Oil and Gas Lease Agreement

OIL, GAS AND MINERAL LEASE
  

This Oil , Gas and Mineral Lease (this “Lease”) is made and entered into on th i s 20 ^th day of August , 2007 (the “Effective Date”) by and between the Atrisco Oil and Gas , LLC, a New Mexico limited liability company , whose addres s is 1730 Montano NW , Suite B , Albuquerque , New Mexico 87107 (hereinafter referred to as “Lessor”) and Tecton Energy , LLC, a Te x as limited liability company, whose address is 3000 Wilcrest, Suite 300 , Houston , Te x as 77042 (hereinafter referred to as “Lessee”) .  

1.      GRANTING CLAUSE

Lessor , in consideration of Ten Dollars ($10 . 00) in h a nd paid , of the royalties herein provided and of the covenants and representations of Lessee herein contained , hereby Grants , Lease s and Lets exclusively unto Lessee for the sole and only purposes of investigating, exploring, prospecting, drilling and operating for , and producing , oil, gas and all other liquid or gaseous minerals (including sulfur produced as a component of oil and gas) from the real property described in Exhibit A attached hereto (the “Leased Premises”) (such oil , gas , and/or liquid and/or gaseous minerals produced from the Leased Premises or lands pooled therewith being herein collectively referred to as the “Minerals”) , subject , however, to all of the terms , conditions , provisions , covenants , and obligations of Lessee under this Lease. The Leased Premises shall specifically exclude the lands embraced in the SunValley Lease and the Great Northern Lease (both defined in Section 9 below). However , this Lease shall also include in the Leased Premises all land located within the Town of Atrisco Land Grant that i s determined to be owned or claimed by Lessor and is not otherwise committed to Lessee in this Lease; except that any such land located within the Town of the Atrisco Land Grant that is hereafter purchased by Lessor shall not be included in the Leased Premise s .  

All mineral rights other than the Minerals are expressly reserved to Lessor. These reserved mineral rights include the rights to lignite , coal and sulfur not produced as a component of oil and gas.

For the purpose of determining the amount of any bonus or other payment hereunder, said Leased Premises shall be deemed to contain 50,000 acres, whether actually containing more or less.

2 . PRIMARY TERM   

Simultaneously with the execution of this Lease and as a condition to the existence of this Lease, Lessee shall make a bonus payment to Lessor in immediately available funds of United States currency, by wire transfer to Lessor’s bank account , in the amount of Two Hundred Forty Thousand and No /00 Dollars ($240,000 . 00). Such payment together with the Ten Thousand and No/00 Dollars($10,000.00) already paid by Lessee to Lessor shall equal a “ Total Bonus Payment” of Two Hundred Fifty Thousand and No/00Dollars ($250 , 000.00). Lessee’s failure to make such Total Bonus Payment shall , at the option of Lessor and without notice from Lessor to Lessee , result in the immediate termination of this Lease in its entirety. Subject to the other provisions herein contained , this Lease shall be for a term of five (5) years from the Effective Date (hereinafter called “Primary Term”) and so long thereafter as Minerals are produced from the Leased Premises or lands pooled therewith , in paying quantities, or drilling operations are in progress thereon as hereinafter provided. Lessee agrees to obtain all governmental approvals and permits required in order to allow the exploration and production of the Minerals . Lessor agrees to cooperate with Les s ee and participate to the extent reasonably necessary to assist Lessee, but at Lessee’s sole cost and expense, in obtaining all governmental approval and permits necessary to allow the exploration and production of the minerals.

Lessee, as further consideration for this Lease , commits to commence within the first year of the Primary Term of this Lease, the drilling or re-entering of two (2) wells to a depth sufficient to test the Cretaceous formation. At least one of these two wells shall be the re-entry of the UTex#1Well on the Leased Premises. If Lessee is precluded from commencing drilling operations on the UTex#1 Well prior to the end of the first year of the Primary Term of this Lease due to the actions of third parties, including the grantor, or its successors in title, in the Quitclaim Mineral Deed and Assignment of Oil and Gas Leases, dated December 4, 2006 , from Westland Development Co . , Inc . to Lessor, recorded in BookA128, Page 8482 in the Office of the County Clerk of Bernalillo County, New Mexico (herein called “Quitclaim Mineral Deed”), such actions will constitute a condition of Force Majeure (as defined in Section 7). Lessee agrees that the condition of Force Majeure applicable to the drilling or re-entering of the UTex#1 Well during the first year of the Primary Term shall be limited to a period of six (6) months following the end of the first year of the Primary Term of the Lease. Thereafter, Lessee shall drill the UTex#1 Well or a substitute well elsewhere on the Leased Premises .

