OIL AND GAS LEASE

 

                                OIL AND GAS LEASE

 

 

 

  STATE OF TEXAS                       ss.

 

 

  COUNTY OF CALHOUN                    ss.

 

 

 

THIS OIL AND GAS LEASE is made this 31st day of August, 2004, by and between The

Northern Trust Bank of Texas, N.A., as Successor Trustee of the Leila Clark Wynn

Mineral  Trust,  whose  address is 2121 San  Jacinto  Street,  P.O.  Box 226270,

Dallas, Texas 75222,  hereinafter "Lessor," and Petrogen,  Inc. whose address is

3200 Southwest Freeway, Suite 3300, Houston, Texas 77027, hereinafter "Lessee."

 

                                   WITNESSETH

 

         1. That  Lessor,  in  consideration  of Ten Dollars  ($10.00) and other

valuable consideration,  the receipt of which is hereby acknowledged, and of the

covenants and  agreements of Lessee  hereinafter  contained,  does hereby grant,

lease and let unto Lessee the land covered  hereby for the purposes  hereinafter

described   and with the  exclusive  right of  exploring,  drilling,  mining and

operating for, producing and owning oil, gas and sulphur, together with right to

make surveys on said land, lay pipe lines,  establish and utilize facilities for

surface or subsurface disposal of salt water, construct roads and bridges, build

tanks, power stations,  telephone lines, employee houses and other structures on

said land,  necessary or useful in Lessee's  operations in  exploring,  drilling

for, producing,  treating,  storing and transporting  minerals produced from the

land covered  hereby or adjacent  thereto.  The land  covered  hereby and herein

referred  to as the "land" or "said  land" is located in the County of  Calboun,

State of Texas, and is described as follows:

 

         TRACT ONE: Being all of the ISAAC W. BOONE SURVEY No. 15,  Abstract No.

         56, Calhoun County, Texas, containing  approximately 801.26 acres, more

         or less,  and being a part of that  certain  land  described  in a Deed

         dated July 15, 1949,  Edwin Hawes.  Jr., et al to George Rust Hawes. as

         recorded in Volume 70, Page 209, Deed Records of Calhoun County, Texas.

 

         TRACT TWO: Being all of the ISAAC W. BOONE SURVEY No. 16,  Abstract No.

         57, Calhoun County, Texas, containing  approximately 770.24 acres, more

         or less,  and being the same land  described in that certain Deed dated

         July 15,  1949,  Edwin  Hawes,  Jr.,  et al to George  Rust  Hawes,  as

         recorded in Volume 70, Page 211, Deed Records of Calhoun County, Texas.

 

         For the  purposes  of  determining  the  amount  of any  bonus or other

payment hereunder,  said land shall be deemed to contain, 1,571,3 acres, whether

actually  containing  more or less,  arid.  the above  recital of acreage in any

tract shall be deemed to be the true acreage  thereof.  Lessor accepts the bonus

as lump sum consideration for this lease and all rights and options hereunder.

 

         2.  Unless  sooner  terminated  or  longer  kept in force  under  other

provision hereof,  this lease shall remain in force for a term of six (6) months

from the effective date hereof,  hereinafter  called "primary term", and as long

thereafter  as oil, gas and/or  sulphur is produced  from the land or other land

pooled therewith in commercial quantities or operations, as hereinafter defined,

are  conducted  upon said  laud with no  cessation  for more  than  ninety  (90)

consecutive days.

