This LLC Operating Agreement involves
Title: EX-10.2 OPERATING AGREEMENT
THIS AGREEMENT ( “Agreement” ), entered by and between NEWPORT OIL CORPORATION , a Florida corporation sometimes known as and being the same corporation as Newport Oil, Inc. ( “Operator” ), and FIRECREEK PETROLEUM, INC. , a Delaware corporation (“Firecreek” ). Firecreek and any third parties to whom Firecreek may assign a portion of its interest in this Agreement in accordance herewith is hereinafter sometimes referred to individually as “Non-Operator” and collectively as “Non-Operators” .
The parties to this Agreement are owners of Oil and Gas Leases and/or Oil and Gas interests in the lands identified in Exhibit “A” . The parties 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:
As used in this Agreement, the following words and terms have the meanings stated:
A. “AFE” means 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. “Completion” or “Complete” means a single operation intended to complete a well as a producer of 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. “Contract Area” means 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” . The Contract Area as defined for this venture shall be limited to the specific leases covered herein.
D. “Deepen” means a single operation whereby a well is drilled to an objective Zone below the deepest Zone in which the well was previously drilled deeper within an existing zone or below the Deepest Zone proposed in the associated AFE, whichever is the lesser.
E. “Drilling Party” and “Participating Party” 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. “Drilling Unit” means 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 the express agreement of the Drilling Parties.
G. “Drillsite” means the Oil and Gas Lease or Oil and Gas Interest on which a proposed well is to be located.
H. “Non-Participant Well” mean a well in which less than all parties have conducted an operation as provided in Article VI. A.2 .
I. “Non-Drilling Party” and “Non-Participating Party” mean a party who elects not to participate in a proposed operation.
J. “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.
K. “Oil and Gas Interests” or “Interests” means 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. L. “Oil and Gas Lease” or “Oil and Gas Leases” , “Lease” or “Leases” and “Leasehold” mean the oil and gas leases or interest therein covering tracts of land lying within the Contract Area which are owned by the parties to this Agreement.
M. “Plug Back” means a single operation whereby a deeper Zone or a portion of a deeper zone is abandoned in order to attempt a Completion in a shallower Zone.
N. “Recompletion” or “Recomplete” means an operation whereby a Completion in one Zone is abandoned in order to attempt a Completion in another portion of an existing zone or a different Zone within the existing wellbore.
O. “ Rework” means 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.
P. “Sidetrack” means 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 to drill around junk in the hole to overcome other mechanical difficulties. Sidetrack operations shall be considered to be initiated at that point when drilling outside of the existing borehole is started.
Q. “Zone” means 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.
The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof.
Exhibit “A” - which includes the following information:
Description of lands, leases and wells subject to this Agreement,
Parties to agreement with addresses and telephone numbers for notice purposes,
Percentages or fractional interests of parties to this Agreement,
Exhibit “B” - Accounting Procedure.
Exhibit “C” - Insurance.
INTERESTS OF PARTIES
A. 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 in 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 hereinafter described.
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 other wise expressly provided in this Agreement, each party shall pay or deliver, or cause to be paid or delivered, all burdens on its share of the production from the Contract Area up to, and shall indemnify, defend and hold the other parties free from any liability therefor. Except as otherwise expressly provided in this Agreement, if any party has contributed hereto any Lease or Interest which is burdened with any royalty, overriding royalty, production payment or other burden on production in excess of the amounts stipulated above, such party so burdened shall assume and alone bear all such excess obligations and shall indemnify, defend and hold the other parties hereto harmless from any and all claims attributable to such excess burden. However, so long as the Drilling Unit for productive Zones is identical with the Contract Area, each party shall pay or deliver, or cause to be paid or delivered, all burdens on production from the Contract Area due under the terms of the Oil and Gas Leases which such party has contributed to this Agreement, and shall indemnify, defend and hold the other parties free from any liability therefor.
No party shall ever be responsible, on a price basis higher than the price received by such party, to any other party’s lessor or royalty owner, and if such other party’s lessor or royalty owner should demand and receive settlement on a higher price basis, the party contributing the affected Lease shall bear the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.A 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.
B. 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.”
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 therefore. Further, if the Burdened Party fails to pay, when due, its share of expenses chargeable hereunder, all provisions of Article VII.A 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, such other party, or parties, shall receive such 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.
