Exhibit 10.6
OPTION TO ACQUIRE
INTERESTS
IN OIL AND GAS
PROPERTIES
This agreement
dated for reference May 1, 2004, is between Brek Petroleum, Inc., a
Nevada corporation (“Brek”), and Griffin Asset
Management, LLC, a Delaware limited liability company
(“Griffin”). Brek and Griffin are collectively referred
to as the Parties and individually as a Party.
RECITALS
A. On July 16, 2002, Brek and others entered into
a purchase agreement with Gasco Energy, Inc. Pannonian Energy Inc.
and San Joachin Oil & Gas Ltd. (together, “ Gasco”)
under which Brek acquired interests in certain oil and gas leases,
wells, related equipment, and other lands and participatory rights
in Wyoming, Utah and California identified in the agreement (the
“Gasco Agreement”). Brek has 25% of whatever interest
Gasco had on July 16, 2002. Gasco is usually but not always the
operator. Gasco and Brek are entitled to a share of production net
of various royalties, overriding royalties and other burdens (the
“Burdens”) that must be paid before any production is
distributed to Brek and Gasco (the “Net
Interest”).
B. Griffin wishes to acquire an interest in
production from wells that Brek is entitled to drill under the
Gasco Agreement on leases in Wyoming and Utah by contributing to
the drilling costs as described by Gasco or another operator in its
written notices and authorizations for expenditure
(“AFEs”) or by Brek in an AFE if Brek initiates a
drilling program.
Now therefore,
in consideration of the foregoing recitals and the following
respective representations, warranties, covenants and agreements,
and other good and valuable consideration, the receipt and
sufficiency of which the Parties acknowledge, the Parties agree as
follows:
AGREEMENT
ARTICLE I
Offer to
Acquire
Section 1.1 The Interest . Brek
grants Griffin the right to acquire an interest in production by
contributing cash for the drilling of wells on the Wyoming and Utah
properties that it owns together with Gasco or has a right to
acquire as described in the Gasco Agreement (the
“Properties”). This right applies to drilling programs
for a total of one hundred wells to be drilled on the Properties
for which Brek receives a notice and AFE from Gasco or another
joint owner, or for which Brek initiates a drilling program, after
the day on which both Parties have signed this agreement (the
“Effective Date”). The right is subject to the
following terms and conditions:
a. Griffin may contribute 50% of the amount of
Brek’s portion of the AFE in return for 50% of Brek’s
working interest in each well and 50% of Brek’s Net Interest
minus a 7% royalty (the “Royalty”) payable to Brek
(“Griffin’s Net Interest”). Griffin’s Net
Interest cannot be less than 75% of 50% of Brek’s Net
Interest. If Griffin’s Net Interest is less than 75% of 50%
of Brek’s Net Interest, then the Royalty must be adjusted:
i.e, if the sum of the Burdens is more than 18%, then the Royalty
is reduced so that the sum of the two is equal to 25% and
Griffin’s Net Interest is equal to 75% of 50% of Brek’s
Net Interest; if the sum of the burdens and the Royalty is less
than 25%, then Brek is entitled to the entire Royalty, and
Griffin’s net interest is more than 75%.
1
1.For
example: if Brek’s share of production equals $100,000 and
the Burdens equal 12.5%, then Brek’s Royalty is equal to 7%
and Griffin’s Net Interest is equal to 80.5% of $50,000; if
the Burdens equal 20%, then Brek’s Royalty is equal to 5% and
Griffin’s Net Interest is equal to 75% of
$50,000.
b. Gasco, or another party with the right to
initiate drilling, delivers to Brek notices that it intends to
drill in accordance with the terms of the joint operating agreement
that governs the drill site (“JOA”). These notices are
written or, if a drill rig is on the site, telephoned. Brek has 30
days from its receipt of a written notice and 48 hours (excluding
Saturday, Sunday and legal holidays) from a telephoned notice in
which to notify Gasco that it consents to the drilling. Brek will
deliver the notice to Griffin on the next business day following
the day that it receives the notice. Griffin will inform Brek
within twenty-one days if it elects to contribute, or within 36
hours of the telephoned notice. Griffin is liable for its portion
of all costs of the drilling program in accordance with the terms
of the governing JOA as of the date on which it notifies Brek that
it intends to contribute to the drilling program.
c. The operator delivers to Brek invoices for
drilling in accordance with the terms of the governing JOA. Brek
will deliver each invoice to Griffin on the next business day
following its receipt with an invoice for its contribution. Griffin
will pay its contribution directly to the operator within the time
required by the JOA and deliver confirmation to Brek that it has
paid its contribution. If Griffin fails to pay the invoiced
contribution as required, then it is deemed to have elected to
decline to participate and loses its right to contribute and share
in the production of the well.
d. If Brek initiates a drilling program then the
notice provisions and response times of the governing JOA apply to
AFEs and invoices.