 

 

 

 

                  OIL AND GAS LEASE, PAGE I OF 7 PAGES

 

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         3. As royalty, Lessee covenants and agrees:

 

              (a) To deliver to the credit of Lessor,  in the pipe line to which

         Lessee may connect its wells,  the equal 1/5th part of all oil produced

         and saved by Lessee from said land, or from time to time, at the option

         of Lessee,  to pay Lessor the average posted market price of such l/5th

         part of such oil at the  wells as of the day it is run to the pipe line

         or storage tanks;

 

              (b) To pay Lessor on gas and  casinghead  gas  produced  from said

         land (1) when sold by Lessee,  I/5tli of the amount realized by Lessee,

         computed at the mouth of the well,  or (2) when used by Lessee off said

         land or in the  manufacture of gasoline or other  products,  the market

         value,  at the mouth of the well,  of l/5th of such gas and  casinghead

         gas;

 

              (c) To pay  Lessor  on all other  minerals  mined or  marketed  or

         utilized by Lessee from said land, one-tenth either in kind or value at

         the well or mine at Lessee's election, except that on sulphur mined and

         marketed the royalty shall be $2.50 per long ton. If at the  expiration

         of the primary  term or at any time or times  thereafter,  there is any

         well on said  land or on lands  with  which  said  land or any  portion

         thereof has been pooled, capable of producing oil and gas. and all each

         wells are shut-in, this lease shall, nevertheless, continue in force as

         though operations were being conducted on said land for so long as said

         wells are shut-in,  and thereafter this lease may be continued in force

         as if no  shut-in  had  occurred.  Lessee  covenants  and agrees to use

         reasonable  diligence  to  produce,  utilize,  or market  the  minerals

         capable of being produced from said wells,  but in the exercise of such

         diligence,  Lessee  shall  not  be  obligated  to  install  or  furnish

         facilities  other than well facilities and ordinary lease facilities of

         flow lines,  separator,  and lease  tank,  and shall not be required to

         settle  labor  trouble  or to market  gas upon  terms  unacceptable  to

         Lessee.  If at any time or times  after the  expiration  of the primary

         term,  all such wells are  shut-in  for a period of ninety  consecutive

         days,  and during such time there are no operations on said land,  then

         at or before the expiration of said ninety day-period, Lessee shall pay

         or  tender  by  check  or  draft  of  Lessee,  as  royalty,  the sum of

         $7,857.50.  Upon making said payment,  it will be considered  that each

         such well is producing gas in paying  quantities  within the meaning of

         this  lease for a period of one (I) year after the  expiration  of said

         ninety (90) day period, In like manner and upon like payment being made

         annually on or before the  expiration  of the last  preceding  year for

         which such payment or tender has been made, it will be considered  that

         said well or wells  are  producing  gas in  commercial  quantities  for

         successive  periods of one (I) year each.  Each such  payment or tender

         shall  be made to the  parties  who at the  time of  payment  would  be

         entitled to receive the royalties  which would be paid under this lease

         if the wells were  producing,  and may be deposited  in the  depository

         bank provided for below.  Nothing herein shall impair Lessee's right to

         release as provided in paragraph 4 hereof.  In event of  assignment  of

         this lease in whole or in part,  liability for payment  hereunder shall

         rest  exclusively on the then owner or owners of this lease,  severally

         as to acreage owned by each.

 

         4. If at any time or times  during  the  primary  term  operations  are

conducted on said land and if all operations are discontinued,  this lease shall

thereafter  terminate on the date next  following  the  ninetieth day after such

discontinuance  unless  on or  before  such  date  Lessee  conducts  operations;

provided,  however,  if such date is at the end of the primary term,  this lease

shall  terminate  at  the  end  of  such  term  or on the  ninetieth  day  after

discontinuance  of all operations,  whichever is the later date,  unless on such

late date either (1) Lessee is  conducting  operations  or (2) the shut-in well

provisions  of paragraph 3 or the  provisions  of  paragraph 10 are  applicable.

Whenever used in this lease the word "operations"  shall mean operations for and

any of the following:  drilling, testing, completing,  reworking,  recompleting,

deepening, plugging back or repairing of a well in search for or in an. endeavor

to  obtain  production  of  oil,  gas or  sulphur,  whether  or  not  in  paying

quantities.

