16-04

Richter, Lee W. Richter and Mary

       Ruth Richter

------------------------------------------------------------------------------------------------------------------------------------

Henry D. Richter Jr. and Amelia     Hamar     SU-25     5/16/01       3      20%   7/24/01 #13095   Sutter   5/16/04

Richter, Lee W. Richter and Mary

       Ruth Richter

------------------------------------------------------------------------------------------------------------------------------------

Heidrick & McGinnis Properties,     Hamar     SU-26      6/5/01       3      20%   7/24/01 #13092   Sutter   6/5/04       present 25% total

   L.P. a California Limited                                                                                     royalty burden will

Partnership, By Edith I. Heidrick                                                                                  be reduced to 23%

and Gloria J. McGinnis, Trustees

of the Gloria J. McGinnis Trust,

      its General Partner

------------------------------------------------------------------------------------------------------------------------------------

Bernard Furlan and Sandra Furlan    Hamar     SU-27     7/10/01       5      1/5   8/21/01 #15218   Sutter   7/10/06

------------------------------------------------------------------------------------------------------------------------------------

Richard Giusti and Sandra Giusti    Hamar     SU-29     6/27/01       5      1/5   8/21/01 #15219   Sutter   6/27/06

  Trustees of the Richard and

Sandra Giusti Family Trust dated

      August 3, 1990

------------------------------------------------------------------------------------------------------------------------------------

  Ralph H. White and Mildred L.      Hamar     SU-30     9/24/01       5      1/5   10/18/01 #19085 Sutter   9/24/06

     White 1991 Trust

------------------------------------------------------------------------------------------------------------------------------------

Richard Giusti and Sandra Giusti    Hamar     SU-31     6/27/01       5      1/5   8/21/01 #15220   Sutter   6/27/06

  Trustees of the Richard and

Sandra Giusti Family Trust dated

       August 3, 1990

------------------------------------------------------------------------------------------------------------------------------------

  The Merle Anderson Revocable      Hamar     SU-32     9/15/01       4      1/5   12/4/01 #22244   Sutter   9/15/06

  Living Trust dated 10/25/88

------------------------------------------------------------------------------------------------------------------------------------

Jane Osborne, as Trustee of the     Hamar     SU-33     8/21/01       5      1/5   10/2/01 #17833   Sutter   8-21-06

  Jane Osborne Revocable Trust

    pursuant to that certain

  Amendment and Restatement of

Declaration of Trust dated June

  29, 1999 and Anna C. Byrd, as

Trustee of the Anna C. Byrd Trust

  under Declaration of Trust dated

          October 1,1997

------------------------------------------------------------------------------------------------------------------------------------

  Jack E. Hansen, The Jerry and     Hamar     SU-34     6/26/01       5      1/5   8/21/01 #15221   Sutter   6/26/06

  Deanna Hansen Trust dated May 3,

2000 and The Michael Hansen Trust

        dated July 5, 2000

------------------------------------------------------------------------------------------------------------------------------------

    Acorn Farms, a California       Hamar     SU-35     6/19/01       5      1/5   7/24/01 #13101   Sutter   6/19/06

          Corporation

------------------------------------------------------------------------------------------------------------------------------------

  The Wagener Bypass Trust dated    Hamar     SU-36     7/26/01       5      1/5   10/2/01 #17834   Sutter   7-26-06

       October 6, 1979

------------------------------------------------------------------------------------------------------------------------------------

    Tom E.Schwarzgruber, John       Hamar     SU-37     7/27/01       5      1/6   10/2/01 #17836   Sutter   7-27-06

   C.Schwarzgruber, and Sue Ann                                                  #17837

          Schwarzgruber

------------------------------------------------------------------------------------------------------------------------------------

  Edward Beall and Lou Ann Beall    Hamar     SU-44     7/17/01       5      1/5   9/10/01 #16440   Sutter   7-17-06

------------------------------------------------------------------------------------------------------------------------------------

  Richard D. Huston and Nancy J.    Hamar     SU-47     7/12/01       5      1/6   8/21/01 #15223   Sutter   7/12/06

  Huston, Trustees of the Huston

  Living Trust dated June 11, 1991

------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

                                   Page 2 of 5

<PAGE>

 

                                  EXHIBIT "A"

 

  TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE

  BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)

                                    INC. DBA

                    USA IVANHOE ENERGY, INC., IN CALIFORNIA

 

<TABLE>

<CAPTION>

                                                                        TERM/

              LESSOR                       LESSEE   LEASE NO.   LEASE DATE   YRS    LOR    RECORDING INFO.   COUNTY   EXPIRES

---------------------------------------    ------   ---------   ---------- -----   ---    ---------------   ------   -------

<S>                                        <C>      <C>         <C>         <C>     <C>    <C>               <C>      <C>        <C>

  William P. Lockett and Jean B. Lockett

      1998 Family Revocable Trust           Hamar     SU-52      7/18/01      5     1/5     9/10/01 #16442   Sutter    7-18-06

 