A. TITLE EXAMINATION
Title examination shall be made on the Drillsite of any proposed well prior to commencement of drilling operations and, unless all Non-Operators and the Operator agree otherwise, 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 all 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 “B” 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.
Each party shall be responsible for securing curative matter and pooling amendments or agreements required in connection with Leases of Oil and Gas Interests contributed by such party. Operator shall be responsible 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 accounting and shall not be covered by the administrative overhead charges as provided in Exhibit “B” . 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.
B. LOSS OR FAILURE OF TITLE
1. Failure of Title : Should any Oil and Gas Interest or Oil and Gas Lease be lost through failure of title, which results in a reduction of interest from that shown on Exhibit “A” , the party credited with contributing the affected Lease or Interest (including, if applicable, a successor in interest to such party) shall have ninety (90) days from final determination of title failure to acquire a new lease or other instrument curing the entirety of the title failure, which acquisition will not be subject to Article VIII.A , and failing to do so, this Agreement, nevertheless, shall continue in force as to all remaining Oil and Gas Leases and Interests; and,
(a) The party credited with contributing the Oil and Gas Lease or Interest affected by the title failure (including, if applicable, a successor in interest to such party) shall bear alone the entire
loss and it shall not be entitled to recover from Operator or the other parties any development or operating costs which it may have previously paid or incurred, but there shall be no additional liability on its part to the other parties hereto by reason of such title failure;
(b) There shall be no retroactive adjustment of expenses incurred or revenues received from the operations of the Lease or Interest which has failed, but the interests of the parties contained on Exhibit “A” shall be revised on an acreage basis, as of the time it is determined finally that title failure has occurred, so that the interest of the party whose Lease or Interest is affected by the title failure will thereafter be reduced in the Contract Area by the amount of the Lease or Interest failed;
(c) If the proportionate interest of the other parties hereto in any producing well previously drilled on the Contract Area is increased by reason of the tile failure, the party who bore the costs incurred in connection with such well attributable to the Lease or Interest which has failed shall receive the proceeds attributable to the increase in such interest (less costs and burdens attributable thereto) until it has been reimbursed for unrecovered costs paid by it in connection with such well attributable to such failed Lease or Interest;
(d) Should any person not a party to this Agreement, who is determined to be the owner of any Lease or interest which has failed, pay in any manner any part of the cost operation, development, or equipment, such amount shall be paid to the party or parties who bore the costs which are so refunded;
(e) Any liability to account to a person not a party to this Agreement for prior production of Oil and Gas which arises by reason of title failure shall be borne severally by each party (including a predecessor to a current party) who received production for which such accounting is required based on the amount of such production received, and each such party shall severally indemnify, defend and hold harmless all other parties hereto for any such liability to account;
(f) No charge shall be made to the joint account for legal expenses, fees or salaries in connection with the defense of the Lease or Interest claimed to have failed, but if the party contributing such Lease or Interest hereto elects to defend its title it shall bear all expenses in connection therewith;
(g) If any party is given credit on Exhibit “A” to a Lease or Interest which is limited solely to ownership of an interest in the wellbore of any well or wells and the production therefrom, such party’s absence of interest in the remainder of the Contract Area shall be considered a Failure of Title as to such remaining Contract Area unless that absence of interest is reflected on Exhibit “A” ; and
(h) Should Operator assign to Non-Operators an Oil and Gas Interest or Oil and Gas Leasehold contributed by Operator to this Agreement and said interest or leasehold be lost through failure of title resulting in a reduction of the interests shown on Exhibit “A” , Operator shall refund to Non-Operators all funds paid by Non-Operators as consideration for said interests or leasehold, save and except any portion thereof which represents expenses incurred by Operator to third parties in connection with said interests or leasehold.
