FARMOUT AND DEVELOPMENT AGREEMENT MADE AS OF AUGUST 1, 2005

 

 

 

FARMOUT AND DEVELOPMENT AGREEMENT

MADE AS OF AUGUST 1, 2005

 

 

BETWEEN:

 

 

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ROCKY MOUNTAIN GAS, INC., a Wyoming corporation (hereinafter called "RMG")

 

– and –

 

PRB ENERGY, INC., a Colorado corporation (hereinafter called "Operator")

 

 

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WHEREAS RMG and Operator have entered into a Letter of Intent dated July 7, 2005 to facilitate the development of coal bed methane properties in the States of Montana and Wyoming.

 

ARTICLE I

DEFINITIONS

 

As used in this Agreement, the following terms shall have the following meanings, unless the context clearly indicates otherwise:

 

" AMI " means the area of mutual interest, consisting of the States of Montana and Wyoming, as described in Article  IX .

 

" Business Plan " means the first business plan and budget (which shall be for not less than $8,750,000 of the Commitment) for the Venture's proposed expenditure from August 1, 2005 to August 31, 2006, and the second business plan and budget (to be submitted by July 31, 2006) for the remaining $13,050,000 of the Commitment to be spent or committed to be spent from September 1, 2006 to August 31, 2007.  The Business Plan shall set out the Venture's projects, the drilling program for each such project, the cash requirements for each project and the overall cash requirements for all of the Venture Properties and include the items noted in Exhibit A attached hereto.  The parties contemplate that the projects will initially consist of the following:

•  North Gillette (Airport, Wings and Echo)

• Reno

•  South Gillette (Gap)

• Dilts

•  Castle Rock

 

"Commitment" means Operator's contractual obligation to spend or commit to be spent $21,800,000 for Venture Costs.

 

" Contribution Account " means the account created by contribution of the parties as provided in Article II and any additions thereto as set forth herein.

 

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" Cost " or " Costs " with respect to Venture Properties means all costs associated with the evaluation, acquisition, maintenance and retention of Venture Properties and the drilling, testing, completion, dewatering and placing on production or abandoning any well and shall include, without limitation, the sum of the price paid for a Venture Property, attorneys' fees, title insurance or examination costs, broker' commissions, filing fees, landmen costs, recording costs, transfer taxes, if any, and like charges connected with the acquisition of such Venture Property; bonuses, rentals, delay rentals and ad valorem taxes and like charges connected with the maintenance of such Venture Property; all exploration costs, including dry hole and similar contributions; and such portion of Operator's direct and indirect overhead and administrative expense for exploration, geological, land, engineering, drafting, accounting, legal and other services as are directly allocable to the Venture Properties and all such non-allocable expenses, pro-rated among all such Properties, including, without limitation, screening costs.  "Cost or "Costs" does not include Costs incurred under an operating agreement after commencement of first commercial gas sales.

 

" Force Majeure " means acts of God, applicable orders or restrictions by a govern­mental authority, failure by a governmental entity to issue a permit, license or similar document, any injunction by a court duly empowered to force a halt to a program in progress, strikes or other labor disturbances, riots, embargoes, power failures, telecommu­nication line failures, revolutions, wars, fires, floods, or any other causes of circumstances beyond the reasonable control of either party.

 

“Operator” means the role as more fully described in Article IV herein and in the AAPL agreement attached as Exhibit C.

 

" Properties " means oil and gas leases, any other lease or mineral rights relating to oil and gas, farmout agreements or other contracts pertaining to oil and gas leases or other lease or mineral rights, plus any other property or rights therein or thereon, tangible or intangible, real, personal or mixed.

 

" Venture " means the joint venture undertaking contemplated by this Agreement under which Operator becomes agent for all the parties to engage on behalf of the parties hereto in the exploration for and development of oil and gas with a primary focus on Coal Bed Methane in the States of Montana and Wyoming.

 

" Venture Income " means the gross receipts of the Venture and of the parties received by reason of participation in the Venture, including all proceeds from the sale or disposition of any Venture Property.

 

" Venture Property " or " Venture Properties " means Properties owned for the benefit of the Venture pursuant to this Agreement, including (i) any coal bed methane interests that are held by RMG as of the date hereof in the States of Wyoming or Montana, excluding the Oyster Ridge area of Wyoming and the spacing units of currently existing well bores that are producing or have produced from the Wyodak/Anderson Coal Strata; and (ii) interests which may be acquired by the parties jointly in the AMI.