 

 

 

                      OIL AND GAS LEASE. PAGE 2 OF 7 PAGES

 

 08-23-04

 

 

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         5.  Lessee  shall  have  the use,  free  from  royalty,  of oil and gas

produced from said land in ail operations hereunder. Lessee shall have the right

at any time to remove all machinery and fixtures placed on said land,  including

the right to draw and remove  casing.  No well shall be drilled  nearer than 200

feet to the house or barn now on said land  without  the  consent of the Lessor.

Lessee  shall pay for  damages  caused by its  operations  to growing  crops and

timber on said land.

 

         6. The rights and estate of any party hereto may be assigned  from time

to time in  whole  or in  part  and as to any  minerals  or  horizon.  AH of the

covenants,  obligations, and considerations of this lease shall extend to and be

binding  upon  the  parties  hereto,  their  heirs,  successors,   assigns,  and

successive  assigns,  No change  or  division  in the  ownership  of said  land,

royalties,  or other moneys,  or any part  thereof,  howsoever  effected,  shall

increase the  obligations or diminish the rights of Lessee,  including,  but not

limited  to,  the  location  and  drilling  of  wells  and  the  measurement  of

production. Notwithstanding any Other actual or constructive knowledge or notice

hereof or to Lessee,  its  successors  or assigns,  no change or division in the

ownership  of said  lands of the  royalties,  or other  moneys,  or the right to

receive  the same,  howsoever  effected,  shall be binding  upon the then record

owner of this lease until  thirty (30) days after  there has been  furnished  to

such  record  owner at his or its  principal  place of  business  by  Lessor  or

Lessor's  heirs,  successors,  or assigns,  notice of such  change or  division,

supported by either originals or duly certified copies of the instruments  which

have been property  filed for record and which evidence such change or division,

and of such court records and  proceedings,  transcripts,  or other documents as

shall be necessary in the opinion of such record owner to establish the validity

of such change or division,  If any such change in ownership occurs by reason of

death of the owner,  Lessee may  nevertheless  pay or tender such royalties,  or

other  moneys,  or part  thereof,  to the credit of the decedent in a depository

bank provided for above.

 

         7. In the event Lessor  considers that Lessee has not complied with all

its obligations hereunder, both express and implied, Lessor shall, notify Lessee

in writing,  setting out  specifically in what respects Lessee has breached this

contract.  Lessee  shall then have sixty  (60) days after the  receipt:  of said

notice  within which to meet or commence to meet all or any part of the breaches

alleged by Lessor. The service of said notice shall be precedent to the bringing

of any action by Lessor on said lease for any cause, and no such action shall be

brought  until the lapse of sixty  (60) days  after  service  of such  notice on

Lessee.  Neither  the service of said notice nor the doing of any acts by Lessee

aimed to meet all or any of the alleged breaches shall be deemed an admission or

presumption: that Lessee has failed to perform all its obligations hereunder. If

this lease is cancelled for any cause, it shall nevertheless remain in force and

effect as to (I)  sufficient  acreage  around  each  well as to which  there are

operations to constitute a drilling or maximum  allowable unit under  applicable

governmental regulations,  (but in no event less than forty acres), such acreage

to be  designated  by Lessee as  nearly as  practicable  in the form of a square

centered at the well, or in such shape as then existing  spacing rules  require;

and (2) any part of said  land  included  in a pooled  unit on which  there  are

operations.  Lessee shall also have such easements on said land as are necessary

to operations on the acreage so retained.

 

         8. Lessor's rights and interests  hereunder shall be charged  primarily

with any mortgages,  taxes or other liens, or interest and other charges on said

land,  bat Lessor  agrees that Lessee shall have the right at any time to pay or

reduce same for Lessor,  either before, or after maturity,  and be surrogated to

the rights of the bolder thereof and to deduct amounts so paid from royalties or

other  payments  payable or which may become  payable to Lessor  and/or  assigns

under this  lease.  If this lease  covers