PetroShare (PRHRQ) S-1 IPO registration

Exhibit 10.9

A.A.P.L. FORM 610 - 1989

MODEL FORM OPERATING AGREEMENT

OPERATING AGREEMENT

DATED

,	,      2013       ,
	year

OPERATOR	PETROSHARECORP.
CONTRACTAREA	Township 6 North, Range90 West, 6thP.M
Section25: All

COUNTY OR PARISH OF MOFFAT   , STATE OF COLORADO

COPYRIGHT 1989 – ALL RIGHTS RESERVED

AMERICAN ASSOCIATION OF PETROLEUM

LANDMEN, 4100 FOSSIL CREEK BLVD. FORT

WORTH, TEXAS, 76137, APPROVED FORM.

A.A.P.L. NO. 610 – 1989

A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

TABLE OF CONTENTS

Article		Page
I.	DEFINITIONS	1
II.	EXHIBITS	1
III.	INTERESTS OF PARTIES	2
	A.  OIL AND GAS INTERESTS:	2
	B.  INTERESTS OF PARTIES IN COSTS AND PRODUCTION	2
	C.  SUBSEQUENTLY CREATED INTERESTS:	2
IV.	TITLES	2
	A.  TITLE EXAMINATION	2
	B.  LOSS OR FAILURE OF TITLE	3
	1.  Failure of Title	3
	2.  Loss by Non-Payment or Erroneous Payment of Amount Due	3
	3.  Other Losses	3
	4.  Curing Title	3
V.	OPERATOR	4
	A.  DESIGNATION AND RESPONSIBILITIES OF OPERATOR	4
	B.  RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR	4
	1.  Resignation or Removal of Operator	4
	2.  Selection of Successor Operator	4
	3.  Effect of Bankruptcy	4
	C.  EMPLOYEES AND CONTRACTORS	4
	D.  RIGHTS AND DUTIES OF OPERATOR:	4
	1.  Competitive Rates and Use of Affiliates	4
	2.  Discharge of Joint Account Obligations	4
	3.  Protection from Liens	4
	4.  Custody of Funds	5
	5.  Access to Contract Area and Records	5
	6.  Filing and Furnishing Governmental Reports	5
	7.  Drilling and Testing Operations	5
	8.  Cost Estimates	5
	9.  Insurance	5
VI.	DRILLING AND DEVELOPMENT	5
	A.  INITIAL WELL	5
	B.  SUBSEQUENT OPERATIONS:	5
	1.  Proposed Operations	5
	2.  Operations by Less Than All Parties	6
	3.  Stand-By Costs	7
	4.  Deepening	8
	5.  Sidetracking	8
	6.  Order of Preference of Operations	8
	7.  Conformity to Spacing Pattern	9
	8.  Paying Wells	9
	C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK	9
	1.  Completion	9
	2.  Rework, Recomplete or Plug Back	9
	D.  OTHER OPERATIONS	9
	E.  ABANDONMENT OF WELLS	9
	1.  Abandonment of Dry Holes	9
	2.  Abandonment of Wells That Have Produced	10
	3.  Abandonment of Non-Consent Operations	10
	F.  TERMINATION OF OPERATIONS	10
	G.  TAKING PRODUCTION IN KIND	10
	(Option 1) Gas Balancing Agreement	10
	(Option 2) No Gas Balancing Agreement	11
VII.	EXPENDITURES AND LIABILITY OF PARTIES	11
	A.  LIABILITY OF PARTIES	11
	B.  LIENS AND SECURITY INTERESTS	12
	C.  ADVANCES	12
	D.  DEFAULTS AND REMEDIES	12
	1.  Suspension of Rights	13
	2.  Suit for Damages	13
	3.  Deemed Non-Consent	13
	4.  Advance Payment	13
	5.  Costs and Attorneys’ Fees	13
	E.  RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES	13
	F.  TAXES	13
VIII.	ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST	14
	A.  SURRENDER OF LEASES	14
	B.  RENEWAL OR EXTENSION OF LEASES	14
	C.  ACREAGE OR CASH CONTRIBUTIONS	14