   Daniel P. Wagener, Trustee of the

   Daniel P. Wagener Childrens Trust

           dated June 28, 1978              Hamar     SU-53      7/26/01      5     1/5     10/2/01 #17835   Sutter    7-26-06

 

  James H. Akin and Aldean Akin Trustees

  of the Jim and Aldean Akin Family Trust

  dated 12/4/99, James H. Akin and Aldean

  Akin, James R. Akin, Susan E. Akin,

      Greg Abbott and Mary C. Akin          Hamar     SU-54       8/8/01      5     1/5      1/9/02 #00592   Sutter    8/8/06

 

          Holland Family Ranch              Hamar     SU-55      8/25/01      5     1/5     10/2/01 #17838   Sutter    8-25-06

 

  Sutter County Waterworks District No.1     Hamar     SU-56      7/16/03      3     1/6                     Sutter    7/16/06

 

   Ricci Farms, a General Partnership       Hamar     SU-57     10/19/01      5     1/5     12/4/01 #22245   Sutter   10/19/06

 

The Arthur C. and Mette K. James Family

  Revocable Trust dated August 2, 1990      Hamar     SU-58      7/18/01      5     1/6     9/10/01 #16443   Sutter    7-18-06

 

    The Giusti Family Residual Trust        Hamar     SU-59      7/17/01      5     1/5     8/21/01 #15215   Sutter    7/17/06

 

    The Giusti Family Marital Trust         Hamar     SU-60      7/17/01      5     1/5     8/21/01 #15216   Sutter    7/17/06

 

  Richard and Sandra Guisti Family Trust     Hamar     SU-61      7/17/01      5     1/5     9/10/01 #16437   Sutter    7-17-06

 

Roberta M. Schreiner, Trustee under the

  Will of William L. Schreiner, deceased

        and Roberta M. Schreiner            Hamar     SU-62      8/26/01      5     1/6    10/18/01 #19112   Sutter    8/26/06

 

Roberta M. Schreiner, Trustee under the

  Will of William L. Schreiner, deceased

        and Roberta M. Schreiner            Hamar    SU-62.1     8/26/01      5     1/6     12/4/01 #22248   Sutter    8/26/06

   Richter Bros., Inc., a California

              Corporation                    Hamar     SU-63      7/11/01      3     1/5     9/10/01 #16444   Sutter    7-11-04   25% total

                                                                                                                         royalty

                                                                                                                          burden

          Quad-H Ranches, Inc.              Hamar     SU-64      7/20/01      5     1/5     9/10/01 #16436   Sutter    7-20-06

 

The Emile and Simone Furlan Family Trust

            dated June 6, 1996               Hamar     SU-65      7/16/01      5     1/5     8/21/01 #15226   Sutter    7/16/06

 

  The Restated   Schreiner Family Trust

          dated April 13, 1989              Hamar     SU-66      7/24/01      5     1/5     9/10/01 #16445   Sutter    7-24-06

 

  John A. Driver and Clare M. Driver,

   Trustees of the John A. Driver and

    Clare M. Driver Family Revocable

      Trust dated August 31, 1994           Hamar     SU-67      8/20/01      3     1/5     10/2/01 #17839   Sutter    8-20-04

 

  Richard and Sandra Guisti Family Trust     Hamar     SU-68      7/17/01      5     1/5     9/10/01 #16435   Sutter    7-17-06

 

   Robert F. Stickel and Lorraine G.

                Stickel                     Hamar     SU-69       8/8/01      5     1/5     10/2/01 #17840   Sutter     8-8-06

 

  Richard and Sandra Guisti Family Trust     Hamar     SU-70      7/17/01      5     1/5     9/10/01 #16446   Sutter    7-17-06

 

Arnold Hoffart, as Successor Trustee of

  the Elizabeth Riehl and Suzanne Jones

   Remainder Trusts under the Adam J.

    Richter Trust, Arnold Hoffart, as

   Successor Trustee of the Kimberly

  Barnett Remainder Trust under the Adam

  J. Richter Trust, and Arnold Hoffart,

  as Successor Trustee of the Remainder

         Trust Adam J. Richter              Hamar     SU-72      7/25/01      5     1/5     9/10/01 #16448   Sutter    7-25-06

 

Arnold Hoffart, as Successor Trustee of

  the Elizabeth Riehl and Suzanne Jones

   Remainder Trusts under the Adam J.

             Richter Trust                  Hamar     SU-73      7/25/01      5     1/5      9/10/01 #16449   Sutter    7-25-06

 

Arnold Hoffart, as Successor Trustee of

  the Kimberly Barnett Remainder Trust

    under the Adam J. Richter Trust         Hamar     SU-74      7/25/01      5     1/5     9/10/01 #16450   Sutter    7-25-06

</TABLE>

 

                                   Page 3 of 5

<PAGE>

 

                                  EXHIBIT "A"

 

  TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE

  BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)

                                     INC. DBA

                    USA IVANHOE ENERGY, INC., IN CALIFORNIA

 

