Exhibit 10.1
EXPLORATION AND DEVELOPMENT
AGREEMENT
This Exploration and Development
Agreement (“ Agreement ”), dated and effective
the 1 st day of April 2005 (the “
Effective Date ”), is entered into by and between Ohio
Cumberland, L.P., a Texas limited partnership (“ Ohio
Cumberland ”) and GEM-CBM Company f/k/a Harken Gulf
Exploration Company, a Delaware corporation (“ GEM
”). Ohio Cumberland and GEM are sometimes referred to
individually as a “ party ”, and collectively as
“ Parties. ” Ute Oil Company, d/b/a. A.C.T.
Operating Company, a Texas corporation (“ Ute Oil
”) is a party to this Agreement because it is to be
designated as Operator under the applicable operating agreement
and, therefore, will be bound by this Agreement.
RECITALS
WHEREAS , Ohio Cumberland and GEM have identified a
particular area of land located in the State of Ohio, described as
the “ Cumberland Prospect Area ”, which is
believed to be prospective for hydrocarbon exploration and more
particularly coalbed methane; and
WHEREAS, the Parties desire to jointly explore and
develop the Cumberland Prospect Area in accordance with the terms
and provisions of this Agreement;
NOW, THEREFORE
, for and in consideration of the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged by all parties, Ohio Cumberland and GEM hereby agree
as follows:
ARTICLE I.
AGREEMENT TO
PARTICIPATE
1.1 Ohio Cumberland and GEM each
agrees to participate in the Cumberland Prospect Area as set forth
in this Agreement, according to the terms and provisions set forth
in this Agreement, and all Exhibits hereto.
ARTICLE II.
CUMBERLAND PROSPECT
AREA
2.1 The Cumberland Prospect
Area . The Cumberland Prospect Area consists of the lands,
located in Guernsey, Noble, Muskingum, Washington, and Morgan
Counties, Ohio, and included within the dotted lines on the map at
Exhibit A hereto, and consisting of approximately 400,000
acres, more or less. The only depth restriction applied to the
Cumberland Prospect Area shall be those, if any, contained in the
applicable Leases and Agreements (as hereinafter defined) and in
leases acquired pursuant to Section 5.4 .
2.2 Leases and Agreements
. Ohio Cumberland is the current owner of a certain Option to
Lease and Drilling Agreement between Ohio Cumberland, Ohio Power
Company, and Franklin Real Estate Company, dated January 4, 2004,
which provides, in part, a five year option to acquire a coalbed
methane lease covering approximately 110,000 gross acres of land
within the Cumberland Prospect Area, which are depicted in yellow
on Exhibit A and which are more particularly described on
Exhibit B hereto. The Option
EXPLORATION AND DEVELOPMENT
AGREEMENT
PAGE 1
to Lease and Drilling Agreement (“
Option Agreement ”) and the proposed form Coal Bed
Methane Lease document (“ Lease Form ”) are
identified on Exhibit B . The Option Agreement and the Lease
Form are, sometimes, collectively referred to as the “
Leases and Agreements .”
ARTICLE III.
DEVELOPMENT OF THE CUMBERLAND
PROSPECT AREA
3.1 Exploration Phases
. Ohio Cumberland and GEM shall initially explore and develop
the Cumberland Prospect Area in three (3) phases, in accordance
with the terms of this Agreement. “ Phase I ”
shall mean and refer to all the obligations and rights of all
Parties in Section 3.2 , along with the activities described
therein. “ Phase II ” shall mean and refer to
all the obligations and rights of all Parties in Section 3.3
, along with the activities described therein. “ Phase
III ” shall mean and refer to all the obligations and
rights of all Parties in Section 3.4 , along with the
activities described therein. Phase I, Phase II, Phase III and the
Subsequent Operations (as defined hereinafter) shall constitute the
“ Project .”
3.2 Phase I. Contemporaneous
with the Effective Date of this Agreement, GEM shall pay to Ohio
Cumberland the sum of Five Hundred Thousand And No/100 Dollars
($500,000.00) as the first payment of the initial prospect costs
(“ First Prospect Payment ”). Said payment shall
be via wire transfer of immediately available funds to the banking
coordinates identified, in writing by Ohio Cumberland. Subject to
Section 9.16 of this Agreement, failure by GEM to timely
make said payment shall cause this Agreement to terminate and
become null and void as between the Parties.