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

	D.  ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:	15
	E.  WAIVER OF RIGHTS TO PARTITION	15
	F.  PREFERENTIAL RIGHT TO PURCHASE	15
IX.	INTERNAL REVENUE COEDE ELECTION	15
X.	CLAIMS AND LAWSUITS	15
XI.	FORCE MAJEURE	16
XII.	NOTICES	16
XIII.	TERM OF AGREEMENT	16
XIV.	COMPLIANCE WITH LAWS AND REGULATIONS	16
	A.  LAWS, REGULATIONS AND ORDERS	16
	B.  GOVERNING LAW	16
	C.  REGULATORY AGENCIES:	16
XV.	MISCELLANEOUS	17
	A.  EXECUTION	17
	B.  SUCCESSORS AND ASSIGNS	17
	C.  COUNTERPARTS	17
	D.  SEVERABILITY	17
XVI.	OTHER PROVISIONS	17

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 OPERATING AGREEMENT

2 THIS AGREEMENT, entered into by and between               PetroShare Corp.           ,

3 hereinafter designated and referred to as  "Operator,"  and  the  signatory  party  or  parties   other  than  Operator,  sometimes

4 hereinafter referred to individually as "Non-Operator," and collectively as "Non-Operators."

5 WITNESSETH:

6 WHEREAS, the parties to this  agreement  are  owners  of  Oil  and  Gas  Leases  and/or  Oil  and  Gas  Interests  in  the  land

7 identified  in  Exhibit  "A,"  and  the  parties  hereto  have  reached  an  agreement  to  explore  and  develop  these  Leases  and/or  Oil

8 and Gas Interests for the production of Oil and Gas to the extent and as hereinafter provided,

9 NOW, THEREFORE, it is agreed as follows:

10 ARTICLE I.

11 DEFINITIONS

12 As used in this agreement, the following words and terms shall have the meanings here ascribed to them:

13 A.   The term "AFE" shall mean an Authority for Expenditure prepared by a party to this agreement for the purpose of

14 estimating the costs to be incurred in conducting an operation hereunder.

15 B.   The term "Completion" or "Complete" shall mean a single operation intended to complete a well as a producer of Oil

16 and  Gas  in  one  or  more  Zones,  including,  but  not  limited  to,  the  setting  of  production  casing,  perforating,  well  stimulation

17 and production testing conducted in such operation.

18 C.   The term "Contract Area" shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas Interests intended to be

19 developed  and  operated  for  Oil  and  Gas  purposes  under  this  agreement.  Such  lands,  Oil  and  Gas  Leases  and  Oil  and  Gas

20 Interests are described in Exhibit "A."

21 D.   The term "Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest

22 Zone  in  which  the  well  was  previously  drilled,  or  below  the  Deepest  Zone  proposed  in  the  associated  AFE,  whichever  is  the

23 lesser.

24 E.   The terms "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the

25 cost of any operation conducted under the provisions of this agreement.

26 F.   The term "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal

27 body  having  authority.   If  a  Drilling  Unit  is  not fixed by any such  rule  or  order,  a  Drilling  Unit  shall  be  the  drilling  unit  as

28 established by the pattern of drilling in the Contract Area unless fixed by express agreement of the Drilling Parties.

29 G.   The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas Interest on which a proposed well is to be

30 located.

31 H.  The term "Initial Well" shall mean the well required to be drilled by the parties hereto as provided in Article VI.A.

32 I.    The  term  "Non-Consent  Well"  shall  mean  a  well  in  which  less  than  all  parties  have  conducted  an  operation  as

33 provided in Article VI.B.2.

34 J.    The  terms  "Non-Drilling  Party"  and  "Non-Consenting  Party"  shall  mean  a  party  who  elects  not  to  participate  in  a

35 proposed operation.

36 K.    The  term  "Oil  and  Gas"  shall  mean  oil,  gas,  casinghead  gas,  gas  condensate,  and/or  all  other  liquid  or  gaseous

37 hydrocarbons and  other  marketable  substances  produced  therewith,  unless  an  intent  to  limit  the  inclusiveness  of  this  term  is

38 specifically stated.

39 L.   The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tracts

40 of land lying within the Contract Area which are owned by parties to this agreement.

41 M.    The  terms  "Oil  and  Gas  Lease,"  "Lease"  and  "Leasehold"  shall  mean  the  oil  and  gas  leases  or  interests  therein

42 covering tracts of land lying within the Contract Area which are owned by the parties to this agreement.