<TABLE>

<CAPTION>

                                                                      TERM/

              LESSOR                       LESSEE LEASE NO. LEASE DATE   YRS    LOR    RECORDING INFO.   COUNTY   EXPIRES

----------------------------------------   ------ --------- ---------- -----   ---    ---------------   ------   -------

<S>                                        <C>     <C>        <C>         <C>     <C>    <C>                <C>      <C>         <C>

Henry D. Richter Jr. and Amelia Richter,

  Lee W. Richter and Mary Ruth Richter      Hamar     SU-75    8/23/01      3     1/5     10/2/01 #17841   Sutter     8-23-04

 

            Mark H. Richter                 Hamar     SU-76    8/23/01      3     1/5     10/2/01 #17842   Sutter     8-23-04

 

           Mary Ruth Richter                Hamar     SU-77    8/23/01      3     1/5     10/2/01 #17843   Sutter     8-23-04

 

             Amelia Richter                 Hamar     SU-78    8/23/01      3     1/5     10/2/01 #17844   Sutter     8-23-04

 

Henry D. Richter Jr. and Amelia Richter,

  Lee W. Richter and Mary Ruth Richter,

   Mark H. Richter, Susan E. Richter,

  David Lee Richter, Kimberly Richter       Hamar     SU-78A   8/27/01      3     1/5    10/18/01 #19113   Sutter     8/27-04

 

Henry D. Richter Jr. and Amelia Richter,

  Lee W. Richter and Mary Ruth Richter,

  Marilyn Knox Larson, Carolyn Knox Green

  Caroline Persis Dixon Zlotnich, and

  Charles Leonard Dixon as Trustees of

  the Testimentary Trust of the Last Will

  and Testament of Helen Knox Dixon also

     known as Helen Caroline Dixon,

  Deceased, filed in the Superior Court

    of the County of Santa Clara, CA

    Probate Case No. 1-96-PR-137266         Hamar     SU-79    8/23/01      3     1/5    10/18/01 #19114   Sutter     8/23/04

 

Henry D. Richter Jr. and Amelia Richter,

  Lee W. Richter and Mary Ruth Richter      Hamar     SU-80    8/23/01      3     1/5     10/2/01 #17845   Sutter     8-23-04

 

Henry D. Richter Jr. and Amelia Richter,

  Lee W. Richter and Mary Ruth Richter      Hamar    SU-80A    8/30/01      3     1/5    11/16/01 #21149   Sutter     8/30/04

 

     Transamerica Minerals Company          Hamar     SU-81     7/2/01      3   17-23%    9/10/01 #16451   Sutter     7-2-04

                                                   SU-82b

 

  The Restated Schreiner Family Trust

          dated April 13, 1989              Hamar    SU-82a    7/24/01      5     1/5     9/10/01 #16452   Sutter     7-24-06

                                                   SU-83

 

           Edward J. Shelley                 Hamar    SU-84a    8/15/01      5     1/6     10/2/01 #17846   Sutter     8-15-06

 

           Michael J. Shelley               Hamar    SU-84b    8/16/01      5     1/5     10/2/01 #17847   Sutter     8-16-06

 

          Jane Shelley Bennett              Hamar    SU-85a    9/19/01      5     1/5     10/18/01#19115   Sutter     9-19-06

 

           Michael J. Shelley               Hamar    SU-85b    8/16/01      5     1/5     10/18/01#19116   Sutter     8-16-06

 

Lela Driver, Trustee of the   Lela Driver

      Revocable Living Trust under

declaration of Trust dated July 15, 1991    Hamar    SU-86     8/23/01      5     1/5     10/2/01 #17848   Sutter     8-23-06

 

  Roger L. Matteoli and Beverly Matteoli     Hamar    SU-91a    9/12/01      5     1/5    10/18/01 #19117   Sutter     9/12/06

 

              Marie Martin                  Hamar    SU-91b   10/15/01      5     1/5     12/4/01 #22251   Sutter    10/15/06

 

  Thomas Adney Butler And Janet Carolyn

      Butler 1995 Revocable Trust           Hamar    SU-92     8/20/01      5     1/5     10/2/01 #17851   Sutter     8-20-06

 

   Norma A. Giusti, as Trustee of the

      Guisti Family Marital Trust           Hamar    SU-94a    8/23/01      5     1/5     10/2/01 #17852   Sutter     8-23-06

 

              Linda Guisti                  Hamar    SU-94b    8/26/01      5     1/5     10/2/01 #17853   Sutter     8-26-06

 

    Richard Giusti and Sandra Giusti        Hamar    SU-94c    8/23/01      5     1/5     10/2/01 #17854   Sutter     8-23-06

 

       B.E.Giovannetti, a widower           Hamar    SU-95    10/17/01      4     1/5     12/4/01 #22252   Sutter    10/17/05

 

      Angelo and Elva Guisti Trust          Hamar    SU-96    10/29/01      5     1/5     12/4/01 #22253   Sutter    10/29/06

 

  Marietta G. Leiser, and   Marietta G.