2. Loss by Non-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. Unless the party who failed to make the required payment secures a new Lease or Interest covered the same interest within ninety (90) days from the discovery of the failure to make proper payment, which acquisition will not be subject to Article VIII.A , the interests of the parties reflected on Exhibit “A” shall be revised on an acreage basis, effective as of the date of termination of the Lease or Interest involved, and the party who failed to make proper payment will no longer be credited with an
interest in the Contract Area on account of ownership of the Lease or Interest which has terminated. If the party who failed to make the required payment shall not have been fully reimbursed, at the time of the loss, from the proceeds of the sale of Oil and Gas attributable to the lost Lease or Interest, calculated on an acreage basis, for the development and operating costs previously paid on account of such Lease or Interest, it shall be reimbursed for unrecovered actual costs previously paid by it (but not for its share of the cost of any dry hole previously drilled or wells previously abandoned) from so much of the following as is necessary to effect reimbursement:
(a) Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expenses and lease burdens chargeable hereunder to the person who failed to make payment, previously accrued to the credit of the lost Lease or Interest, on an acreage basis, up to the amount of unrecovered cost;
(b) Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable hereunder to the person who failed to make payment up to the amount of unrecovered costs attributable to that portion of Oil and Gas thereafter produced and marketed (excluding production from any wells thereafter drilled) which, in the absence of such Lease or Interest termination, would be attributable to the lost Lease or Interest on an acreage basis and which as a result of such Lease or Interest termination is credited to other parties, the proceeds of said portion of the Oil and Gas to be contributed by the other parties in proportion to their respective interests reflected on Exhibit “A” ; and,
(c) Any monies, up to the amount of unrecovered costs, that may be paid by any party who is, or becomes, the owner of the Lease or interest lost, for the privilege of participating in the Contract Area or becoming a party to this Agreement.
3. Other Losses : All losses of Leases or Interests committed to this Agreement, other than those set forth in Articles IV.B.1 and IV.B.2 above, 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.
4. Curing Title : In the event of a Failure of Title under Article IV.B.1 or a loss of title under Article IV.B.2 above, any Lease or Interest acquired by any party hereto (other than the party whose interest has failed or was lost) during the ninety (90) day period provided by Article IV.B.1 and Article IV.B.2 above covering all or a portion of the interest that has failed or was lost shall be offered at cost to the party whose interest has failed or was lost, and the provisions of Article VIII.B shall not apply to such acquisition.
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR
Newport 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 reasonably prudent operator, in a good and workmanlike
matter, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulations, but in no event shall it have any liability as Operator to the other parties 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 own 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 on Non-Operators owning a majority interest based on ownership as shown on Exhibit “A” . 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 first receipt of the notice or, if the default concerns and 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 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 or 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. Should the well or wells being produced utilize gathering facilities owned by the outgoing operator, said wells shall be shut-in until such time as new facilities are installed or a formal arrangement and agreement be made, with the outgoing operator, for the use of the existing facilities. Said shut-in may not be in contravention of or violate the ongoing requirements of said lease.
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 to 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 by 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 therefore 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. Nothing herein shall be construed as being a Turnkey Agreement.
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 “B” . 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 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 Contact 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 “B” .
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 obligation, 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:
(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 reasonable request, including, but not limited to, daily drilling reports by telephone, completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered which may reasonable 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 “B” . Operator shall also carry or provide insurance for the benefit of the joint account of the parties as outlined in Exhibit “C” attached hereto and made a part hereof. Operator shall require all contractors engaged in work on of 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 “C” , 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.
DRILLING AND DEVELOPMENT
1. Proposed Operations : Non-Operators shall have the option, but not the obligation, to participate in the drilling of wells; provided, however, that Operator and Non-Operators shall participate in and pay for the cost of workover of two (2) existing wells on the Contract Area (identified as “State 68-15600 7-16” and “State 68-15600 16-1” in Section 16, Township 212 North, Range 99 West, 6 th P.M., on Exhibit “A” ). Each of the parties has contributed the sum of $614,129.50 (total of $1,228,259) pursuant to the initial AFE for such workover.
The parties acknowledge that the initial AFE is only an estimate of workover costs for such two (2) wells and that each party shall be liable for 50% of all costs attributable to workover of such two (2) wells.
The parties contemplate workover of a third well pursuant to a separate agreement between them. Upon resolution of certain issues discussed in such agreement to the mutual satisfaction of the parties, each of the parties will be deemed to have elected to “participate” in such well, and workover of such well will then be done on the same basis as described foregoing; that is, there will be an initial AFE which must be promptly funded and the parties will be liable for 50% of all costs attributable to workover of such third well.