 

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ARTICLE II

PARTIES' COMMITMENTS

 

2.1

Commitments .  The parties hereby agree immediately to commit to the Venture the consideration set forth below:

 

 

Initially, RMG owns 100% in the Venture and Operator will proportionately earn an interest in the Venture Properties as it makes expenditures and will own 50% of any Venture Property jointly acquired by the parties in the AMI, as defined in the Operating Agreement.  By drilling a well on Venture Properties, Operator will earn a 50% interest in an 80-acre spacing unit to all depths on which the well is located and will also earn a proportionate interest in the balance of the Venture Properties as follows:

 

 

If Operator fails to expend $21.8 million by September 1, 2007 or if Operator elects in writing not to proceed with its Commitment, then the Venture will forthwith convey to Operator one half of that percentage interest in the balance of the Venture Properties equal to the amount expended by Operator divided by $21.8 million (“True Up”) and terminate.  

 

 

The parties agree that:

 

(a)

In the Gap project, Foundation Coal and RMG have an agreement which provides that Foundation Coal has the option on a well-by-well basis to pay all of the costs of drilling, completion and dewatering to first production (i.e., Foundation Coal carries RMG).  If Foundation Coal elects to drill and carry RMG, then Operator will have earned its 50% interest.  However, if Foundation Coal elects not to drill, Operator must drill the balance to earn its 50% interest in Gap.

 

(b)

In the Dilts and Reno projects, if Operator completes and dewaters any well described in Exhibit B , then Operator will earn 50% therein.

 

 

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ARTICLE III

OPERATING COMMITTEE

 

3.1

Operating Committee .  Subject to the provisions hereof, the decisions required for the conduct of the Venture shall be made by an Operating Committee (hereinafter sometimes called the "Committee") initially consisting of two persons.  The Committee shall have the following specified powers and duties and no other powers and duties:

 

(a)

To approve and modify the Business Plan at least annually and to determine the strategic direction of the Venture.

 

(b)

To authorize any specific additional powers of Operator that may be required from time to time and in the ordinary course of business, so as to permit the orderly and efficient execution of the Business Plan.

 

(c)

To authorize the negotiation of acquisitions, dispositions, trades or exchanges of any of the Venture Properties to improve the performance of the Venture.

 

(d)

To authorize the leasing of tangible property (whether or not in the ordinary course of business) used or to be used in connection with the operations of the Venture.

 

3.2

Committee Membership .  Each party shall designate in writing a person to serve on the Committee and shall also designate another person, as an alternate to serve in the stead of its member of the Committee in the event its member is not available to act in that capacity.  Each such designation shall state the address and telephone number (business and home) of the member of the Committee and of his designated alternate.  Each member and alternate shall be vested by the party appointing him with the authority to act and vote at the meetings of the Committee.  Any written notice to any such member or to any such alternate to be given under the terms of this Agreement shall be addressed to him at his address so stated.  Any designation of a member of the Committee or an alternate may be rescinded by the party appointing such member or alternate by delivering written notice to that effect to the Chairman of the Committee, or his alternate, and designating another person to act in the stead of the member or alternate whose authority has been rescinded.  The member appointed by Operator, or his alternate, shall act as Chairman of the Committee.

 

3.3

Committee Meetings .  The Chairman may call a meeting of the Committee at any time, and he shall call a meeting upon request of any other party.  When feasible, the Chairman shall give each member notice at least twenty-four (24) hours in advance of each meeting.  Any member of the Committee who will not be present at a meeting of the Committee may vote on any item to be con­sidered at such meeting by telephone communication to the Chairman, or by mail or wire, addressed to the Chairman.  The vote of each member present on any question submitted to the meeting shall also be recorded in the Minutes.  All action taken by the Committee (whether or not at a meeting) shall require a unanimous favorable vote, whether or not present at the meeting, and any action so approved shall be binding on the parties.  

 

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All meetings of the Committee shall be held in Operator's office in Denver, Colorado, or at such other places unanimously agreed upon by the Committee.

 

3.4

Committee Action Without Meeting .  The Committee may take action without an assembled meeting by communications between the Chairman and the other member of the Committee.  The Chairman may submit any matter or matters by giving the other member notice by mail, telegram, or telephone (confirmed in writing as soon there­after as practicable).  Each member of the Committee may communicate his vote thereon to the Chairman by mail, facsimile, electronic mail or telephone (confirmed in writing as soon thereafter as practicable).  All action so taken by the Committee shall have the same effect and be binding on the parties to the same extent as though taken at a duly called meeting.