   Leiser Trustee of the Testimentary

   Trust of Phil K. Leiser, deceased        Hamar    SU-97a     9/4/01      5     1/5     2/25/02 #03665   Sutter      9/4/06

                                                   SU-98a

 

  Daniel P. Wagener, as Trustee of the

  Wagener Bypass Trust dated October 6,

                  1978                      Hamar   SU-98.1     9/9/01      5     1/5    10/18/01 #19121   Sutter      9/9/06

 

B.E.Giovannetti and Sons, a partnership     Hamar   SU-98.2   10/17/01      4     1/5     12/4/01 #22254   Sutter    10/17/05

 

    Richard Giusti and Sandra Giusti        Hamar   SU-98.3   10/22/01      5     1/5     12/4/01 #22255   Sutter    10/22/06

 

  Arnold Hoffart, as Successor Trustee      Hamar   SU-98.6     9/3/02           1/5                     Sutter

 

             Mette K. James                 Hamar    SU-99     8-27-01      5     1/6     10/2/01 #17856   Sutter     8-27-06

</TABLE>

 

                                  Page 4 of 5

<PAGE>

 

                                  EXHIBIT "A"

 

  TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE

  BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)

                                    INC. DBA

                    USA IVANHOE ENERGY, INC., IN CALIFORNIA

 

<TABLE>

<CAPTION>

                                                                     TERM/

               LESSOR                      LESSEE LEASE NO. LEASE DATE   YRS      LOR    RECORDING INFO.   COUNTY   EXPIRES

---------------------------------------- ------ --------- ---------- ----      ---    ---------------   ------   -------

<S>                                       <C>     <C>        <C>         <C>       <C>    <C>               <C>      <C>         <C>

  Heidrick & McGinnis Properties, L.P. a

  California Limited Partnership, By

    Edith I. Heidrick and Gloria J.

  McGinnis, Trustees of the Gloria J.

  McGinnis Trust, its General Partner      Hamar    SU-101     12/12/01    3       1/5     1/24/02 #01591   Sutter    12/12/04

 

          William Ashley Payne             Hamar SU-102.1a    10/13/01    5       1/5     12/4/01 #22256   Sutter    10/13/06

 

            Robert B. Payne                Hamar SU-102.1b    10/13/01    5       1/5     12/4/01 #22257   Sutter    10/13/06

 

  John B. Anderson, dba Anderson Farms

     Company, a sole proprietorship        Hamar   SU-105a      2/11/02    5       1/5      5/9/02 #09160   Sutter     2/11/07

 

  Davis C. Bundock, Jr. and Nurene E.

  Bundock, Trustees of the Bundock Family

      Trust dated January 14,1991          Hamar   SU-106d    11/8/2001    5       1/5      1/9/02 #00593   Sutter     11/8/06

 

           Beatrice Ann Huber              Hamar   SU-106e      11/8/01    5       1/5      1/9/02 #00594   Sutter     11/8/06

 

            Dolores Azevedo                Hamar   SU-107a     10/29/01    5       1/5      1/9/02 #00595   Sutter    10/29/06

 

              Mary Baldwin                 Hamar   SU-107b     11/11/01    5       1/5      1/9/02 #00596   Sutter    11/11/06

 

  James F. Waters and Bernice E. Waters,

  as Trustees of the Waters Family Trust

    under Declaration of Trust dated

            October 23, 1996               Hamar    SU-108     10/26/01    5       1/5     12/4/01 #22258   Sutter    10/26/06

 

  Richard Raymond and Maria E. Raymond     Hamar    SU-109     10/29/01    5       1/5     12/4/01 #22259   Sutter    10/19/06

 

  Irene J. Meckfessel, Trustee under the

  Will of Alexander F. Johnson, deceased    Hamar    SU-112      1/28/02    5       1/5      5/9/02 #09161   Sutter     1/28/07

 

  Jane Osborne, as Trustee of the Jane

  Osborne Revocable Trust pursuant to

  that certain Amendment and Restatement

  of Declaration of Trust dated June 29,

                  1999                     Hamar   SU-113a      1/14/02    5       1/5                     Sutter     1/14/07

 

Anna C. Byrd, as Trustee of the Anna C.

  Byrd Trust under Declaration of Trust

          dated October 1,1997             Hamar   SU-113b      1/14/02    5       1/5                     Sutter     1/14/07

 

   Norma A. Giusti, as Trustee of the

  Guisti Family Revocable Trust, Norma A.

  Giusti, as Trustee of the Guisti Family

  Residual Trust, and Norma A. Giusti, as

  Trustee of the Guisti Family Marital

                 Trust                     Hamar    SU-114       2/4/02    5       1/5      5/9/02 #09162   Sutter      2/4/07

 

  Frank Giusti and Sons, a partnership     Hamar    SU-115       2/4/02    5       1/5      5/9/02 #09163   Sutter      2/4/07

 

            Hust Bros., Inc.               Hamar    SU-117      2/25/02    5       1/6      5/9/02 #09164   Sutter     2/25/07

 

  Timothy W. Cusick and Gayle A Cusick     Hamar    SU-118       7/1/03    5       1/6                     Sutter      7/1/08

 

             Mette K. James                Hamar    SU-119       7/1/03    5       1/6                      Sutter      7/1/08

