DEVELOPMENT AGREEMENT
(KENTUCKY)
INTRODUCTION
THIS DEVELOPMENT AGREEMENT (this "Development Agreement") from ENERGY
CORPORATION OF AMERICA, a West Virginia
corporation, with offices at 4643 South
Ulster Street, Suite 100, Denver, Colorado 80237-2867 ("ECA") and EASTERN
AMERICAN ENERGY CORPORATION, a West Virginia corporation, with
offices at 501
56th Street, Charleston, West Virginia 25304 ("Eastern")
(ECA and Eastern are
sometimes hereinafter collectively referred to as "Operator"), to
BLACK STONE
ACQUISITIONS PARTNERS II, L.P., a Delaware limited partnership,
BLACK STONE
ACQUISITIONS PARTNERS II-B, L.P., a Delaware limited
partnership, and HATFIELD
ROYALTY, L.P., a Delaware limited partnership, with offices at 1001
Fannin,
Suite 2020, Houston, Texas, 77002
(collectively "Black
Stone"), is delivered to
be effective as of 7:00 a.m., Eastern Time, April 1, 2005 (the
"Effective
Time").
Operator
and Black Stone
contemporaneously herewith have entered into each
of the following conveyances dated effective as of January 1, 2005
(i) Term
Royalty Conveyance (West Virginia) ("West Virginia Conveyance"), (ii) Term
Royalty Conveyance (Pennsylvania) ("Pennsylvania Conveyance"), (iii) Term
Royalty Conveyance (Kentucky) ("Kentucky Conveyance") collectively the
"Term
Royalty Conveyance," and the Term Royalty Agreement
dated May 17, 2005 between
Operator and Black Stone (the "Term Royalty
Agreement"). In connection with the
Term Royalty Conveyance, Operator has agreed to undertake
certain obligations
during the term of the Term Royalty Conveyance with respect to
the Subject
Interests and the Development Wells to be
drilled on AMI Areas designated in the
Term Royalty Conveyance.
ARTICLE I
DEFINITIONS
All capitalized words, terms, and the phrases used in this
Development
Agreement and not defined herein shall have
the meanings ascribed thereto in the
Term Royalty Agreement and Term Royalty
Conveyance. Certain
other capitalized
words, terms, and phrases used in this Development Agreement are defined
elsewhere in this Development Agreement.
"Adjusted
Completed Well Development Well Value" means, with respect
to
each Completed Development Well, the value obtained by multiplying for
each
Completed Development Well drilled or caused to be drilled by
Operator during
any Annual Period one (1) times the Working Interest (stated as a
decimal
fraction or 1.00, where Operator holds a 100%
Working Interest), that Operator
is required to bear in such Completed Development Well. For example, if
Operator holds an eighty-five percent (85%) Working Interest in a
Completed
Development Well, the computation would be:
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1 x .85 = .85
therefore, such Completed Development Well would
have a .85 Adjusted Completed
Development Well Value.
"Annual
Drilling Target" means that number of
Completed Development Wells
where (a) the cumulative total of all the
Adjusted Completed Development Well
Values for all Completed Development Wells
drilled by or caused to be drilled by
Operator during the first Annual Period
equals not less than sixty (60), (b) the
cumulative total of all the Adjusted Completed
Development Well Values for all
Completed Development Wells drilled during the first two
Annual Periods equals
not less than One Hundred Twenty
(120), and (c) the cumulative total of all the
Adjusted Completed Development Well Values for all
Completed Development Wells
drilled during the first three Annual Periods equals not
less than the Total
Drilling Commitment.
"AMI
Areas" mean the areas depicted on the map set
forth on Exhibit B as
the Yawkey Freeman AMI and the PK AMI.
"Annual Period"
means the annual period commencing on April 1 each year and
ending on March 31 of the succeeding year.
"Assignor's Net
Share of Gas" means the share of Subject Gas from each Well
that is attributable to Operator's Net Revenue Interest in that Well.
"Completed
Development
Well" means the Wellbore of any Development
Well
that is completed pursuant to Section 2.02
herein in the Big Lime formation or
deeper formation(s).
"Deed
of Trust" means the Credit Line Deed
of Trust from Eastern to Black
Stone referenced in Section 2.18.