43 N.    The  term  "Plug  Back"  shall  mean  a  single  operation  whereby  a  deeper  Zone  is  abandoned  in  order  to  attempt  a

44 Completion in a shallower Zone.

45 O.   The term "Recompletion" or "Recomplete" shall mean an operation whereby a Completion in one Zone is abandoned

46 in order to attempt a Completion in a different Zone within the existing wellbore.

47 P.    The  term  "Rework"  shall  mean  an  operation  conducted  in  the  wellbore  of  a  well  after  it  is  Completed  to  secure,

48 restore, or improve production  in  a  Zone  which  is  currently  open  to  production  in  the  wellbore.    Such  operations  include,  but

49 are not limited  to,  well  stimulation  operations  but  exclude  any  routine  repair  or  maintenance  work  or  drilling,  Sidetracking,

50 Deepening, Completing, Recompleting, or Plugging Back of a well.

51 Q.   The  term  "Sidetrack"  shall  mean  the  directional  control  and  intentional  deviation  of  a  well  from  vertical  so  as  to

52 change  the  bottom  hole  location  unless  done  to  straighten  the  hole  or  drill  around  junk  in  the  hole  to  overcome  other

53 mechanical difficulties.

54 R.   The term "Zone" shall mean a stratum of earth containing or thought to contain a common accumulation of Oil and

55 Gas separately producible from any other common accumulation of Oil and Gas.

56 Unless the context otherwise clearly indicates, words used in the singular include the plural, the word "person" includes

57 natural and artificial persons, the plural includes the singular, and any gender includes the masculine, feminine, and neuter.

58 ARTICLE II.

59 EXHIBITS

60 The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof:

61      X     A. Exhibit "A," shall include the following information:

62 (1) Description of lands subject to this agreement,

63 (2) Restrictions, if any, as to depths, formations, or substances,

64 (3) Parties to agreement with addresses and telephone numbers for notice purposes,

65 (4) Percentages or fractional interests of parties to this agreement,

66 (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement,

67 (6) Burdens on production.

68     B.  Exhibit "B," Form of Lease.

69      X     C.   Exhibit "C," Accounting Procedure.

70      X      D.  Exhibit "D," Insurance.

71    E.   Exhibit "E," Gas Balancing Agreement.

72    F.   Exhibit "F," Non-Discrimination and Certification of Non-Segregated Facilities.

73    G.  Exhibit "G," Tax Partnership.

74      X      H.  Other:     Memorandum of Operating Agreement and Financing Statement

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 If  any  provision  of  any  exhibit,  except  Exhibits  "E,"  "F"  and  "G,"  is  inconsistent  with  any  provision  contained  in

2 the body of this agreement, the provisions in the body of this agreement shall prevail.

3 ARTICLE III.

4 INTERESTS OF PARTIES

5 A. Oil and Gas Interests:

6 If  any  party  owns  an  Oil  and  Gas  Interest  in  the  Contract  Area,  that  Interest  shall  be  treated  for  all  purposes  of  this

7 agreement  and  during  the  term  hereof  as  if  it  were  covered  by  the  form  of  Oil  and  Gas  Lease  attached  hereto  as  Exhibit  "B,"

8 and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the lessee thereunder.

9 B. Interests of Parties in Costs and Production:

10 Unless  changed  by other provisions,  all costs  and  liabilities  incurred  in  operations under this  agreement  shall  be borne

11 and  paid,  and  all  equipment  and  materials  acquired  in  operations  on  the  Contract  Area  shall  be  owned,  by  the  parties  as  their

12 interests  are  set  forth  in  Exhibit  "A."    In  the  same  manner,  the  parties  shall  also  own  all  production  of  Oil  and  Gas  from  the

13 Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter.

14 Regardlessofwhichpartyhas contributedanyOiland GasLeaseorOiland GasInterestonwhichroyaltyorother

15 burdensmaybe payableand exceptas otherwiseexpresslyprovidedin thisagreement,eachparty Operator / shall pay or deliver, or

16 cause to be paid or delivered, all burdens on its shareofthe production from the Contract Area for the account of al parties.  /up to,butnotinexcessof,

17 ______   andshall indemnify,defend and hold theother partiesfreefrom anyliabilitytherefor.