 

     County of Sutter, a political

  subdivision of the State of California    Hamar    SU-120      7/16/03    3       1/6                     Sutter     7/16/06

 

 

William A. Driver, Paula D. Shimada and

           Mary A. McDermott                Hamar    KYO-4    10/02/2001    3       1/5    1/11/02 #001600    Yolo    10/2/2004

 

  Irene J. Meckfessel, Trustee under the

  Will of Alexander F. Johnson, deceased    Hamar    KYO-6    02/11/2002    5       1/5    5/9/02 #0019753    Yolo    2/11/2007

 

   Mary Margaret Simonson , Successor

  Trustee of the Elizabeth A. Hatcher

          Trust dated 8/15/89              Hamar    SUN-81   12/07/2001    3       1/5      1/9/02 #00585   Sutter   12/7/2004

 

  Edith I. Heidrick,Successor Trustee of

  the Joe   A. Heidrick Family Trust dated

  April 8,1987, and Ray Leo Massoni and

  Marie Estelle Massoni as Trustees of the

   Ray and Marie Massoni Family Trust

          dated July 24, 1990              NEG       MU-2      10/01/93    3       1/5      10/26/93 Book   Sutter      HBP      27.4861%

                                                                                      1596 Page 436                       total

                                                                                                                         royalty

                                                                                                                         burden

</TABLE>

 

**Note: Only the portions of these leases lying within the boundary of the AMI

are included in this Agreement. All leases are burdened by a 2% ORR payable to

Martin I. Smith et al. The NEG royalty shall be a positive number equal to 23%

less (LOR+2%). Leases and units holding wells yet to be put on production

already have 25% total royalties assigned (see above list). MU leases are

burdened by an existing 27.4861% royalty burden.

 

                                  Page 5 of 5

<PAGE>

                                  EXHIBIT "B-1"

 

  To that certain Farmout and Exploration Agreement dated February 17, 2004 made

  by and between The Nahabedian Exploration Group LLC and Ivanhoe Energy (USA)

                                      Inc.

                  dba USA Ivanhoe Energy, Inc., in California

 

 

         CONTRACT AREA (SHOWN IN YELLOW), SACRAMENTO VALLEY, CALIFORNIA

 

 

 

                                      (MAP)

 

 

                By ___________________________________________

                   Michael Stark for Ivanhoe Energy (USA) Inc

 

 

                By ___________________________________________

                           Mark A. Nahabedian for NEG

<PAGE>

                                  EXHIBIT "B-2"

 

  To that certain Farmout and Exploration Agreement dated February 17, 2004 made

  by and between The Nahabedian Exploration Group LLC and Ivanhoe Energy (USA)

                                       Inc.

                   dba USA Ivanhoe Energy, Inc., in Califonria

 

     OUTER BOUNDARY OF THE AMI (SHOWN IN RED), SACRAMENTO VALLEY, CALIFORNIA

 

 

                                     (MAP)

 

 

                By ___________________________________________

                   Michael Stark for Ivanhoe Energy (USA) Inc

 

                By ___________________________________________

                           Mark A. Nahabedian for NEG

<PAGE>

                                  EXHIBIT "B-3"

 

  To that certain Farmout and Exploration Agreement dated February 17, 2004 made

  by and between The Nahabedian Exploration Group LLC and Ivanhoe Energy (USA)

                                      Inc.

                 dba USA Ivanhoe Energy, Inc., in California

 

          EXCLUDED AREA (SHOWN IN GRAY), SACRAMENTO VALLEY, CALIFORNIA

 

 

                                      (MAP)

 

 

 

                By ___________________________________________

                   Michael Stark for Ivanhoe Energy (USA) Inc

 

                By ___________________________________________

                           Mark A. Nahabedian for NEG

<PAGE>

 

                             EXHIBIT B-3 (CONTINUED)

 

  LIST OF EXCLUDED LEASES TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT MADE

    FEBRUARY 17, 2004 BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP LLC AND

      IVANHOE ENERGY (USA) INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

 

<TABLE>

<CAPTION>

           LESSOR                 LESSEE   LEASE NO.   LEASE DATE   TERM/YRS   LOR     RECORDING INFO.   COUNTY   EXPIRES

           ------                 ------   ---------   ----------   --------   ---    ---------------   ------   -------

<S>                               <C>      <C>         <C>          <C>        <C>    <C>               <C>      <C>

   Henry D. Richter Jr. and        NEG       MU-1       12/15/88        3      1/4        2/15/89       Sutter     HBP

    Amelia Richter, Lee W.                                                          Book 1289

  Richter and Mary Ruth Richter                                                       Page 423

 

Michael James Mullen Successor     NEG       MU-3       11/11/88        5      1/6       12/27/88       Sutter     HBP

  Trustee under the Dorothy E.                                                       Book 1283

  Mullen Revocable Trust dated                                                       Page 425

           12/14/90

 

      Kenneth L. Wallace          Hamar      SU-10       5/10/01        3      1/5        7/24/01       Sutter     HBP

