LEASE ACQUISITION AND PARTICIPATION AGREEMENT
Alpena County Antrim Shale Project
Alpena County, Michigan
This Agreement
is made and entered into on this 8th day of December, 2002,
between Aurora Energy,
Ltd., P.O. Box 961,
Traverse City, Michigan 49685-0961,
herein "Aurora", and Cadence Resources Corp. of 6 East Rose St.
PO Box 2056.,
Walla, Walla, WA 99362,
herein "Investor".
Whereas,
Aurora has developed or will develop certain oil and/or gas
prospects in Alpena
County, Michigan, and has acquired oil and gas
leaseholds
and intends to acquire additional oil and gas leaseholds in Alpena County,
Michigan;
Whereas,
Investor desires to acquire an interest in said oil and gas
leaseholds and the wells to
be permitted, drilled and operated thereon; and,
Whereas, Aurora
and Investor desire to establish an Area of Mutual
Interest
consisting of all of Alpena County, Michigan, and develop the same for the
production of hydrocarbons as
provided for herein.
Now therefore,
for and in
consideration of the sums to be paid pursuant to
this Agreement, the mutual promises contained herein and the benefits to
be
derived therefrom Aurora and Investor agree as follows:
Section 1. Area of Mutual
Interest
1.01.
The lands subject to this Agreement and deemed the "Area of
Mutual
Interest" or "AMI" shall
include all of Alpena County, Michigan. Projects known
as Treasure Island,
Ravine Creek, and
Gerhke have been committed to Wells Fargo
Energy Capital and are excluded from this AMI although they are located in
Alpena County, Michigan. Also, as Aurora develops projects in Alcona
County,
Michigan, they may at Aurora's option be included in the AMI. Notice of
inclusion will be subject to
Investor's approval.
Section 2. Oil and Gas
Leases
2.01. Aurora
Leases. Aurora is the
owner of the oil and gas leases set out
on Exhibit I attached hereto
(the "Aurora Leases").
For and in consideration of
the sum provided for in Section 2.03 below, the receipt of which is
acknowledged, Aurora sells, assigns and sets over unto
Investor an
undivided
Twenty-two and one-half
percent (22.5%) interest before payout on a well-by-well
basis and an undivided
Twenty percent (20.0%) after payout on a well by
well
basis, in and to each of the
Aurora Leases;
subject, however, to
the terms and
provisions of this
Agreement.
<PAGE>
2.02.
Subsequently Acquired Leases. It is understood by the parties that
it
may be advisable to acquire additional leases within the AMI (Subsequently
Acquired Leases).
Aurora, at its option,
may acquire such
Leases on such terms
and for such consideration as Aurora deems reasonable. On each monthly Joint
Interest Billing statement,
Aurora shall provide
Investor with an estimation of
Subsequently Acquired Leases to be obtained by Aurora in the next month,
including the acquisition costs for the same. Based on these estimated lease
acquisition costs Aurora shall include on each Joint Interest Billing, the
Investor's proportionate advance payment required for said
lease acquisitions.
Reconciliation to Investor's Joint Interest
Billing shall be made
periodically
based on the actual costs of
the leasing program.
Investor shall participate in
such Subsequently
Acquired Leases to the
extent of an undivided
twenty-two and
one-half percent (22.5%) interest before payout on a well
by well basis and an
undivided twenty percent (20.0%) after
payout on a well by well basis by paying
to Aurora twenty-five percent (25%) of the actual acquisition costs for the
Subsequently Acquired Leases.
Payment by Investor
shall be made within ten (10)
days of receipt of each Joint
Interest Billing. For purposes of this
section,
lease acquisition costs shall include but shall not
be limited to lease bonus,
surface use fees and land and
legal fees. If
Investor does not make his payment
as required in this paragraph, he forfeits his interest to those leases
acquired.
2.03.
Payment by
Investor. Contemporaneous with the execution of this
Agreement, Investor shall pay to Aurora the sum of
Forty-seven
Thousand
Five
Hundred Dollars ($47,500.00). Said sum shall be applied
first to Investor's
proportionate share, based on twenty-five percent (25%), of the lease
acquisition costs of the
Aurora Leases, then to Investor's proportionate share,
based on twenty-five percent (25%) of project development costs to the date
hereof. Any sums remaining thereafter will be applied to Investor's
proportionate share of the cost of the Test Well
provided for in Section 3.01
below.