After the year and for the following four (4) years of the Primary Term of the Lease, Lessee agrees to drill or re-enter one (1) well to a depth sufficient to test the Cretaceous formation each year or pay Lessor an amount equal to Six Dollars and No / IOO Dollars ($6 . 00) per acre each year for all acreage committed to this Lease up to and including the end of the (5) year Primary Term thereof; provided, however, in determining the total amount of such payment, the acreage committed to this Lease shall be proportionately reduced. Should Lessee fail to the obligation to drill or pay contained in this Section 2, Lessor shall have the right to sue Lessee to collect any payments owed hereunder.

3. POOLING   

Other than as provided in this Section 3, Lessee shall have no right to pool or combine any portion of the Leased Premises with other lands without obtaining the prior written consent of Lessor. Lessee may pool as follows:

A.      Limitations on Pooling. Lessee may not pool the Leased Premises with any acreage outside of the boundaries of the Leased Premises, unless written consent is obtained from Lessor. Lessee may pool so long as no less than fifty percent (50%) of the land comprising the pooled unit for such well shall be from the Leased Premises, unless written consent is obtained from Lessor or such pooling is required pursuant to a rule or order issued by the Oil Conservation Division of the Energy and Minerals Department of the State of New Mexico or by any other lawful authority for the pool or area in which the Leased Premises are situated.

B.      Pooled Unit Size . Units pooled hereunder shall not exceed the standard proration unit by law or by the Oil Conservation Division of the Energy and Minerals Department of the State of New Mexico or by any other lawful authority for the pool or area in which the Leased Premises are situated, plus a tolerance often percent (10%).

C.      Recordation of Pooled Unit Declaration . In the exercise of its pooling rights hereunder, Lessee shall file of record in the Official Public Records of Bernalillo County, New Mexico a written declaration describing the unit and stating the effective date of pooling (which effective date in no event can be more than thirty days prior to the date of filing). Lessee shall promptly provide Lessor a copy of such recorded written declaration. Lessee may file such declaration at any time while this Lease is in effect and whether before or after production has been established on the pooled unit lands.

D.      Termination of Pooled Unit . Upon termination of the pooled unit, Lessee must file of record in the Official Public Records of Bernalillo County, New Mexico a written instrument declaring the dissolution of said pooled unit.

E.      Allocation of Pooled Unit Production . In the event of such pooling, subject to other terms and provisions contained in this Section 3.E, there shall be allocated to the land covered by this Lease within such pooled unit that proportion of the total production from the producing well applicable to such pooled unit which the number of surface acres in such land covered by this Lease within such pooled unit bears to the total number of surface acres in such pooled unit.

F.      Outstanding Royalty Interests . If there are royalty interests in Minerals in the Leased Premises now owned by parties other than Lessor and if pooling occurs, Lessor makes no warranty or representation that this Lease grants Lessee the power or authority to pool such royalty interests.

4. REWORKING AND CONTINUOUS DRILLING OF WELLS   

In the event production of Minerals from the Leased Premises or lands pooled therewith, once obtained , shall cease for any cause within one hundred fifty (150) days before the expiration of the Primary Term of this Lease or at any time or times thereafter, this Lease shall not terminate (i) if Lessee commences reworking operations within one hundred fifty (150) days thereafter, and this Lease shall remain in full force and effect so long as such operations continue in good faith and in a workmanlike manner without an interruption totaling more than one hundred fifty (150) days; and if such reworking operations result in the production of Minerals, this Lease shall remain in full force and effect so long as Minerals are produced therefrom in paying quantities or shut - in payments are tendered to Lessor as provided herein or (ii) if production in paying quantities is restored within one hundred fifty (150) days after such cessation of operations .  