                                                                                    #13088

                                                                                 Amend.9/10/01

                                                                                   #16453

 

    Richter Bros., Inc., a        Hamar     SU-11.1      5/17/01        3      1/5        7/24/01       Sutter     HBP

    California Corporation                                                           #13089

                                                                                  Amend.9/10/01

                                                                                    #16454

 

    Richter Bros., Inc., a        Hamar     SU-11.2      5/17/01        3      1/5        7/24/01       Sutter     HBP

    California Corporation                                                            #13090

                                                                                 Amend.9/10/01

                                                                                    #16455

 

  Jane Osborne, as Trustee of      Hamar      SU-20       7/10/01        5      1/5        8/21/01       Sutter     HBP

  the Jane Osborne Revocable                                                         #15217

Trust pursuant to that certain

  Amendment and Restatement of

Declaration of Trust dated June

29, 1999 and   Anna C. Byrd, as

  Trustee of the Anna C. Byrd

  Trust under Declaration of

  Trust dated October 1, 1997

 

  Sutter Basin Corporation,Lltd    Hamar      SU-23        6/7/01        5      1/5        7/24/01       Sutter     HBP

         a corporation                                                               #13097

 

    Sutter Basin Corp., LTD       Hamar      SU-71       7/20/01        5      1/5        9/10/01       Sutter     HBP

                                                                                     #16447

</TABLE>

 

                                   Page 1 of 1

<PAGE>

 

                                   EXHIBIT "C"

 

ATTACHED TO AND MADE A PART OF THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT

DATED FEBRUARY 17, 2004, BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC

(NEG), AS OPERATOR, AND IVANHOE ENERGY (USA) INC. DBA USA IVANHOE ENERGY, INC.,

IN CALIFORNIA (IVANHOE), AS NON-OPERATOR.

 

                            A.A.P.L. FORM 610 - 1989

 

                         MODEL FORM OPERATING AGREEMENT

 

                               OPERATING AGREEMENT

 

                                      DATED

 

                               FEBRUARY 17, 2004,

                                            -----

                                             Year

 

OPERATOR THE NAHABEDIAN EXPLORATION GROUP, LLC

 

CONTRACT AREA SEE FARMOUT AND EXPLORATION AGREEMENT THIS OPERATING

 

                  AGREEMENT IS ATTACHED AND MADE A PART THEREOF

 

COUNTY OR PARISH OF SUTTER, STATE OF CALIFORNIA

 

                                     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 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:.......................................     12

          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>

<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 THE NAHABEDIAN EXPLORATION

GROUP, LLC , 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 well capable of producing 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.

 

         Unless the context otherwise clearly indicates, words used in the

singular include the plural, the word "person" includes natural and artificial

persons, the plural includes the singular, and any gender includes the

masculine, feminine, and neuter.

 

                                   ARTICLE II.

                                    EXHIBITS

 

         The following exhibits, as indicated below and attached hereto, are

incorporated in and made a part hereof:

 

   [X]    A. Exhibit "A," shall include the following information:

 

            (1) Description of lands subject to this agreement,

 

            (2) Restrictions, if any, as to depths, formations, or substances,

 

             (3) Parties to agreement with addresses and telephone numbers for

                notice purposes,

 

            (4) Percentages or fractional interests of parties to this

                agreement,

 

            (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this

                agreement,

 

   [X]    A-1 AREA OF MUTUAL INTEREST

 

   [X]    B. Exhibit "B," Form of Lease.

 

   [X]    C. Exhibit "C," Accounting Procedure.

 

   [X]    D. Exhibit "D," Insurance.

 

   [X]    E. Exhibit "E," Gas Balancing Agreement.

 

   [X]    F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated

            Facilities.

 

   [X]    H. Other: Memorandum of Operating Agreement

 

                                      - 1 -

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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, Operator shall pay or deliver,

or cause to be paid or delivered, all burdens on its share of the production

from the Contract Area and shall indemnify, defend and hold the other parties

free from any liability therefor.

 

         Nothing contained in this Article III.B. shall be deemed an assignment

or cross-assignment of interests covered hereby, and in the event two or more

parties contribute to this agreement jointly owned Leases, the parties'

undivided interests in said Leaseholds shall be deemed separate leasehold

interests for the purposes of this agreement.

 

C. SUBSEQUENTLY CREATED INTERESTS:

 

         If any party has contributed hereto a Lease or Interest that is

burdened with an assignment of production given as security for the payment of

money, or if, after the date of this agreement, any party creates an overriding

royalty, production payment, net profits interest, assignment of production or

other burden payable out of production attributable to its working interest

hereunder, such burden shall be deemed a "Subsequently Created Interest."

Further, if any party has contributed hereto a Lease or Interest burdened with

an overriding royalty, production payment, net profits interests, or other

burden payable out of production created prior to the date of this agreement,

and such burden is not shown on Exhibit "A," such burden also shall be deemed a

Subsequently Created Interest to the extent such burden causes the burdens on

such party's Lease or Interest to exceed the amount stipulated in Article III.B.

above.