"Development
Well" means any Gas well drilled, within the meaning of
Section 2.01(b) of the Development Agreement,
after the Effective Time of this
Agreement on the Subject Development Lands.
"Drilling
Obligation Completion Date" means March 31, 2008.
"Effective Time"
means April 1, 2005.
"Gas"
means natural gas and all other gaseous hydrocarbons, and all
non-combustible gas that are contained in the full wellstream.
"Producing
Well" means the Wellbore of each Gas well more
particularly
described in Exhibit A-1 to the Term Royalty Conveyance, subject to the
exceptions, exclusions and reservations set forth on such Exhibit A-1 to
the
Term Royalty Conveyance.
"Reasonably
Prudent Operator Standard" means the
standard of conduct of a
reasonably prudent oil and gas operator in
the Appalachian Basin under the same
or similar circumstances, acting with respect to its own property and
disregarding the existence of the Term Royalty Interest as a burden
on such
property.
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"Subject
Development
Lands" means the lands subject to or
covered by the
oil and gas leases described in Exhibit A-2, subject to the exceptions,
exclusions and reservations set forth on such
Exhibit A-2, as such Exhibit may
be modified pursuant to the Term Royalty Conveyance.
"Subject
Gas" means with respect to each Well,
Gas in and under, and that
may be produced, saved, and sold from all
producing horizons from the Wellbore
of such Well, subject to the following:
(a) "Subject
Gas" excludes Gas that is:
(i)
lost in accordance with the Reasonably Prudent
Operator Standard
in the production,
gathering, or marketing of
Gas, or that is
liquefied and removed from the gas stream in the
normal course
of Operator's operation, consistent with prior
practice, via any method other than processing as contemplated
in
the Term Royalty Conveyance;
(ii)
subject to
the Reasonably Prudent Operator
Standard, used
in operations on the Subject Lands, including
drilling and
production
operations
on the Subject
Development
Lands); or
(iii) retained
by a Third Person, or
Operator (pursuant
to Section
3.02(c)) of the Term Royalty Conveyance, for
gathering,
transportation,
processing, or
marketing services
related to
the Subject Gas in lieu of or in addition to
cash
payment for
such services; or
(iv)
in excess of the percentage attributable to
Assignor's Net
Share of Gas taken by
Operator to recover costs,
or some multiple of costs, paid or incurred by Operator under
any
operating agreement,
unit agreement, or other agreement in
connection with
nonconsent operations conducted (or participated
in) by Operator.
(b) "Subject
Gas" includes Gas, not otherwise
excluded above, that is
sold or otherwise disposed of for valuable consideration.
"Subject
Interests"
means Operator's undivided interests in the
Subject
Lands as lessee under Gas leases covering
and affecting the Subject Lands, as an
owner of the Subject Gas (or the right to
extract such Gas), or otherwise, by
virtue of which undivided interests Operator has the right to conduct
exploration, drilling, development, and Gas
production operations on the Subject
Lands, or to cause such operations to be
conducted, or to participate in such
operations by paying and bearing all or any part of the costs, risks,
and
liabilities of such operations, to drill, test,
complete, equip, operate, and
produce Wells to exploit the Gas. Any oil and gas lease or other similar
instrument that covers Gas produced from
the Subject Lands shall be considered a
"Gas lease" hereunder, even if it also covers other substances.
"Subject
Interests" includes all extensions and renewals of Gas leases covering and
affecting the Subject Lands acquired within
six (6) months after the expiration
or termination of any such lease, and all new Gas
leases covering the Subject
Lands (or any portion thereof) obtained by Operator, or any Affiliate
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thereof prior to the termination of the Development Agreement. "Subject
Interests" do not include (a) Operator's rights to
substances other than Gas;
(b) Operator's rights under contracts for the purchase,
sale, transportation,
storage, processing, or other handling or disposition of Gas;
(c) Operator's
interests in, or rights with respect to,
pipelines, gathering systems, storage
facilities, processing facilities, or other
equipment or facilities, other than
the Wells; or (d) subject to Section
1.04(c) of the Term Royalty Conveyance, any
after-acquired, additional, or enlarged
interests in the Wells, Subject Lands or
Subject Gas, except those reflected in Exhibit A-1 to the Term Royalty
Conveyance or Exhibit A-2 or any Additional Lease as
provided for in Section
12.01 of the Term Royalty Conveyance, or
extensions and renewals covered by the
preceding sentence. "Subject Interests" may be owned by
Operator by virtue of
grants or reservations in deeds, Gas
leases, or other instruments, or by virtue
of operating agreements, pooling or unitization
agreements or orders, or other
kinds of instruments, agreements, or
documents, legal or equitable, recorded or
unrecorded. The Subject Interests are subject to the Permitted
Encumbrances.