5. CONTINUOUS DEVELOPMENT   

A.           Extension of Primary Term . Notwithstanding any provision contained herein to the contrary, whether or not Minerals are being produced on the Leased Premises at the expiration of the Primary Term, if Lessee (i) is engaged at the expiration of the Primary Term in drilling or reworking operations on the Leased Premises or lands pooled therewith or (ii) has completed a well either as a dry hole or as a producer on the Leased Premises within one hundred fifty (150) days before the expiration of the Primary Term, the Primary Term of this Lease shall be extended and remain in full force and effect as to all of the Leased Premises for so long as operations for drilling are conducted on the Leased Premises or lands pooled therewith with no more than one hundred fifty days elapsing between the completion or abandonment of one well and the commencement of actual drilling operations of another well. Upon the expiration of such extended Primary Term, this Lease shall terminate as to: (1) all lands which are not included within (i) a pooled unit created pursuant to Section 3 or (ii) a proration unit established by Lessee and approved by the New Mexico Oil and Gas Conservation Division applicable to each producing well located on the Leased Premises or on lands pooled therewith (it being understood that each such proration unit shall contain no more acreage than the minimum number of acres required to obtain approval of the drilling unit size applicable to a well under the applicable density rules adopted by a governmental authority having jurisdiction, and (2) all depths and horizons 100 feet below the stratigraphic equivalent of the deepest depth producing or capable of producing Minerals in paying quantities, in each well which is included within the boundaries of such proration unit. After the expiration of the Primary Term, as extended if applicable, (i) Lessee shall release all of the Leased Premises not otherwise held hereunder, and (ii) this Lease as to each pooled unit or proration unit held by a producing well shall be considered a separate Lease from the lease covering any other such pooled unit or proration units, so that this Lease shall, thereafter, as to each such pooled unit or proration unit, remain in force as to each such pooled unit or proration unit only so long as oil or gas is produced from such pooled unit or proration unit or the lease as to such pooled unit or proration unit is maintained in force under some other provision o f this Lease and (iii) if the deepest depth producing oil or gas in paying quantities in a well ceases to produce oil or gas in paying quantities, and Lessee obtains production of oil or gas in paying quantities from a depth that is closer to the surface than said deepest depth, all depths below 100 feet below such depth which is closer to the surface shall be released from this Lease, it being intended that after the expiration of the Primary Term, as extended if applicable, this Lease shall never cover any subsurface depths below 100 feet below the deepest depth then producing or capable of producing Minerals in paying quantities.  

B.            150 day rework . If production should thereafter cease as to acreage included in a proration unit or pooled unit, this Lease will terminate as to such acreage unless Lessee commences reworking or additional drilling operations on such acreage within one hundred fifty (150) days thereafter and continues such reworking or additional drilling operations until such production is restored thereon , provided that if more than one-hundred fifty (150) days pass between the abandonment of such well and the commencement of actual drilling operations for an additional well , or more than one hundred fifty (150) days pass since the commencement of reworking operations without the restoration of production of Minerals in paying quantities, this Lease shall terminate as to the applicable proration unit and the pooled unit.   

C.            Release and Survival of Lessee Obligations . At any time or times that this Lease terminates as to all or any portion of the acreage of the Leased Premises , Lessee shall promptly execute and record in the Official Public Records of Bernalillo County , New Mexico , a proper release of such terminated acreage and all depths thereunder and shall furnish executed counterparts of each such release to Lessor at the address shown in Section 17 hereof . All obligations of Lessee contained in this Lease that are to be performed by Lessee regardless of the execution and delivery of releases of this Lease by Lessee shall continue in force and effect and survive the execution and delivery of such releases.   

D.            Definition . “Completion of drilling” as used herein means, as to dry holes, the date Lessee releases the drilling rig used to drill such well or the date such rig is moved off of the location, whichever date occurs first, and as to producing wells, the date Lessee has run casing and production casing or tubing and has perforated and/or tested the well, except for producing wells which are “fraced” by Lessee, “completion of drilling” shall mean the earlier to occur of (i) thirty (30) days from the date Lessee releases the drilling rig used to drill such well or the date such rig is moved off of the location, whichever date occurs first, or (ii) the date Lessee completes such “fracing” operations and conducts a flow test on the well. “Commencement of drilling” as used herein means either (i) the date Lessee commences actual drilling with rotary drilling tools of a suitable size necessary to reach the object depth or (ii) the date the Lessee spuds the well, so long as such spudding operations are initiated and prosecuted in good faith and with reasonable diligence toward drilling and completion of the object depth.