 

         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 all required curative

matters 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 -

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

 

                                      - 2 -

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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.

 

         2. Loss by Non-Payment or Erroneous Payment of Amount Due: If, through

mistake or oversight, any rental, shut-in well payment, minimum royalty or

royalty payment, or other payment necessary to maintain all or a portion of an

Oil and Gas Lease or interest is not paid or is erroneously paid, and as a

result a Lease or Interest terminates, there shall be no monetary liability

against the party who failed to make such payment.

 

         3. Other 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:

 

   THE NAHABEDIAN EXPLORATION GROUP, LLC, OR AN AFFILIATE DESIGNATED BY IT 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, THEIR OFFICERS, EMPLOYEES OR AGENTS, 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.

 

          Subject to Article VII.D.1., such resignation or removal shall not

become effective until 7:00 o'clock A.M. on the first day of the calendar month

following the expiration of ninety (90) days after the giving of notice of

resignation by Operator or action by the Non-Operators to remove Operator,

unless a successor Operator has been selected and assumes the duties of Operator

at an earlier date. Operator, after effective date of resignation or removal,

shall be bound by the terms hereof as a Non-Operator. A change of a corporate

name or structure of Operator or transfer of Operator's interest to any single

subsidiary, parent or successor corporation shall not be the basis for removal

of Operator.

 

         2. Selection of Successor Operator: Upon the resignation or removal of

Operator under any provision of this agreement, a successor Operator shall be

selected by the parties. The successor Operator shall be selected from the

parties owning an interest in the Contract Area at the time such successor

Operator is selected. The successor Operator shall be selected by the

affirmative vote of two (2) or more parties owning a majority interest based on

ownership as shown on Exhibit "A"; provided, however, if an Operator which has

been removed or is deemed to have resigned fails to vote or votes only to

succeed itself, the successor Operator shall be selected by the affirmative vote

of the party or parties owning a majority interest based on ownership as shown

on Exhibit "A" remaining after excluding the voting interest of the Operator

that was removed or resigned. The former Operator shall promptly deliver to the

successor Operator all records and data relating to the operations conducted by

the former Operator to the extent such records and data are not already in the

possession of the successor operator. Any cost of obtaining or copying the

former Operator's records and data shall be charged to the joint account.

 

         3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is

placed in receivership, it shall be deemed to have resigned without any action

by Non-Operators, except the selection of a successor. If a petition for relief

under the federal bankruptcy laws is filed by or against Operator, and the

removal of Operator is prevented by the federal bankruptcy court, all

Non-Operators and Operator shall comprise an interim operating committee to

serve until Operator has elected to reject or assume this agreement pursuant to

the Bankruptcy Code, and an election to reject this agreement by Operator as a

debtor in possession, or by a trustee in bankruptcy, shall be deemed a

resignation as Operator without any action by Non-Operators, except the

selection of a successor. During the period of time the operating committee

controls operations, all actions shall require the approval of two (2) or more

parties owning a majority interest based on ownership as shown on Exhibit "A."

In the event there are only two (2) parties to this agreement, during the period

of time the operating committee controls operations, a third party acceptable to

Operator, Non-Operator and the federal bankruptcy court shall be selected as a

member of the operating committee, and all actions shall require the approval of

two (2) members of the operating committee without regard for their interest in

the Contract Area based on Exhibit "A."

 

C. EMPLOYEES AND CONTRACTORS:

 

         The number of employees or contractors used by Operator in conducting

operations hereunder, their selection, and the hours of labor and the

compensation for services performed shall be determined Operator, and all such

employees or contractors shall be the employees or contractors of Operator.

 

D. RIGHTS AND DUTIES OF OPERATOR:

 

         1. Competitive Rates and Use of Affiliates: All wells drilled on the

Contract Area shall be drilled on a competitive contract basis at the usual

rates prevailing in the area. If it so desires, Operator may employ its own

tools and equipment in the drilling of wells, but its charges therefor shall not

exceed the prevailing rates in the area and the rate of such charges shall be

agreed upon by the parties in writing before drilling operations are commenced,

and such work shall be performed by Operator under the same terms and conditions

as are customary and usual in the area in contracts of independent contractors

who are doing work of a similar nature. All work performed or materials supplied

by affiliates or related parties of Operator shall be performed or supplied at

competitive rates, pursuant to written agreement, and in accordance with customs

and standards prevailing in the industry.

 

         2. Discharge of Joint Account Obligations: Except as herein otherwise

specifically provided, Operator shall promptly pay and discharge expenses

incurred in the development and operation of the Contract Area pursuant to this

agreement and shall charge each of the parties hereto with their respective

proportionate shares upon the expense basis provided in Exhibit "C." Operator

shall keep an accurate record of the joint account hereunder, showing expenses

incurred and charges and credits made and received.