Section 3. Development of
AMI
3.01. Test Well.
Aurora agrees to commence the drilling of ten wells
within
the AMI on or before December
31, 2002 (the "Test Well"). The Test Well shall be
in the Black Bean Antrim unit, located in T30N & T31N of R6E &
7E, Alpena
County, Michigan. Investor agrees to participate in the
drilling of said Test
Well to the extent of an
undivided five percent (25%), which will result on
Investor acquiring an
undivided twenty-two
and one-half percent (22.5%) working
interest before payout on a well by well
basis and an undivided
twenty percent
(20.0%) working interest after payout on a well by well
basis pursuant to
Section 5.02 below. Within ten (10) days prior to the
estimated spud date,
Investor shall pay its
proportionate share of
the estimated dry-hole
costs for
the Test Well as set out on
the AFE attached
hereto and made a part
hereof as
Exhibit II. In the event
Investor elects to participate in the completion of the
Test
<PAGE>
Well, Investor will pay its proportionate share of completion costs
simultaneously with making its election to
participate in the completion of the
Test Well.
3.02.
Subsequent
Wells. During the term of this Agreement, Aurora may
propose the drilling of a
well or wells within the AMI, other than the Test Well
(which consists of 10 wells),
to test any formation
("Subsequent
Well"). The
Subsequent Well or Wells may
be proposed on a well-by-well or unit basis. Aurora
shall provide Investor with a summary of its intended operations and the
estimated development costs. Within twenty (20) days of receipt
of the notice,
Investor shall notify Aurora
of its election to
participate or not
participate
in the proposed Subsequent Well. Failure to respond within twenty (20) days
shall be deemed an election
not to participate. Investor shall have the right to
participate in any proposed Subsequent Well to the extent of an undivided
twenty-five percent (25%) working interest, which will result in Investor
acquiring an undivided
twenty-two and
one-half percent (22.5%) working interest
before payout on a well by
well basis and an undivided twenty percent (20.0%)
working interest after payout on a well by well
basis pursuant to Section 5.02
below. In the event Investor elects not to participate in a Subsequent
Well,
Aurora shall refund to
Investor the leasehold acquisition costs paid by
Investor
for those leases contained in the drilling unit for the Subsequent Well.
Investor shall then forthwith re-assign to Aurora its interest in the
leases
contained in the drilling
unit for the Subsequent Well, and Investor shall
have
no further interest in said
Subsequent Well. In the event Investor elects not to
participate in a Subsequent
Well within an
established pooled or
unitized area
as provided for in Section 4.02 below in which Investor had previously
participated, the interest of Investor in that
pooled or unitized area shall be
based on the wells in which Investor has participated divided by the total
number of wells in the pooled
or unitized area,
proportionately
reduced by the
undivided interest in said
wells acquired by Investor hereunder.
3.03. Subsequent
Operations. During the
term of this Agreement, Aurora may
propose to rework, re-complete, deepen or sidetrack an existing well
(hereinafter collectively, "Subsequent Operations"). Aurora shall provide
Investor with a summary of
its proposed Subsequent Operations and the
estimated
costs. Within twenty (20) days of receipt
of the notice,
Investor shall notify
Aurora of its election to participate or not participate in the proposed
Subsequent Operations. Failure to respond within twenty (20) days shall be
deemed an election not to participate. In the event one (1) or more
working
interest owners of the existing well elect not to participate, Aurora may
proceed with the Subsequent Operations provided that parties owning at least
fifty percent (50%) of the working interest in the existing well elect to
participate, but upon the following
terms: Aurora shall purchase the working
interest of the working interest owners who elect not to
participate
in the
Subsequent Operations (the
"Non-Consenting Parties"). The amount of compensation
to be paid for the
Non-Consenting Parties' working interest in the existing
well
shall be the one hundred
percent (100%) of the
NonConsenting Parties'
capital
cost of the existing well
less fifty percent
(50%) of the revenue
received by
the Non-Consenting Party for
production from the existing well.
<PAGE>
Notwithstanding anything set forth herein, parties having at least a fifty
percent (50%) working interest in the Aurora Leases
and/or AMI, may propose a
Subsequent Well(s) and parties having at least a fifty
percent (50%) working
interest in an existing well may propose Subsequent Operations. In such
instances, if Aurora elects not to participate, Aurora shall nevertheless
operate such well if requested by the working
interest owners. In addition,
Aurora's working interest in
such proposed
Subsequent Well shall default to the
other working interest owners who elect to participate and Aurora's working
interest in an existing well
for which Subsequent
Operations are proposed shall
be purchased by the working interest owners who elect to participate in
accordance with the terms set
forth in this Section.
Section 4. Well Spacing,
Pooling of Interests
4.01.
Drilling Units.
Each Test Well and
Subsequent Well shall be drilled
on a permitted unit of a size authorized by the regulatory agency having
jurisdiction.
4.02. Pooling of
Interests. At such time that Aurora has confirmed the
commercial feasibility of an
area within t