18 Exceptas otherwiseexpresslyprovidedin thisagreement,if anyparty has contributedheretoany LeaseorInterestwhichis

19  burdenedwithany royalty,overridingroyalty,productionpaymentorotherburdenonproductioninexcessofthe amounts

20  stipulatedabove,suchparty soburdenedshallassumeandalonebearallsuchexcessobligationsandshallindemnify,defend

21 andholdtheotherpartiesheretoharmlessfromany and allclaimsattributableto such excessburden.However,solongas

22 theDrillingUnitforthe productiveZone(s)is identicalwiththe ContractArea,eachpartyshallpay or deliver,orcause to

23 be paidordelivered,allburdens onproductionfromthe ContractAreadue underthetermsoftheOiland GasLease(s)

24 whichsuchpartyhas contributedto this agreement,andshallindemnify,defendand holdtheotherpartiesfreefromany

25 liabilitytherefor.Operatorshallhave no liability withrespecttothepayment ofburdensexcepttothe extentofitsgrossnegligence.

26 Nopartyshallever beresponsible,ona pricebasishigherthan thepricereceivedbysuch party,to anyotherparty's

27 lessororroyaltyowner,and if suchotherparty'slessororroyaltyownershoulddemandandreceivesettlementona higher

28 pricebasis,thepartycontributingtheaffectedLease shall bear theadditional royaltyburdenattributableto such higherprice.

29 Nothing contained  in  this Article III.B. shall be deemed an assignment or cross-assignment of interests covered hereby,

30 and  in  the  event  two  or  more  parties  contribute  to  this  agreement  jointly  owned  Leases,  the  parties'  undivided  interests  in

31 said Leaseholds shall be deemed separate leasehold interests for the purposes of this agreement.

32 C.  Subsequently Created Interests:

33 If any party has contributed hereto a Lease or Interest that is burdened with an assignment of production given as security

34 for   the   payment   of   money,   or   if,   after   the  date   of   this   agreement,   any   party   creates   an   overriding   royalty,   production

35 payment,  net  profits  interest,  assignment  of  production  or  other  burden  payable  out  of  production  attributable  to  its  working

36 interest  hereunder,  such  burden  shall  be  deemed  a  "Subsequently  Created  Interest."Further,  if  any  party  has  contributed

37 hereto  a  Lease  or  Interest  burdened  with  an  overriding  royalty,  production  payment,  net  profits  interests,  or  other  burden

38 payable  out  of  production  created  prior  to  the  date  of  this  agreement,  and  such  burden  is  not  shown  on  Exhibit  "A,"  such

39 burden  also  shall  be  deemed  a  Subsequently  Created  Interest  to  the  extent  such  burden  causes  the  burdens  on  such  party's

40 Lease or Interest to exceed the amount stipulated in Article III.B. above.

41 The  party  whose  interest  is  burdened  with  the  Subsequently  Created  Interest  (the  "Burdened  Party")  shall  assume  and

42 alone  bear,  pay  and  discharge  the  Subsequently  Created  Interest  and  shall  indemnify,  defend  and  hold  harmless  the  other

43 parties  from  and  against  any  liability  therefor.    Further,  if  the  Burdened  Party  fails  to  pay,  when  due,  its  share  of  expenses

44 chargeable  hereunder,  all  provisions  of  Article  VII.B.  shall  be  enforceable  against  the  Subsequently  Created  Interest  in  the

45 same  manner  as  they  are  enforceable  against  the  working  interest  of  the  Burdened  Party.    If  the  Burdened  Party  is  required

46 under  this  agreement  to  assign  or  relinquish  to  any  other  party,  or  parties,  all  or  a  portion  of  its  working  interest  and/or  the

47 production  attributable  thereto,  said  other  party,  or  parties,  shall  receive  said  assignment  and/or  production  free  and  clear  of

48 said  Subsequently  Created  Interest,  and  the  Burdened  Party  shall  indemnify,  defend  and  hold  harmless  said  other  party,  or

49 parties, from any and all claims and demands for payment asserted by owners of the Subsequently Created Interest.