Proposed operations in additional wells (that is, wells beyond the three workover wells) to be drilled and completed will be undertaken on the industry basis of a “third for a quarter”: Non-Operators will pay all costs of drilling, equipping, testing and completing each well and will own 75% of the working interest therein; Operator will receive the remaining 25% working interest as a free carried working interest.
Operator and Non-Operators contemplate four (4) additional wells during 2006 in Section 16, Township 21 North, Range 99 West, 6 th P.M., and four (4) to (6) wells on other land subject to this Agreement, subject to the right of each Non-Operator to “not participate” as described herein.
Operator will be responsible for the management of the development program, will determine the parameters, timing, and direction of any further drilling.
Operator will formally offer to the Non-Operators an opportunity to participate in wells to be drilled in addition to the two (2) wells to be worked over in Section 16 on the Contract Area as discussed above. Operator may require participating Non-Operators to deposit to Operator’s account, each Non-Operator’s share of the estimated cost of drilling, equipping, testing, and completing each such subsequent well. Each Non-Operator will promptly elect to “participate” or “not participate” in any proposed such additional well or wells. Failure to give prompt notice of an election to participate within fifteen (15) calendar days from the date of receipt by Non-Operator of written notice from Operator of a proposed well shall formally evidence such Non-Operator’s decision to “not participate.”
If a Non-Operator elects at any time to “not participate” in a well to which an election may be made by the Non-Operator, the Non-Operator will loose all future rights to participate in future drilling. Wells may, at the discretion of the Operator, be drilled in groups (e.g., 4 or 5 wells) and in such case (i) an election by a Non-Operator to “participate” or “not participate” will apply to all wells in the group and (ii) if the Non-Operator elects to “not participate” in the group, all rights of the Non-Operator to “participate” in future wells and operations relating thereto shall become void and of no further force or effect.
If all parties to whom such notice is delivered, elect to participate in a proposed operation, the parties shall contractually be committed to participate therein provided such operations are commenced within the time period hereafter set forth. Operator shall, no later than ninety (90) days after expiration of the notice of fifteen (15) (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 right-of-way) or appropriate drilling equipment, or to complete title examination or curative matter required for title approval or acceptance.
2. Operations by Less Than All Parties : If any party to whom appropriate notice is delivered as provided in Article VI.A.1 or VI.B.1 elects not to participate in the proposed operation, then Operator and such other parties as shall elect to participate in the proposed operation shall, no later than ninety (90) days after the expiration of the notice period of fifteen (15) 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 Participating Parties. The term “proposed operation” shall include the drilling of any well and the completing, recompleting, sidetracking, deepening or reworking of any well.
If any party elects not to participate in any proposed operation, the non-participating interest will be offered to the Participating Parties on a prorata basis. Immediately after the expiration of the applicable notice period, Operator shall advise all Parties of the total interest of the parties approving such operation and its recommendation as to whether the Participating Parties should proceed with the operation as proposed. Each Participating Party, within forty-eight (48) hours (including Saturday, Sunday and legal holidays) after delivery of such notice, shall advise the Operator 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 Participating Parties in the Contract Area) of Non-Participating Parties’ interests, or (iii) carry its proportionate part [determined as provided in (ii)] of Non-Participating Parties’ interest together will all or a portion of its proportionate part of any Non-Participating Parties’ interests that any Participating Party did not elect to take. Failure to advise the Operator 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 (including Saturday, Sunday and legal holidays). IF A PARTY ELECTS NOT TO PARTICIPATE IN ANY PROPOSED OPERATION, THE NON-PARTICIPATING PARTY SHALL HAVE NO FURTHER RIGHT TO PARTICIPATE UNDER THIS AGREEMENT AS TO ANY UNDEVELOPED ACREAGE AND SHALL FURTHER HAVE NO RIGHT TO PARTICIPATE IN A SUBSEQUENTLY PROPOSED OPERATION AS TO A WELL, FOR WHICH THE COMPLETION, RECOMPLETION, REWORKING, DEEPENING OR SIDETRACKING IS PROPOSED. If such Non-Participating Party has made a prepayment for the completion and equipping of a well and then determines not to participate in the completion of the well, Operator shall promptly refund to such Non-Participating Party who relinquishes its interest at the time a proposed operation is proposed shall have no liability for the plugging of such well or for surface restoration operations and likewise shall forfeit any interest in the well or salvage value therefrom. If all or part of the non-participating interest is not assumed by the remaining Participating Parties, Operator shall be authorized to replace the Non-Participating Party with a Third Party as to any of the non participating interest not taken by participating parties and such Third Party shall be thereafter deemed a Participating Party. The Non-Participating Party shall reassign to Operator all of the remaining undeveloped acreage and shall also reassign the Operator the proration unit corresponding to the well, the completion, recompletion, reworking, deepening or
sidetracking of which is proposed within fifteen (15) calendar days. In the event the Non-Participating Party fails to reassign to Operator all of the remaining undeveloped acreage and/or the proration unit mentioned in the preceding sentence within the fifteen (15) day limitation period provided for herein, Operator shall be deemed the attorney-in-fact for the Non-Participating Party with express authority to execute an assignment of such Non Participating Party’s interest in any undeveloped acreage and/or proration unit to Operator. Operator, at its election, may withdraw its proposal for an additional operation 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, either through the existing participants or by the inclusion of a third party or parties, Operator shall promptly notify the Participating Parties of their proportionate interests in the operation and Operator shall commence such operation within the period provided in Article VI.A.1 , subject to the same extension right as provided therein.