6. OFFSET OBLIGATIONS
  

A.            Offset Obligation. In the event one or more wells producing oil or gas should be brought in on land outside the Leased Premises but within 330 feet from any boundary of the Leased Premises (the “ Lease Boundary”), or are brought in elsewhere and are draining the Leased Premises, or a portion thereof (said wells located within 330 feet of the Lease Boundary, or which are draining the Leased Premises or portion thereof being hereinafter referred to singularly as the “Draining Well”) and there is then no well with a bottom hole location on the Leased Premises or lands pooled therewith producing oil or gas, as the case may be, in commercial quantities from the same geological formation as the Draining Well, then Lessee agrees to drill such well as a reasonably prudent operator would drill under the same or similar circumstances.

B.            Implied Duty to Protect from Drainage . The foregoing offset obligation shall be in addition to the duty the Lessee has to protect the Leased Premises from drainage which is implied in the absence of any express provisions dealing with drainage, and Lessee shall owe such duty to Lessor in addition to the contractual provisions hereof.
   

7. FORCE MAJEURE   

A.            Force Majeure . The term “Force Majeure” as used herein shall mean and include: requisition, order, regulation, or control by governmental authority or commission; exercise of rights or priority or control by governmental authority or third parties resulting in delay in obtaining or inability to obtain either material, equipment or means of transportation normally necessary in prospecting or drilling for Minerals, or in producing, handling or transporting same from the Leased Premises or lands pooled therewith; war; acts of God; insurrection; flood; or strike. Should Lessee be prevented from complying with any express or implied covenant of this Lease, or from conducting drilling or reworking operations hereunder, or from producing oil or gas hereunder due to delays encountered in obtaining approval of permits or drill sites on the Leased Premises, by governmental authority or by third parties including grantor in the Quit Claim Mineral deed as referenced in Paragraph 2 of this lease it shall be deemed that “Force Majeure” has occurred; provided, however, that such Force Majeure shall be limited to a period of six (6) months and so long thereafter as Lessee shall make a Good Faith Effort to resolve to obtain the necessary permits. For purposes of this Section 7.A., a “Good Faith Effort” shall mean that the Lessee is actively and in good faith pursuing approval of such permits by taking all measures to obtain such approvals as a reasonably prudent operator would under the same or similar circumstances.

B.            Not Grounds for Termination . Notwithstanding any other provisions of this Lease , but subject to the conditions hereinafter set forth in this Section should Lessee be prevented by Force Majeure as defined above, from conducting drilling , completion or reworking operations on, or producing Minerals from , the Leased Premises or lands pooled therewith, such failure shall not constitute a ground for the termination of this Lease or subject said Lessee to damages therefor; and the period of time during which Lessee is so prevented shall not be counted against Lessee, but this Lease shall be extended for a period of time equal to that during which such Lessee is so prevented from conducting such drilling or reworking operations on, or producing Minerals from, such Leased Premises or lands pooled therewith, plus, at Lessor’s sole discretion, a reasonable amount of time thereafter. All of the provisions of this Section 7 are subject to each of the following e x press conditions:   

C .            Limitations . The terms and conditions of this Section 7 shall not extend beyond the expiration date of any law, order , rule or regulation invoked under this Section 7, and shall be applicable and effective only during the following periods :  

(1)           If the Force Majeure shall occur during the Primary Term of this Lease, as the same ma y be extended pursuant to Section 5 hereof, Force Majeure shall not operate to extend this Lease more than two (2) year beyond the expiration of such Primary Term ; provided , however , that if the e v ent of Force Majeure is any form of injunction granted pursuant to a mineral partition lawsuit or similar action brought against Lessee, then such Force Majeure shall not operate to extend this Lease more than the lesser of six (6) months or the period of time during which such injunction is effective.
  

(2)           If the Force Majeure shall occur during a drilling or reworking period provided for in Section 5 hereof , after the Primary Term has expired, then Force Majeure shall not operate to extend this Lease more than two (2) years beyond the expiration of such period .
  

D .            Notice . None of the provisions of this Section 7 shall ever be or become effective and applicable unless Lessee shall , within a reasonable time (not to e x ceed sixty (60) days in any event) after occurrence of the claimed event of Force Majeure above referred to , notify Lessor , in writing , of such occurrence with full particulars thereof.   

E.            Not Applicable to Monetary Payments . The terms of this Section do not apply to monetary payments due under the terms of this Lease .