50 ARTICLE IV.

51 TITLES

52 A.  Title Examination:

53 Title examination shall be made on the Drillsite of any proposed well prior to commencement of drilling operations and,

54 if  a  majority  in  interest  of  the  Drilling  Parties  so  request  or  Operator  so  elects,  title  examination  shall  be  made  on  the  entire

55 Drilling  Unit,  or  maximum  anticipated  Drilling  Unit,  of  the  well.   The  opinion  will  include  the  ownership  of  the  working

56 interest,  minerals,  royalty,  overriding  royalty  and  production  payments  under  the  applicable  Leases.Each  party  contributing

57 Leases  and/or  Oil  and  Gas  Interests  to  be  included  in  the  Drillsite  or  Drilling  Unit,  if  appropriate,  shall  furnish  to  Operator

58 all  abstracts  (including  federal  lease  status  reports),  title  opinions,  title  papers  and  curative  material  in  its  possession  free  of

59 charge.   All  such  information  not  in  the  possession  of  or  made  available  to  Operator  by  the  parties,  but  necessary  for  the

60 examination  of  the  title,  shall  be  obtained  by  Operator.    Operator  shall  cause  title  to  be  examined  by  attorneys  on  its  staff  or

61 by  outside  attorneys.   Copies  of  all  title  opinions  shall  be  furnished  to  each  Drilling  Party. Costs  incurred  by  Operator  in

62 procuring   abstracts,   fees   paid   outside   attorneys or title examination  (including preliminary, supplemental, shut-in royalty

63 opinions and division order title opinions),  ( fees paid to outside landmen or brokers) / and other direct charges as provided in Exhibit "C" shall be borne by the Drilling

64  Parties  in  the  proportion  that  the  interest  of  each  Drilling  Party  bears  to  the  total  interest  of  all  Drilling  Parties  as  such

65 interests  appear  in  Exhibit  "A."    Operator  shall  make  no  charge  for  services  rendered  by  its  staff  attorneys  or  other  personnel

66 in the performance of the above functions.

67  Eachparty Operator /shall be responsible for securing curative matter and pooling amendments or agreements required in

68 connection with any title opinion obtained as set forth above./ LeasesorOilandGasInterestscontributedby suchparty. Operator shall be responsible for the preparation

69 and  recording  of  pooling  designations  or  declarations  and  communitization  agreements  as  well  as  the  conduct  of  hearings

70 before  governmental  agencies  for  the  securing  of  spacing  or  pooling  orders  or  any  other  orders  necessary  or  appropriate  to

71 the  conduct  of  operations  hereunder.   This  shall  not  prevent  any  party  from  appearing  on  its  own  behalf  at  such  hearings.

72 Costs  incurred  by  Operator,  including  fees  paid  to  outside  attorneys,  which  are  associated  with  hearings  before  governmental

73 agencies,  and   which   costs  are   necessary  and  proper   for   the  activities   contemplated   under  this  agreement,   shall   be  direct

74 charges to the joint account and shall not be covered by the administrative overhead charges as provided in Exhibit "C."

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1   Operator  shall  make  no  charge  for  services  rendered  by  its  staff  attorneys  or  other  personnel  in  the  performance  of  the  above

2   functions.

3 No well shall be drilled on the Contract Area until after (1) the title to the Drillsite or Drilling Unit, if appropriate, has

4   been  examined  as  above  provided,  and  (2)  the  title  has  been  approved  by  the  examining  attorney  or  title  has  been  accepted  by

5   Operator. a/ll of theDrilling Partiesinsuchwell.

6  B. Loss or Failure of Title:

7 1. FailureofTitle:ShouldanyOilandGasInterestorOilandGasLeasebelostthroughfailureoftitle,whichresultsina

8   reduction  of  interest  from  that  shown  on  Exhibit  "A,"  the  party  credited  with  contributing  the  affected  Lease  or  Interest

9   (including,  if  applicable,  a  successor  in  interest  to  such  party)  shall  have  ninety  (90)  days  from  final  determination  of  title

10   failure  to  acquire  a  new  lease  or  other  instrument  curing  the  entirety  of  the  title  failure,  which  acquisition  will  not  be  subject

11   to  Article  VIII.B.,  and  failing  to  do  so,  this  agreement,  nevertheless,  shall  continue  in  force  as  to  all  remaining  Oil  and  Gas

12   Leases and Interests; and,

13                    (a) The party credited with contributing the Oil and Gas Lease or Interest affected by the title failure (including, if

14   applicable,  a  successor  in  interest  to  such  party)  shall  bear  alone  the  entire  loss  and  it  shall  not  be  entitled  to  recover  from

15   Operator  or  the  other  parties  any  development  or  operating  costs  which  it  may  have  previously  paid  or  incurred,  but  there

16   shall be no additional liability on its part to the other parties hereto by reason of such title failure;