The entire cost and risk of conducting such operations shall be borne by the Participating Parties in the proportions they have elected to bear same under the terms of the preceding paragraph.
3. Conformity to Spacing Pattern : Notwithstanding the provisions of Article VI.A.2 , it is agreed that no wells shall be proposed to be drilled to or Completed in or produced from a Zone from which a well located elsewhere on the Contract Area is producing, unless such well conforms to the then-existing well spacing pattern for such Zone.
4. Paying Wells : No party shall conduct any Reworking, Deepening, Plugging Back, Completion, Recompletion, or Sidetracking operation under this Agreement with respect to any well then capable of producing in paying quantities except with the consent of all parties that have not relinquished interests in the well at the time of such operation.
B. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK
1. Drilling, Deepening or Sidetracking : Without the consent of all parties, no well shall be drilled, Deepened or Sidetracked, except a well drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.A.2 of this Agreement. Consent to the drilling, Deepening or Sidetracking shall be deemed to include consent to all necessary expenditures for the drilling, Deepening or Sidetracking and testing of the well. When such well has reached its authorized depth, and all logs, cores and other tests have been completed, and the results thereof furnished to the parties, Operator and the participating Non-Operators, or their designated representative, shall make a determination whether to proceed with the attempted Completion of the Well. The parties receiving such notice shall have forty-eight (48) hours (including Saturday, Sunday and legal holidays) from receipt of notice in which to elect by delivery of notice to Operator to participate in a recommended Completion attempt. Election to participate in a Completion attempt shall include consent to all necessary expenditures for the Completing and equipping of such well, including necessary tankage and/or surface facilities but excluding any stimulation operation not contained on the Completion AFE. If Operator is unable, after reasonable efforts, to locate a Non-Operator, or its designated representative, Operator is authorized to proceed at its own discretion to make the decision on Non-Operator’s behalf as to whether to participate in a completion attempt. If one or more, but less than all of the parties, elect to attempt a Completion, the provisions of Article VI.A.2 hereof shall apply to the operations thereafter conducted by less than all parties, and a Non-Participating Party shall be deemed to have relinquished its interest in the proration unit for the well as to which a Reworking operation, Sidetracking operation, Recompletion operation, or Plugging Back operation is to be attempted as well as in all undeveloped acreage.
2. Rework, Sidetrack, Recomplete or Plug Back : No well shall be Reworked, Sidetracked, Recompleted, or Plugged Back except a well Reworked, Sidetracked, Recompleted, or Plugged Back pursuant to the provisions of Article VI.A.2 of this Agreement. Consent to the Reworking, Sidetracking,
Recompleting or Plugging Back of a well shall be deemed to include consent to all necessary expenditures in conducting such operations and Completing and equipping of said well, including necessary tankage and/or surface facilities. Any Non-Participating Party shall be deemed to have relinquished such Party’s interest in the proration unit for the well as to which a Reworking operation, Recompletion operation, or Plugging Back operation is to be attempted as well as in all undeveloped acreage.