F.            Time of the Essence . Time is of the essence with respect to each provision of this Lease .  

8. SHUT-IN GAS WELL PROVISIONS

If at any time there is a well on the Leased Premises or land pooled therewith which is capable of producing gas in paying quantities, but the production thereof is shut-in or suspended due to lack of market for such gas, and if this Lease is not then continued in force by some other provision hereof, then this Lease shall nevertheless continue in force as to such well and the pooled unit or proration unit allocated to it for a period of sixty (60) days from the date such well is shut-in. Before the expiration of any such sixty (60) day period , Lessee may pay to Lessor an advance annual royalty equal to Ten and NO/100 Dollars ($10.00) per net mineral acre for the acreage under this Lease committed to the proration unit for such well and if such payment or tender is timely made, this Lease shall continue in force but only as to said well or wells and the proration unit allocated to it or them and it shall be considered that gas is being produced from said well or wells in paying quantities for one (1) year from the date such well or wells are shut-in, and in like manner subsequent advance annual royalty payment may be made or tendered and it will be considered that gas is being produced from said well or wells in paying quantities for such additional one (1) year period as well, but in no event shall Lessee be entitled to pay shut-ins for more than four (4) years cumulative, per well , during the term of this lease.

Should such shut-in royalty payments not be made in a timely manner as provided in this Section 8 , it will be considered for all purposes that there is no production and no excuse for delayed production of gas from any such w ell or wells, and unless there is then in effect other preservation provisions of this Lease, Lessor may , at Lessor’s option , elect to terminate this Lease as to the proration unit for such well by sending written notice to Lessee. Lessee shall have fifteen (15) days from receipt of Lessor ’ s notice to cure such breach by paying the shut-in royalty . If Lessee has not paid the shut-in royalty by the end of the 15-day curative period, Lessor shall have the right to terminate the Lease as to the proration unit for such well by filing a Notice of Termination in the Official Public Records of Bernalillo County, New Mexico. The effective date of said termination shall be the date said Notice of Termination is filed with the said County Clerk.   

9. ROYALTIES
   

Lessee shall pay to Lessor the following royalties:

It is the intent of the parties that the provisions of this Section 9 are to be fully effective and enforceable and are not to be construed as “surplusage” under the holding set forth in Creson v. Amoco Production Co. , 10 P.3d 853 (N.M . App. 2000). Additionally, said Royalty Percentage shall never bear, either directly or indirectly , under any circumstances , the costs or expenses (including depreciation) to construct, repair, renovate or operate any pipeline, plant, or other facilities or equipment used in connection with the treating, separation, extraction, gathering, processing, refining, transporting , manufacturing or marketing of Minerals produced from the Leased Premises or lands pooled therewith. Lessor shall be paid its Royalty Percentage on all oil or gas produced , including without limitation oil or gas used by Lessee for operations off the Leased Premises or lands pooled therewith. Lessor’s Royalty Percentage shall bear Lessor’s proportionate part of all ad valorem, excise, state severance, wind-fall profits, or like and similar taxes imposed on Minerals or on the value thereof that is attributable to Lessor’s Royalty Percentage , if any, paid by Lessee, which proportionate part may be deducted from Lessor’s Royalty Percentage before payment to Lessor.   

For purposes of this Section 9, the following definitions shall be used:
  

“SunValley Lease” means that certain Oil and Gas Lease, dated June 6, 2000, from Westland Development Co., Inc. to SunValley Energy Corporation, recorded in Book A6, Page 7854, Official Public Records of Bernalillo County, New Mexico, as the same has been amended through Fifth Amendment to Oil and Gas Lease between the same parties, acknowledged by Lessor on April 21, 2006, recorded in Book Al15 , Page 7121.

“ Great Northern Lease” means that certain Oil and Gas Lease, dated September 17 , 2001 ,from Westland Development Co ., Inc. to Great Northern Gas Company, recorded in Book A25 , Page 1245, Official Public Records of Bernalillo County , New Mexico, as amended, and all subsequent oil and gas leases covering a portion of the leased premises therein issued under the terms thereof.   

“Atrisco Leases” means this Lease, the SunValley Lease, and the Great Northern Lease.   