(a) Within one hundred twenty (120)
days following execution of this Agreement, GEM shall direct the
Operator to commence the drilling of three (3) core holes to be
located in the Cumberland Prospect Area. The three (3) core holes
(each a “ Phase I Core Hole ,” and together with
any other core holes drilled during Phase I, the “ Phase I
Core Holes” ) shall be continuous wireline retrievable
whole core holes which shall be drilled from the shallowest to the
deepest structural position on the Cumberland Prospect Area. Each
Phase I Core Hole will be drilled to a depth sufficient to
penetrate the #1 coal (Sharon Coal), as determined by GEM, as seen
at one thousand fifty feet (1,050’) in the logs of the Saber
Energy Corp. Moretz #3 well located in Section 7, T6N, R10W, Morgan
County, Ohio, and at the written request of GEM, may be drilled
through the #1 coal member which is believed to be the deepest
known coal zone in the Cumberland Prospect Area and is believed to
be not more than 1,200 feet below the surface at any location
within the Cumberland Prospect Area. GEM may choose to direct the
Operator to drill more than three (3) Phase I Core Holes at a
location and at a depth to be determined by GEM, the drilling of
additional Phase I Core Holes shall also be considered to be a part
of Phase I for all purposes under this Agreement. All Phase I Core
Holes shall be plugged and abandoned in compliance with all state
and federal rules, regulations and/or procedures and in accordance
with standard industry customs and practices. The plugging and
abandonment of all Phase I Core Holes shall also be considered to
be part of Phase I for all purposes under this
Agreement.
(b) In conjunction with the Phase I
Core Hole operations, the Operator will use its best efforts to
collect a sufficient quantity of coal samples in gas desorption
canisters. Thereafter, the Operator shall have all Phase I Core
Hole samples analyzed by a laboratory approved by the Parties. The
analysis will include, without limitation, gas content, gas and
coal qualitative analyses, and desorption isotherm
EXPLORATION AND DEVELOPMENT
AGREEMENT
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determination. The Operator shall obtain reports
of such laboratory analysis and shall deliver such reports to the
Parties no later than ten (10) days after receipt of the reports.
Within thirty (30) days of the completion of the Phase I Core Holes
and the delivery of the laboratory analysis of all samples taken in
the Cumberland Prospect Area, the Operator and Ohio Cumberland
shall prepare and deliver to GEM a report detailing the
Operator’s recommendations (which shall account for
environmental issues) for Phase II of the Cumberland Prospect
(hereinafter referred to as the “ Phase I Report
”). The Phase I Report shall account for all aspects of the
Phase II Pilot Projects (as defined hereinafter), which shall
include, with out limiting the generality of the foregoing,
location of each pilot project, schedule for drilling of all wells
and construction of facilities, location of each well to be drilled
(including surface and bottomhole locations, if applicable), all
zones to be tested, drill depth of each well, prognosis of drilling
operations for each well, method of drilling each well, completion
procedures to be utilized for each well, any stimulation procedures
to be utilized, equipping of each well, electrical services,
production facilities, flowlines, gathering systems and facilities,
compression, dehydration and other treating facilities, pipeline
taps, transmission lines and facilities. GEM shall have thirty (30)
days after receiving the Phase I Report from the Operator and Ohio
Cumberland to elect to proceed with Phase II (the “ Phase
II Election Window ”) and must make such election
pursuant to the terms of Section 3.2(d) . Within the Phase
II Election Window, GEM shall review the Phase I Report and make
any modifications to the recommendations (the “ Phase I
Report Modifications ”) set forth in the Phase I Report.
Notwithstanding the foregoing, GEM’s modifications, if any,
shall be solely limited to the technical aspects of the Phase I
Report, and shall in no manner modify or change the schedule for
the drilling or construction of facilities set forth in the Phase I
Report. If GEM does not deliver any Phase I Report Modifications
within the Phase II Election Window, it shall be deemed to have no
Phase I Report Modifications, and the Phase I Report shall stand as
it was submitted to GEM. However, if, within the Phase II Election
Window, GEM delivers to Ohio Cumberland, written Phase I
Modifications, then the version submitted by the Operator and Ohio
Cumberland along with the Phase I Report Modifications shall
constitute the Phase I Report. Unless mutually agreed to by the
Ohio Cumberland and GEM, no Phase I Report Modifications shall have
the effect of extending the time of the Phase II Election
Window.