"Subject
Lands" means collectively, the Subject Producing Lands and
the
Subject Development Lands.
"Subject
Producing Lands" means
the lands subject to or covered by the oil
and gas leases described in Exhibit A-1 to
the Term Royalty Conveyance for lands
related to the Producing Wells, subject to the exceptions, exclusions and
reservations set forth on such Exhibit A-1 to the Term Royalty
Conveyance.
"Term
Royalty Agreement" is
defined in the Introduction to this Agreement.
"Term Royalty
Conveyance" is defined in the Introduction to this Agreement.
"Term
Royalty Gas" means, for any month, that
percentage of Gas to which
Black Stone is entitled, calculated in accordance with the Term Royalty
Conveyance.
"Term Royalty
Interest" means the variable undivided interest in and to the
Subject Interests, to the extent that the Subject
Interests pertain to Gas in,
under and that may be produced from the Wellbores
of the Wells, sufficient to
cause Black Stone to receive a volume of Term Royalty Gas and the
revenues
attributable thereto calculated and paid in money in accordance with
Section
3.01 of the Term Royalty Conveyance.
"Term Royalty
Proceeds" means, for any month, proceeds received by Assignor
for the account of Assignee, as Black Stone's
marketing and payment agent and
representative, from the sale of Term Royalty Gas under this
Conveyance less
Chargeable Costs calculated in accordance
with Section 3.03 of the Term Royalty
Conveyance.
"Total
Drilling Commitment" means that number of Completed
Development
Wells where the cumulative total of all
such Adjusted Completed Development Well
Value for all Completed Development
Wells drilled by or caused to be drilled by
Operator equals 180.
"Termination
Date" is defined in Section 1.02.
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"Transfer"
including its
syntactical variants, means any assignment, sale,
transfer, conveyance, or disposition of any
property; provided, Transfer as used
herein does not include the granting of a security interest in
Operator's
interest in any property including the Subject Interests or
Subject Lands so
long as any such security interest shall not affect and is made
expressly
subject to the Term Royalty Interest.
"Wells"
means, collectively, the Wellbores of the
Producing Wells and the
Completed Development Wells.
ARTICLE II
DEVELOPMENT OF THE SUBJECT DEVELOPMENT LANDS
SECTION
2.01 DRILLING
PROGRAM.
(a) OBLIGATION
TO DRILL. In each of the first three Annual
Periods
during the Development Agreement Term,
Operator shall, subject to the terms of
this Article II, drill, or cause to be drilled, at
Operator's sole cost, (i)
such number of Completed Development Wells that is necessary to achieve
the
Annual Drilling Target and (ii) such number
of Completed Development Wells as to
achieve the Total Drilling Commitment prior to the Drilling Obligation
Completion Date; it being understood that so
long as Operator is performing its
obligations hereunder in good faith and with due diligence the
drilling and
testing operations may extend beyond the
last day of an Annual Period for which
such Completed Development Well is being
included to meet Operator's obligations
under this Section 2.01(a), and provided further that Operator
shall have an
additional ninety (90) day period at the
end of each Annual Period and that the
Drilling Obligation Completion Date to
perform its obligations pursuant to this
Section 2.01(a). Operator further agrees to use
commercially reasonable efforts
to drill seventy (70) Completed Development Wells during the first Annual
Period, sixty (60) Completed Development
Wells during the second Annual Period,
and fifty (50) Completed Development Wells
during the third Annual Period.
(b) MEANING
OF "DRILL."
For purposes of this
Section 2.01, to "drill"
means to commence the actual drilling of a
Development Well, and thereafter to
drill that Development Well diligently to
the target depth (or target depths, in
the case of multiple target producing
horizons) that Operator has determined, in
accordance with the Reasonably Prudent Operator Standard, may encounter
producing Gas horizons and then to test
that Develop