“Royalty Percentage” means a royalty equal to fifteen percent (15%) until such time as the net total production from the Atrisco Leases equals a rate of 3000 MCFD for a one (1) day period, at which time, the royalty shall be increased to seventeen and one-half percent (17.5%); when the net total production from the Atrisco Leases equals a rate of 6000 MCFD for a one (1) day period, the royalty shall be increased to eighteen and one-half percent (18.5%); payment of such escalated Royalty Percentage to commence on the first day of the month following the month in which the applicable production rate threshold is attained.

A.            Royalty . On oil, gas and casinghead gas, together with any other liquid or gaseous hydrocarbons recovered by lease operations such as drips or separators, and on any other type of Minerals, the Royalty Percentage of the proceeds of the sale or of the gross market value thereof, whichever is higher, (provided that with respect to oil, gas, casinghead gas, or any other liquid or gaseous hydrocarbons recovered by lease operations and used by Lessee for operations on or off the Leased Premises or lands pooled therewith, royalty shall be equal to the Royalty Percentage of the gross market value thereof) oil, gas and casinghead gas , together with any other liquid or gaseous hydrocarbons recovered by lease operations, is to be delivered free of cost to the credit of Lessor into pipelines , gathering lines, or other facilities to which the wells and tanks on the property may be connected; or to be delivered in kind into tanks, gathering lines, or other shipping facilities provided by Lessor, at Lessor’s option and at Lessor’s expense, such option to be exercised by Lessor from time to time, but for periods of not less than six (6) months at a time after ninety (90) days written notice to Lessee of Lessor’s intention to take in kind such oil, gas or other hydrocarbons. No royalty shall be due on any gas that is flared or tested, or any oil and or gas that is produced from the Leased Premises or lands pooled therewith and used as fuel for lease operation , compression, separation, dehydration, transportation or other ordinary and customary Lessee operations.

B.            Products . On products resulting from such oil, gas, casinghead gas, or other Minerals, the Royalty Percentage of the proceeds of sale thereof.

C.            Residue Gas . On residue gas or gas remaining after separation, extraction or processing operations, the Royalty Percentage of the proceeds of sale .

D.            Meaning of Market Value . For purposes of this Section 9 the term “market value” shall mean for such oil, gas , casinghead gas, other Minerals, and products therefrom (i) the gross price at which such oil, gas, casinghead gas , other Minerals or products there from are sold pursuant to a “Production Sales Contract,” as defined below, or (ii) if not sold pursuant to a Production Sales Contract, the highest gross price paid for oil, gas, casinghead gas, other Minerals and/or products there from of comparable physical characteristics, within Bernalillo County, New Mexico, such calculations of price to be made as of the time such oil, gas, casinghead gas, other Minerals or products there from are produced and saved, or separated, processed or extracted. Included within the definition of “market value” as used herein is the presumption that Production Sales Contracts have been negotiated by Lessee in good faith at arms-length contracts with bona fide purchasers who are not subsidiaries or affiliates of Lessee, and contain adequate provisions for redetermination of price at reasonable and customary intervals. In no event, however, shall “market value” ever be less than the amount actually received by the Lessee and/or any affiliate for the sale of Minerals, plus the value of all other consideration and benefits of whatsoever kind and amount recei v ed, directly or indirectly , by Lessee and/or any affiliate or subsidiary of Lessee, for the sale of Minerals.

E.            Payment of Royalty . All royalties provided in this Lease shall be payable in cash (unless Lessor elects to take such royalty Minerals in kind) to Lessor within one hundred twenty (120) days following the commercial sale of production and thereafter no more than sixty(60) days after the end of the month during which production takes place. Subject to the provisions of Section 8 of this Lease concerning shut-in wells, royalties shall be paid to Lessor by Lessee and/or its assigns or by the product purchaser for Minerals. Any alleged failure by Lessee or any production purchaser to timely pay royalty to Lessor shall give rise to the remedies set forth in the New Mexico Oil and Gas Proceeds Payment Act, as the same may be amended from time to time. Any alleged failure by Lessee or any production purchaser to properly calculate Lessor’s royalty shall be subject to arbitration as set forth in Section l8B. below