(c) Following the execution of this
Agreement and within ten (10) days of the receipt by GEM of the
written request by Ohio Cumberland, GEM shall deliver to the
Operator, a fully executed Authority For Expenditure (“
AFE I ”) attached hereto as Exhibit C . GEM
shall pay to the Operator the total AFE I amount within thirty (30)
days from its delivery of the fully executed AFE I. Subject to
Section 9.16 of this Agreement, failure by GEM to timely
make said payment shall cause this Agreement to terminate and
become null and void as between the Parties. Subject to the
provisions of Section 3.7 below, GEM is responsible for all
of the actual costs incurred even if they exceed the amounts shown
in the AFE I, and all such costs actually paid or credited shall be
considered in the calculation of the Carried Interest Amount (as
defined below). All costs in excess of the AFE I shall be billed to
GEM in accordance with the provisions of the Cumberland Prospect
Joint Operating Agreement and shall be paid by GEM within fifteen
(15) days of receipt of an invoice for any such costs. At the end
of operations for Phase I, any overpayment will be returned, unless
GEM elects otherwise, and any underpayment will be paid
promptly.
(d) GEM shall have the option, but
not the obligation, to elect to proceed with Phase II of the
Cumberland Prospect . GEM must provide Ohio Cumberland with written
notice of its election to proceed with Phase II within the Phase II
Election Window. If GEM fails to respond within the Phase II
Election Window, Ohio Cumberland shall send GEM a termination
notice. If GEM fails to elect to proceed
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AGREEMENT
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with Phase II following three (3) business days
after receipt of such termination notice, then GEM shall be deemed
to have elected not to proceed with Phase II, and this Agreement
shall terminate and be null and void as of the date that the Phase
II Election Window expired.
3.3 Phase II . If GEM
elects to participate in Phase II, it shall pay to Ohio Cumberland,
within ten (10) days of receipt by Cumberland of GEM’s
written election to participate, the sum of Five Hundred Thousand
And No/100 Dollars ($500,000.00) as the second payment of the
initial prospect costs (“ Second Prospect Payment
”). Said payment shall be via wire transfer of immediately
available funds to the banking coordinates identified in writing by
Ohio Cumberland. Subject to Section 9.16 , GEM’s
failure to pay timely shall cause this Agreement to terminate and
become null and void as between the Parties.
(a) Within sixty (60) days of Ohio
Cumberland’s receipt of the Second Prospect Payment, the
Operator shall commence operations for Phase II which will consist
of two (2) pilot projects. The first pilot project (the “
First Pilot Project ”) shall be at a location in the
general vicinity of a Phase I Core Hole and will consist of five
(5) wells in a “five-spot” pattern spaced on 40 acres,
more or less, per well. The second pilot project (the “
Second Pilot Project” ; together with the First Pilot
Project, referred to as the “ Phase II Pilot
Projects” ) shall be located in the general vicinity of
where a Phase I Core Hole (but a different Phase I Core Hole than
chosen for the First Pilot Project) and will consist of five (5)
wells in a “five-spot” pattern spaced on 40 acres, more
or less, per well. The purpose of Phase II will be to determine the
commercial viability of actual producing wells in the Cumberland
Prospect Area. The Parties agree to market and sell, to the extent
commercially viable, all liquid and gaseous hydrocarbons produced
and save from Phase II wells. The Operator, within ninety (90) days
after completion of the Phase II Pilot Projects, or other such time
as may be mutually agreed between GEM and Ohio Cumberland not to
exceed one hundred eighty (180) days after completion of the Phase
II Pilot Projects, shall prepare and deliver to Ohio Cumberland and
GEM a report detailing the Operator’s recommendations (which
shall account for, among other things, environmental issues, if
any) for Phase III of the Cumberland Prospect (hereinafter referred
to as the “ Phase II Report” ). The Phase II
Report shall account for all aspects of the development drilling of
the Cumberland Prospect Area, which shall include a development
plan scheduling the drilling and development of the Cumberland
Prospect Area, which shall include without limiting the generality
of the foregoing, a schedule for drilling of all wells, a schedule
for the construction of gathering, production, and treatment
facilities, location of all wells to be drilled (including surface
and bottomhole locations, if applicable), all zones to be tested,
drill depth of each well, prognosis of drilling operations for each
well, method of drilling each well, completion procedures to be
utilized for each well, any stimulation procedures to be utilized,
equipping of each well, electrical services, production facilities,
flowlines, gathering systems and facilities, compression,
dehydration and other treating facilities, pipeline taps,
transmission lines and facilities and any other operations
necessary to the development of the Cumberland Prospect Area. GEM
shall have thirty (30) days after receiving the Phase II Report
from the Operator and Ohio Cumberland to elect to proceed with
Phase III (the “ Phase III Election Window ”)
and must make the election pursuant to the terms of Section
3.3(b) . Within the Phase III Election Window, GEM shall review
the Phase II Report and make any modifications to the
recommendations (the “ Phase II Report Modifications
”) set forth in the Phase II Report. Notwithstanding the
foregoing, GEM’s modifications, if any, shall be solely
limited to technical aspects of the Phase II Report, and shall in
no way modify or change the schedule for the drilling of wells or
construction of production, gathering, or treating facilities as
set forth in the Phase II Report. If GEM does not deliver the Phase
II Report Modifications within the Phase III Election Window, then
GEM
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AGREEMENT
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shall be deemed to have no modifications to the
Phase II Report, and the Phase II Report shall stand as it was
submitted to GEM. However, if, within the Phase III Election
Window, GEM delivers to Ohio Cumberland written Phase II Report
Modifications, then the version submitted by the Operator along
with GEM’s Phase II Report Modifications shall constitute the
Phase II Report. . Unless mutually agreed to by the Ohio Cumberland
and GEM, no Phase II Report Modifications shall have the effect of
extending the time of the Phase III Election Window.