e. If Griffin elects to contribute, Griffin will
pay Brek a fee equal to 7.5% of the amount of Griffin’s
contribution to the drilling and completion costs (the
“Fee”) as consideration for the right to contribute and
acquire the working interests and net share of production. Griffin
will pay the Fee when it delivers its written consent to Brek. The
amount of the Fee must be adjusted when the well is completed to
reflect the actual costs: if the costs are more than the AFE, then
Griffin will pay Brek 7.5% of the difference; if the costs are
less, then Brek will refund 7.5% of the difference to
Griffin.
f. When Griffin has paid its contributions for
drilling and completion and the Fee to Brek, it has earned its
working interest and share of production and is subject to the
terms of the governing JOA. Brek then will inform Gasco (or whoever
is the operator if Gasco is not) of Griffin’s interest with
instructions to record Griffin’s interest and send
Griffin’s net share of production on Griffin’s
instructions. Nothing in this agreement grants Griffin a right to
acquire an interest in the Properties or a right under the Gasco
Agreement.
g. If Griffin fails to contribute its portion of
the costs that accrue to its working interest in wells, then its
entire interest reverts to Brek and Griffin is not entitled to any
further share of production or the return of any costs that it has
contributed.
h. If Griffin elects to contribute to an AFE for
drilling a well but does not elect to contribute to the completion
of a well following the drilling, then its entire interest reverts
to Brek and Brek is entitled to 100% of the working interest and
the share of production to which Griffin would otherwise be
entitled.
i. Griffin’s right is not exclusive. If
Griffin declines to contribute to a well, then Brek may invite
others to contribute to the drilling of the well that Griffin
declined.
Section 1.2 Invited Participants .
Griffin may invite others to participate in its contribution and
share of production. If it does, then it must deliver to Brek a
notice with the name, address, and payment instructions of the
invited participant. When Griffin has earned its interest, Brek
will instruct Gasco to make a division order in the favor of the
invited participants. Nothing in this arrangement, however,
requires that Brek or Gasco deal directly with the invited
participants or relieves Griffin of any obligations under this
agreement; all dealings are between Griffin and the invited
participants and Brek is entitled to rely on Griffin’s
instructions and representations in connection with the invited
participants and their participation until they have earned their
interests, at which point they will deal directly with the operator
under the JOA.
Section 1.3 Non-consent . If Brek
elects not to participate in a drilling program, then Griffin may
contribute Brek’s portion to earn Brek’s entire
interest and the well is counted as one well for the purpose of
counting the 100 wells in which Griffin can acquire an interest
under this agreement. If Brek does not participate at
Griffin’s request, then the well is counted as two wells. In
either case, if Griffin contributes Brek’s portion of a
drilling program, Brek remains entitled to the Royalty and the Fee
calculated on the whole of Griffin’s participation and
interest.
Section 1.4 Conflict of Terms .
Where the terms of this agreement and a governing JOA conflict, the
terms of this agreement prevail unless they cause a Party to breach
the JOA, in which case the terms of the JOA prevail.
Section 1.5 Programs Underway . The
Parties acknowledge that Brek received two AFEs from Gasco during
the month of April before the terms of this agreement were
finalized for which drilling programs are underway. Griffin may
contribute to the AFEs. The Parties will work out the terms of
payment for these two wells if Griffin elects to
contribute.
Section 1.6 Notice to Others . Brek
will notify the other parties to a JOA of the terms of this
agreement as required by the governing JOA.
Section 1.7
Term
. This agreement and Griffin’s
right to acquire the interests described above end when Griffin has
acquired its interests in 100 wells under this agreement or at the
end of eight years from the date of this agreement, whichever is
the earlier.
Section 1.8
Force
Majeure . If Gasco
or Brek is unable to drill on the Properties during the term of
this agreement because of force majeure (as defined in Article XI
of the AAPL Form 610-Model Form Operating Agreement-1982 attached
to the Gasco Agreement as Exhibit D, a copy of which Griffin
acknowledges having received) then Brek will inform Griffin and
Article XI in the exhibited model form operating agreement
applies.
ARTICLE II
Representations and
Warranties of Brek
Brek represents to Griffin as
follows:
Section 2.1
Organization and
Qualification . Brek
is a corporation duly organized, validly existing and in good
standing under the laws of Nevada, and has the requisite corporate
power and authority to own or lease all material property that it
purports to own or lease and to carry on its business as now being
conducted. It is duly qualified as a foreign corporation, and is in
good standing in each jurisdiction where the character of its
properties owned or held under lease or the nature of its
activities makes such qualification necessary, unless the failure
to so qualify would not have a material adverse effect on its
business or financial condition. It is qualified, to its Knowledge
and where qualification is required, with all applicable
governmental authorities to own and operate the properties and
interests which are the subject matter of this
agreement.
Section 2.2
Authorization of
Agreement . It has
full right, power and authority to enter into this agreement and to
deliver the interests to Griffin. The execution and delivery of
this agreement and the performance of the transactions contemplated
by it have been duly authorized by its