F.            Marketing; Production Sales Contracts . If Lessor is not taking its royalty production in kind , Lessee agrees that it will use its best efforts as are reasonable under the circumstances to market and sell Minerals at the highest price and on the most favorable terms possible. Lessee agrees that it will not enter into any contract for the sale , delivery, transporting or processing of any type of Minerals produced from the Leased Premises or lands pooled therewith (i) with any subsidiary or affiliate of Lessee and (ii) which shall extend more than (5) years from the effective date of such sales contract unless such contract has adequate provisions for redetermination of price at reasonable and customary intervals. In the event Lessor elects to take and separately dispose of its royalty share of Minerals , an appropriate balancing agreement shall be entered into between Lessor and Lessee . At least thirty(30) days subsequent to the execution of any contract for the sale , delivery, transporting or processing of any type of Minerals produced from the Leased Premises (each a “Production Sales Contract”), Lessee shall provide Lessor with the pertinent portions of such Production Sales Contract.. If any Production Sales Contract, or any other contract pursuant to which any Minerals produced hereunder are sold , makes any express deductions for the expenses of production, gathering, dehydration, compression , transportation, manufacture , processing, treatment or marketing of any such Minerals, then all such deductions shall be added to the price received by Lessee for such Minerals for the purpose of the calculation and payments of royalties to Lessor, so that Lessor’s royalty shall not bear, directly or indirectly, any of such expenses, subject to part (ii) of this section.

G.            Take or Pay . In the event Lessee enters into a Mineral purchase contract which contains what is commonly referred to as a”take or pay provision” (such provision meaning that the Mineral purchaser agrees to take delivery of a specified minimum volume or quantity of Minerals over a specified term at a specified price or to make minimum periodic payments to the producer for Minerals not taken by the purchaser) and the purchaser under such Mineral purchase contract makes payment to Lessee by virtue of such purchaser’s failure to take delivery of such minimum volume or quantity of Minerals, then Lessor shall be entitled to the Royalty Percentage of all such sums paid to Lessee or producer under the “pay” provisions of such Mineral purchase contract. Such royalty payments shall be due and owing to Lessor within sixty (60) days after the receipt of such payments by Lessee. Any royalty payments made to Lessor under the “pay” obligation of any “take or pay” Mineral contract shall be applied as a credit toward Lessee’s minimum royalty obligation. If the Mineral purchaser “makes up” such Minerals within the period called for in the Mineral contract and Lessee is required to give such purchaser a credit for Minerals previously paid for but not taken, then Lessor shall not be entitled to royalty on such “makeup” Minerals. If Lessee is not producing any quantities of Minerals from the Leased Premises or lands pooled therewith but is receiving payments under the “pay” portion of such “take or pay” Mineral purchase contract provision, such payments shall not relieve Lessee of the duty to make shut-in royalty payments if Lessee desires to continue this Lease, but such “take or pay” royalty payments shall be applied as a credit against any shut-in royalty obligation of the Lessee. Lessor shall be a third-party beneficiary of any Mineral purchase contract and/or transportation agreement entered into between Lessee and any purchaser and/or transporter of Lessor’s Minerals, irrespective of any provision of said contracts to the contrary, and such Mineral purchase contract and/or transportation agreement will expressly so provide. Further, Lessor shall be entitled to the Royalty Percentage of the value of any benefits obtained by or granted to Lessee from any Mineral purchaser and/or transporter for the amendment, modification, extension, alteration, consolidation, transfer, cancellation or settlement of any Mineral purchase contract and/or transportation agreement.   

H.            Use of Separator . If a reasonable and prudent operator would do so under similar circumstances, Lessee agrees that before any gas produced from the Leased Premises is used or sold off the Leased Premises, it will be run, free of cost to Lessor, through an adequate oil and gas separator of a conventional type or equipment that will ensure that all liquid hydrocarbons recoverable from the gas by such means will be recovered on this Lease and Lessor properly compensated therefor.   

J.            Division Orders . Regardless of the contents of any division order executed by Lessor, the terms of this Lease may not be amended by any division order and the signing of a division order by any mineral owner may not be made a prerequisite to payment of royalty hereunder.

M.            Right to Audit. Lessor expressly reserves the right and Lessee expressly grants to Lessor the right to audit production, revenue, and the calculation and payment of revenues to Lessor by giving Lessee notice of the exercise of this right. Within thirty (30) days after receipt of such notice, Lessee shall make available to Lessor all books and records (together with copies thereof ifrequested by Lessor) along with all other data necessary for Lessor to audit such production, revenue, and/or royalty payments. Such audit shall take place at Lessee’s office or at such other place as may be mutually agreed upon by the parties.