 

         3. Protection from Liens: Operator shall pay, or cause to be paid, as

and when they become due and payable, all accounts of contractors and suppliers

and wages and salaries for services rendered or performed, and for materials

supplied on, to or in respect of the Contract Area or any operations for the

joint account thereof, and shall keep the Contract Area free from

 

                                     - 4 -

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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 VII.B. Nothing in this paragraph

shall be construed to establish a fiduciary relationship between Operator and

Non-Operators for any purpose other than to account for Non-Operator funds as

herein specifically provided. Nothing in this paragraph shall require the

maintenance by Operator of separate accounts for the funds of Non-Operators

unless the parties otherwise specifically agree.

 

         5. Access to Contract Area and Records: Operator shall, except as

otherwise provided herein, permit each Non-Operator or its duly authorized

representative, at the Non-Operator's sole risk and cost, full and free access

at all reasonable times to all operations of every kind and character being

conducted for the joint account on the Contract Area and to the records of

operations conducted thereon or production therefrom, including Operator's books

and records relating thereto. Such access rights shall not be exercised in a

manner interfering with Operator's conduct of an operation hereunder and shall

not obligate Operator to furnish any geologic or geophysical data of an

interpretive nature unless the cost of preparation of such interpretive data was

charged to the joint account. Operator will furnish to each Non-Operator upon

request copies of any and all reports and information obtained by Operator in

connection with production and related items, including, without limitation,

meter and chart reports, production purchaser statements, run tickets and

monthly gauge reports, but excluding purchase contracts and pricing information

to the extent not applicable to the production of the Non-Operator seeking the

information. Any audit of Operator's records relating to amounts expended and

the appropriateness of such expenditures shall be conducted in accordance with

the audit protocol specified in Exhibit "C."

 

         6. Filing and Furnishing Governmental Reports: Operator will file, and

upon written request promptly furnish copies to each requesting Non-Operator not

in default of its payment obligations, all operational notices, reports or

applications required to be filed by local, State, Federal or Indian agencies or

authorities having jurisdiction over operations hereunder. Each Non-Operator

shall provide to Operator on a timely basis all information necessary to

Operator to make such filings.

 

         7. Drilling and Testing Operations: The following provisions shall

apply to each well drilled hereunder, including but not limited to the Initial

Well:

 

           (a) Operator will promptly advise Non-Operators of the date on which

the well is spudded, or the date on which drilling operations are commenced.

 

           (b) Operator will send to Non-Operators such reports, test results

and notices regarding the progress of operations on the well as the

Non-Operators shall reasonably request, including, but not limited to, daily

drilling reports, completion reports, and well logs.

 

           (c) Operator shall adequately test all Zones encountered which may

reasonably be expected to be capable of producing Oil and Gas in paying

quantities as a result of examination of the electric log or any other logs or

cores or tests conducted hereunder.

 

         8. Cost Estimates: Upon request of any Consenting Party, Operator shall

furnish estimates of current and cumulative costs incurred for the joint account

at reasonable intervals during the conduct of any operation pursuant to this

agreement. Operator shall not be held liable for errors in such estimates so

long as the estimates are made in good faith.

 

         9. Insurance: At all times while operations are conducted hereunder,

Operator shall comply with the workers compensation law of the state where the

operations are being conducted; provided, however, that Operator may be a self-

insurer for liability under said compensation laws in which event the only

charge that shall be made to the joint account shall be as provided in Exhibit

"C." Operator shall also carry or provide insurance for the benefit of the joint

account of the parties as outlined in Exhibit "D" attached hereto and made a

part hereof. Operator shall require all contractors engaged in work on or for

the Contract Area to comply with the workers compensation law of the state where

the operations are being conducted and to maintain such other insurance as

Operator may require.

 

         In the event automobile liability insurance is specified in said

Exhibit "D," or subsequently receives the approval of the parties, no direct

charge shall be made by Operator for premiums paid for such insurance for

Operator's automotive equipment.

 

                                   ARTICLE VI.

                             DRILLING AND DEVELOPMENT

 

A. INITIAL WELL:

 

         AS SOON AS PRACTICABLE, Operator shall commence the drilling of the

Initial Well at the following location:

 

         AS PROVIDED IN THE FARMOUT AND EXPLORATION AGREEMENT TO WHICH THIS

OPERATING AGREEMENT IS ATTACHED AS EXHIBIT "C".

 

and shall thereafter continue the drilling of the well with due diligence, AS

PROVIDED IN THE FARMOUT AND EXPLORATION AGREEMENT TO WHICH THIS OPERATING

AGREEMENT IS ATTACHED AS EXHIBIT "C".

 

The drilling of the Initial Well and the participation therein by all parties is

obligatory, subject to Article VI.C.1. as to participation in Completion

operations and Article VI.F. as to termination of operations and Article XI as

to occurrence of force majeure.

 

B. SUBSEQUENT OPERATIONS:

 

         1. Proposed Operations: If any party hereto should desire to drill any

well on the Contract Area other than the Initial Well, or if any party should

desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a

well no longer capable of producing in paying quantities in which such party has

not otherwise relinquished its interest in the proposed objective Zone under

this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,

Recomplete or Plug Back such a well shall give written notice of the proposed

operation to the parties who have not otherwise relinquished their interest in

such objective Zone

 

                                     - 5 -

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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.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) 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, Recomplete