C. OTHER PROVISIONS
Operator shall not undertake any single project reasonable estimated to required an expenditure in excess of TEN THOUSAND DOLLARS ($10,000.00) except in connection with the drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or Plugging Back of a well that has been previously authorized by or pursuant to this Agreement; provided, however, that, in case of explosion, fire, flood or other sudden emergency, whether of the same or different nature, Operator may take such steps and incur such expenses as in its opinion are required to deal with the emergency to safeguard life and property but Operator, as promptly as possible, shall report the emergency to the other parties. If Operator prepares an AFE for its own use Operator shall furnish any Non-Operator so requesting an information copy thereof for any single project costing in excess of TEN THOUSAND DOLLARS ($10,000.00) .
D. ABANDONMENT OF WELLS
1. Abandonment of Dry Holes : Any well which has been drilled or Deepened under the terms of this Agreement and is proposed to be completed as a dry hole shall not be plugged and abandoned without the consent of all participating parties. Should operator, after diligent effort, be unable to contact any party, or should any party fail to reply within forty-eight (48) hours (including Saturday, Sunday and legal holidays) after delivery of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the proposed abandonment. All such wells shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk and expense of the parties who participated in the cost of drilling or Deepening such well. Any party who objects to plugging and abandoning such well by notice delivered to Operator within forty-eight (48) hours (including Saturday, Sunday and legal holidays) after delivery of notice of the proposed plugging shall take over the well as of the end of such forty-eight (48) hour notice period and conduct further operations in search of Oil and/or Gas subject to the provisions of Article VI.A ; failure of such party to provide proof reasonably satisfactory to Operator of its financial capability to conduct such operations or to take over the well within such period or thereafter to conduct operations on such well or plug and abandon such well shall entitle Operator to retain or take possession of the well and plug and abandon the well. The party taking over the well shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties against all liability for any further operations conducted on such well including the costs of plugging and abandoning the well and restoring the surface.
2. Abandonment of Wells That Have Produced : Any well which has been completed as a producer shall not be plugged an abandoned well without the consent of all Participating Parties. If all parties consent to such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk and expense of all the participating parties hereto. Failure of a party to reply within thirty (30) days after delivery of notice of the proposed abandonment of any well, all participating parties do not agree to the abandonment of such well, those wishing to continue its operation from the Zone then open to production shall be obligated to take over the well as of the expiration of the applicable notice period and shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties against liability for any further operations of the well conducted by such parties. Failure of such party or parties to provide proof reasonably satisfactory to Operator of their financial capability to conduct such operations or to take over the well within the required period or thereafter to
conduct operations on such well shall entitle Operator to the right, but not the obligation, to retain or take possession of such well and plug and abandon the well. Parties taking over a well as provided herein shall tender to each of the other parties their proportionate share of the value of the well’s salvable material and equipment, determined in accordance with the provisions of Exhibit “B” , less the estimated cost of salvaging and the estimated costs of plugging and abandoning and restoring the surface; provided, however, that in the event the estimated plugging and abandoning and surface restoration costs and the estimated costs of salvaging are greater than the value of the well’s salvable material and equipment, each of the abandoning parties shall tender to the parties continuing operations such abandoning parties’ proportionate shares of the estimated excess cost. Each abandoning party shall assign to the non-abandoning parties, without warranty, express or implied, as to title or as to quantity, or fitness for use of the equipment and material, all of its interest in the wellbore of the well and related equipment, together with its interest in the Leasehold in so far and only in so far as the leasehold covers the right to obtain production from that wellbore in the Zone then open to production. The assignments so limited shall encompass the Drilling Unit upon which the well is located. The payments by, and the assignments to, the assignees shall be in a ratio based upon the relationship of their respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract Area of all assignees. There shall be no readjustment of interests in the remaining portions of the Contract Area.
E. TERMINATION OF OPERATIONS
Upon the commencement of an operation for the drilling, Reworking, Sidetracking, Plugging Back, Deepening, testing Completion or plugging of a well, such operation shall not be terminated without consent of parties bearing 60% of the costs of such operation; provided, however, that in the event granite or other practically impenetrable substance or condition in the hole is encountered which renders further operations impractical, Operator may discontinue operations and give notice of such condition in the manner provided in Article VI.B.1 , and the provisions of Article VI.B or VI.E shall thereafter apply to such operations, as appropriate.