(i) Within ten (10) days after the
written request of Ohio Cumberland, following GEM’s written
election to participate in Phase II, GEM shall execute and deliver
to the Operator the Authority For Expenditure II (“ AFE
II” ) for 100% of the estimated costs for the Firs Pilot
Project which is attached hereto as Exhibit D. AFE II maybe
modified by the Operator to account for any increase or reduction
in third party services prices that may have incurred prior to the
execution of the AFE II. In the event AFE II is modified Ohio
Cumberland shall submit the modified AFE II along with the request.
GEM shall pay to the Operator the 100% of AFE amounts for tangible
and intangible costs within thirty (30) days from its delivery of
the fully executed AFE. That portion of the AFE attributable to
field facilities cost shall be paid within five (5) business days
of the GEM’s receipt of a written request from the Operator.
Subject to Section 9.16 of this Agreement, failure by GEM to
timely make said payment shall cause this Agreement to terminate
and become null and void as between the Parties.
(ii) After the fifth well in the
First Pilot Project has been spudded, the Operator shall submit an
additional AFE (“ AFE III ”) for 100% of the
estimated costs for the Second Pilot Project. GEM shall deliver a
fully executed AFE III to the Operator within ten (10) days after
the receipt of AFE III from the Operator. Should GEM elect not to
proceed with the Second Pilot Project or, if GEM fails to return
the executed AFE III to the Operator within the specified time,
then Ohio Cumberland shall send GEM a written termination notice.
If GEM fails to deliver the executed AFE III within three (3)
business days after receipt of a termination notice, then GEM shall
be deemed to have elected not to proceed with the Second Pilot
Project and with Phase III and this Agreement shall terminate and
be null and void except, with respect to the wells drilled in the
First Pilot Project. GEM shall earn an assignment of a forty (40)
acre production unit, as to all depths, surrounding each well
drilled and completed in the First Pilot Project. Said forty (40)
acre production unit shall be the closest quarter (1/4) quarter
(1/4) section of land surrounding each such well.
(iii) Subject to the provisions of
Section 3.7 below, GEM is responsible for all of the costs
incurred even if they exceed the amounts shown in AFE II or AFE
III, and all such costs actually paid or credited shall be
considered in the calculation of the Carried Interest Amount. At
the end of operations for Phase II, any overpayment will be
returned, unless GEM elects otherwise, and any underpayment will be
paid promptly.
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AGREEMENT
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(b) GEM shall have the option, but
not the obligation, to elect to proceed with Phase III of the
Cumberland Prospect. GEM must provide Ohio Cumberland with written
notice of its election to proceed with Phase III within the Phase
III Election Window. If GEM fails to respond within the Phase III
Election Window, then Ohio Cumberland shall send GEM a written
termination notice. If GEM fails to elect to proceed within three
(3) days after receipt of a termination notice, then GEM shall be
deemed to have elected not to proceed with Phase III and this
Agreement shall terminate and be null and void as of the date that
the Phase III Election Window expired except, with respect to the
wells drilled in Phase II, as to a forty (40) acre production unit,
as to all depths, for each well drilled and completed in the
Cumberland Prospect Area in Phase II. Said forty (40) acre
production unit shall be the closest quarter (1/4) quarter (1/4)
section of land surrounding each such well.
3.4 Phase III . If GEM
elects to participate in Phase III, it shall pay to Ohio
Cumberland, within ten (10) days of receipt by Ohio Cumberland of
GEM’s written election to participate, the sum of Five
Hundred Thousand And No/100 Dollars ($500,000.00) as the third and
final payment of the initial prospect costs (“ Third
Prospect Payment” ). Said payment shall be via wire
transfer of immediately available funds to the banking coordinates
identified, in writing by Ohio Cumberland. Subject to Section
9.16 , GEM’s failure to pay timely shall cause this
Agreement to terminate and become null and void as between the
Parties.