 

3.5

Liability of Committee Members .  No member of the Committee shall be liable for any act or omission of any other member of the Committee, nor for any act or omission on his own part, excepting his own willful misconduct or gross negligence.

 

3.6

Minutes of Committee Meetings .  Minutes of each Committee meeting and Committee action taken without a meeting shall be kept and copies of all such Minutes shall be mailed by the Chairman to each party and to each member and alternate sitting on the Committee promptly after the meeting or action.

 

ARTICLE IV

POWERS AND DUTIES OF OPERATOR

 

4.1

Powers .  In conducting the Venture con­templated in this Agreement, Operator shall have full, exclusive and complete discretion, power and authority, subject to the specific provisions of the Operating Agreement attached hereto as Exhibit C (the " Operating Agreement ") and the require­ments of applicable law, to manage, control, administer and operate the business and affairs of the Venture for the purposes herein stated, to make all decisions affecting such business and affairs as it deems appropriate in the conduct of the business and affairs of the Venture, including without limitation (whether similar or dissimilar) the power and authority:

 

(1)

to receive and expend capital and receipts of the Venture, maintain and operate books of account of the Venture (including, without limitation, production accounting) and to incur obligations and liabilities on behalf of the Venture;

 

(2)

to acquire Venture Properties in the AMI as provided herein;

 

(3)

to explore for and develop oil and gas, including geological and geophysical activities in connection therewith or in connection with the evaluation of Properties, and to produce such oil and gas;

 

(4)

to manage, operate and develop the Venture Properties, and to enter into operating agreements with respect to Venture Properties, containing such terms, provisions and conditions as Operator shall approve.

 

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(5)

to enter into and execute division orders, unitization and pooling agreements, drilling contracts, leases, assignments, reassignments, farmout or farm-in agreements, transfer orders, dry and bottom hole and acreage contribution agreements, participation agree­ments, partnership agreements, joint venture agreements and any and all other contracts, documents or instruments customarily employed in the oil and gas industry in connection with the acquisition, sale, exploration, development, operation or exploitation of oil and gas properties, and all other instruments deemed by Operator to be necessary or appropriate to the operations of the Venture and the Venture Properties or to perform its duties or exercise its powers;

 

(6)

to enter into agreements and contracts with parties and to give receipts, releases and dis­charges with respect to the Venture's operations, business and any matters incident thereto as Operator may deem advisable or appropriate;

 

(7)

to purchase liability and other insurance to protect the Venture and the Venture Properties;

 

(8)

to maintain offices, staff and equipment and to furnish such accounting services as may be necessary to carry on the activities contemplated by the Venture;

 

(9)

to obtain such legal and independent geologi­cal, geophysical, engineering, brokerage and other services as in its sole discretion may be necessary to carry on the activities contemplated by the Venture;

 

(10)

to conduct and control all operations of the Venture except where such power is granted to the Committee; and

 

(11)

to exercise such other duties and powers as are conferred on Operator elsewhere in this Agreement.

 

The parties, with respect to their interest in Venture Properties (including, without limitation, farm-in and farmout agreements entered into on behalf of the Venture) hereby agree that any person, firm or corporation dealing with Operator may rely upon the execution by Operator alone as being fully binding upon the interest of each of the parties hereto and no person, firm or corporation dealing with the Venture shall have any duty to inquire into the authority of Operator to take any action or make any decision.

 

4.2

Duties .

 

(a)

Each party may own, and may from time to time after the formation of the Venture, acquire oil and gas properties in Montana and Wyoming subject to the AMI requirements.  Operator shall, for the parties' information and accounting purposes, submit a report showing leasehold working interests acquired, burdens thereon, summaries of any farmout agreements, any marketing agreements or restrictions on Operator's right to purchase natural gas under Section 6.4 hereof and a geological and

 

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economic analysis, and Operator's program, if any, for drilling evaluation, including the estimated costs and expenses thereof and status of title to the drill site.  During the drilling of any well on a Prospect, the parties shall be furnished, if requested, copies of daily drilling reports, logs, test information, results of surveys, and core analyses, as such information relates to the well or Prospect, together with such other information as may be appropriate.  The parties shal