10. INFORMATION ACCESS AND REPORTS

A.       Access to Information . Lessee agrees to make available, at Lessee’s offices, to Lessor or Lessor’s nominee, all well information, including cores, cuttings, samples, logs (including Schlumberger and other electrical logs), results of deviation tests and directional surveys, results of seismic and geologic surveys (unless a licensing agreement prohibits Lessee from sharing such seismic data) and the results of all drill stem tests and other tests of other kind or character that may be made with respect to the Leased Premises or lands pooled therewith or wells on the Leased Premises or lands pooled therewith. Any examination by Lessor of any licensed seismic data shall be subject to strict compliance with the applicable license agreement under which Lessee acquired such data and shall remain confidential, even after termination of this Lease, or portions thereof, despite the provisions of Section 10.A.3. below. Lessor or Lessor’s nominee shall have free access during normal business hours to Lessee’s books and records relative to the production and sale of Minerals from the Leased Premises or lands pooled therewith, including reports of every kind and character to governmental authorities, State or Federal. Lessor shall have the right at its own election and risk, and its sole cost and expense, to employ gaugers or install meters to gauge or measure the production of all Minerals produced from the Leased Premises or lands pooled therewith, and Lessee agrees to make available, at Lessee’s offices, to Lessor or Lessor’s gauger or nominee run or gauge tickets for all Minerals removed from the Leased Premises or lands pooled therewith. Lessee shall furnish to Lessor daily drilling reports on each well drilled or provide Lessor with website and password information to permit Lessor to access drilling reports. Lessor agrees to keep confidential the information obtained by Lessor pursuant to this Section 10.A, in accordance with the following provisions:   

B.            Gas and Oil Purchase Contracts. Lessee shall furnish to Lessor, within a reasonable time after execution, a copy of any Mineral purchase contract or transportation agreement entered into in connection with the Leased Premises or lands pooled therewith, or if there is already a Mineral purchase contract or transportation agreement in effect due to Lessee’s operations in the field, then a copy of that contract. Furthermore, a copy of any amendments to the Mineral purchase contract or transportation agreement shall be furnished to said Lessor within thirty (30) days after execution thereof. Lessee agrees to make available, at Lessee’s offices, to Lessor or Lessor’s nominee , all core records, core analyses, well completion , bottom hole pressure measurement, directional survey records, electrical and induction surveys and logs, gas and oil ratio reports, paleontological reports pertaining to the paleontology of the formations encountered in the drilling of any wells on the Leased Premises or lands pooled therewith, and all other reports which pertain to the drilling, completing or operating of the wells located on the Leased Premises. The technical data in this Section 10.A and this Section 10 . B and Mineral contract information (but not including production volumes or prices paid for Minerals) shall be solely for Lessor’s use, and Lessor shall in good faith attempt to keep same confidential after acquiring same from Lessee, subject, however, to the Confidentiality Exceptions .  

11. SURVEYS, ABSTRACTS, TITLE OPINIONS AND CURATIVE WORK   

A.            Surveys and Maps . If either party shall cause any of the exterior or interior lines of the property covered by this Lease to be surveyed, the surveying party shall furnish the other party a copy of such survey.   

B.            Abstracts of Title . In the event either party causes an abstract of title to be prepared covering the Leased Premises or lands pooled therewith, or any portion thereof, the other party shall have access to said abstract at any reasonable time. In the event either party shall cause the title to be examined or should obtain a title opinion or title certificate upon the property herein leased, such party agrees to furnish the other party a copy or photostatic copy thereof within a reasonable time of receipt of the same, with the understanding that neither the party obtaining the opinion or certificate nor the attorney or firm of attorneys rendering the opinion or certificate shall be responsible to the other party for its correctness, the said opinion or certificate being furnished to the other party simply for the other party’s own convenience, information and personal use . Similarly, if any curative material is obtained by either party, a copy there of shall immediately be furnished to the other party under the same conditions of non-liability on the part of the obtaining party or the persons who may have obtained or prepared the same.   

12. USE OF THE SURFACE AND SUBSURFACE
  

A.            Surface and Subsurface Operations . This Lease is made expressly subject to the terms and conditions of Exhibit B to the Quitclaim Mineral Deed - attached hereto as Exhibit B and made a part hereof. Lessee expressly agrees to conduct all surface and subsurface operations pursuant to t