(a) Notwithstanding the operator
replacement provisions in the Cumberland Prospect Operating
Agreement, GEM shall have the option at any time, after GEM makes
the Third Prospect Payment and after consultation with Ohio
Cumberland, to become the contract operator or to appoint a
designee as contract operator. For the purposes of this Agreement
the term “Contract Operator” shall mean GEM, if it
elects to become the contract operator or its designee contract
operator and shall not be interchanged with the term
“operator” as hereinafter defined. If GEM elects to
become the Contract Operator, then Ohio Cumberland and the Operator
shall be obligated to take all reasonably necessary actions to make
GEM or a designee the contract operator for the Cumberland Prospect
Area for the purposes of this Agreement; such contract operating
agreement shall be consistent with industry standards, have a term
of one year (and may be renewable, unless terminated earlier by
Ohio Cumberland pursuant to Section 3.4(c) hereinbelow),
provide that all Overhead charges under the Cumberland Prospect
Operating Agreement shall be paid to the Contract Operator, but
shall provide for distribution of production revenues by the
Contract Operator only if the first purchaser of production who is
not a Party, refuses to distribute directly to the Parties. If GEM
elects to become the Contract Operator or elects a designee to be
the Contract Operator, neither GEM nor its designee shall in any
manner change or modify the scheduling or implementation of the
Phase II Report or change or modify any AFE previously submitted to
GEM pursuant to the terms of this Agreement.
(b) Within ninety (90) days of Ohio
Cumberland’s receipt of the Third Prospect Payment, the
Operator shall commence operations for Phase III, in accordance
with the Phase II Report. The Phase III operations will begin the
development drilling of the Cumberland Prospect Area. Phase III
will end at the point in time when GEM has met the Carried Interest
Amount as defined in Section 3.5 below.
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AGREEMENT
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(c) In addition to the payment of
the Third Prospect Payment, GEM shall pay all of the costs for all
operations to be conducted in Phase III until GEM has paid the
Carried Interest Amount. Subject to the provisions of Section
3.7 , GEM shall pay 100% of the actual costs incurred for Phase
III until GEM has paid the Carried Interest Amount. Within ten (10)
days after Ohio Cumberland’s receipt of the Third Prospect
Payment, the Operator shall submit to GEM an AFE for 100% of the
estimated costs for all operations to be conducted pursuant to the
Phase II Report for the first calendar quarter. GEM shall pay to
the Operator the total AFE amount within thirty (30) days from its
receipt of the AFE and shall contemporaneously deliver a fully
executed AFE. Thereafter the Operator shall submit to GEM at least
thirty (30) days prior to the next calendar quarter an AFE for 100%
of the estimated costs for all operations to be conducted pursuant
to the Phase II Report for the next calendar quarter. GEM shall pay
to the Operator the total AFE amount within thirty (30) days from
its receipt of the AFE and shall deliver an executed AFE with its
payment. The Operator shall continue to submit AFE’s on a
quarterly basis until such time as the Carried Interest Amount has
been reached. Once the Carried Interest Amount is met, then Phase
III shall end. Subject to Section 9.16 of this Agreement,
failure by GEM to timely pay the full amount of each AFE submitted
by the Operator for the Phase III costs shall cause the Agreement
to terminate and become null and void as between the Parties. GEM
shall only be entitled to an assignment of a forty (40) acre
production unit, as to all depths, surrounding each well drilled.
Said forty (40) acre production unit shall be the closest quarter
(1/4) quarter (1/4) section of land surrounding each such
well.
3.5 Ohio Cumberland’s
Carried Interest .
(a) Notwithstanding anything to the
contrary contained herein, GEM hereby agrees to pay for or carry
Ohio Cumberland’s interest in all operations conducted in
Phases I, II, and III in the Cumberland Prospect Area until such
time as GEM has expended a total amount of Seven Million Five
Hundred Thousand And No/100 Dollars ($7,500,000.00) in the
Cumberland Prospect Area (the “ Carried Interest
Amount ”), without regard to any production proceeds or
other income received by GEM with respect to the Cumberland
Prospect . For the purposes of calculating the total amount
expended by GEM, the sum shall include the First, Second, and Third
Prospect Payments, all costs expended in Phase I, II and III, that
portion, if any, of the actual costs reimbursed to 25-25 Corp. for
management fees and expenses paid to Oso Energy Resources Corp.
(“Oso Fees”) as determined by GEM pursuant to the terms
of that certain Coalbed Methane Master Exploration Agreement dated
March 1, 2005 by and between 25-25 Corp. and GEM, any costs under
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