17                    (b)  There  shall  be  no  retroactive  adjustment  of  expenses  incurred  or  revenues  received  from  the  operation  of  the

18   Lease  or  Interest  which  has  failed,  but  the  interests  of  the  parties  contained  on  Exhibit  "A"  shall  be  revised  on  an  acreage

19   basis,  as  of  the  time  it  is  determined  finally  that  title  failure  has  occurred,  so  that  the  interest  of  the  party  whose  Lease  or

20   Interest is affected by the title failure will thereafter be reduced in the Contract Area by the amount of the Lease or Interest failed;

21                    (c) If the proportionate interest of the other parties hereto in any producing well previously drilled on the Contract

22   Area  is  increased  by  reason  of  the  title  failure,  the  party  who  bore  the  costs  incurred  in  connection  with  such  well  attributable

23   to  the  Lease  or  Interest  which  has  failed  shall  receive  the  proceeds  attributable  to  the  increase  in  such  interest  (less  costs  and

24   burdens  attributable  thereto)  until  it  has  been reimbursed  for  unrecovered  costs  paid  by  it  in  connection  with  such  well

25   attributable to such failed Lease or Interest;

26                    (d) Should any person not a party to this agreement, who is determined to be the owner of any Lease or Interest

27   which  has  failed,  pay  in  any  manner  any  part  of  the  cost  of  operation,  development,  or  equipment,  such  amount  shall  be  paid

28   to the party or parties who bore the costs which are so refunded;

29                    (e) Any liability to account to a person not a party to this agreement for prior production of Oil and Gas which arises

30   by  reason  of  title  failure  shall  be  borne  severally  by  each  party  (including  a  predecessor  to  a  current  party)  who  received

31   production  for  which  such  accounting  is  required  based  on  the  amount  of  such  production  received,  and  each  such  party  shall

32   severally indemnify, defend and hold harmless all other parties hereto for any such liability to account;

33                    (f) No charge shall be made to the joint account for legal expenses, fees or salaries in connection with the defense of

34   the  Lease  or  Interest  claimed  to  have  failed,  but  if  the  party  contributing  such  Lease  or  Interest  hereto  elects  to  defend  its  title

35   it shall bear all expenses in connection therewith; and

36                    (g)  If  any party is  given credit  on Exhibit "A" to a  Lease or  Interest  which  is  limited solely to  ownership  of an

37   interest  in  the  wellbore  of  any  well  or  wells  and  the  production  therefrom,  such  party's  absence  of  interest  in  the  remainder

38   of  the  Contract  Area  shall  be  considered  a  Failure  of  Title  as  to  such  remaining  Contract  Area  unless  that  absence  of  interest

39   is reflected on Exhibit "A."

40              2.   Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shut-in well

41   payment,  minimum  royalty  or  royalty  payment,  or  other  payment  necessary  to  maintain  all  or  a  portion  of  an  Oil  and  Gas

42   Lease  or  interest  is  not  paid  or  is  erroneously  paid,  and  as  a  result  a  Lease  or  Interest  terminates,  there  shall  be  no  monetary

43   liability  against  the  party  who  failed  to  make  such  payment.  Unless  the  party  who  failed  to  make  the  required  payment

44   secures  a  new  Lease  or  Interest  covering  the  same  interest  within  ninety  (90)  days  from  the  discovery  of  the  failure  to  make

45   proper  payment,  which  acquisition  will  not  be  subject  to  Article  VIII.B.,  the  interests  of  the  parties  reflected  on  Exhibit  "A"

46   shall  be  revised  on  an  acreage  basis,  effective  as  of  the  date  of  termination  of  the  Lease  or  Interest  involved,  and  the  party

47   who  failed  to  make  proper  payment  will  no  longer  be  credited  with  an  interest  in  the  Contract  Area  on  account  of  ownership

48   of  the  Lease  or  Interest  which  has  terminated.  If  the  party  who  failed  to  make  the  required  payment  shall  not  have  been  fully

49 reimbursed,  at  the  time  of  the  loss,  from  the  proceeds  of  the  sale  of  Oil  and  Gas  attributable  to  the  lost  Lease  or  Interest,

50   calculated  on  an  acreage  basis,  for  the  development  and  operating  costs  previously  paid  on  account  of  such  Lease  or  Interest,

51   it  shall  be  reimbursed  for  unrecovered  actual  costs  previously  paid  by  it  (but  not  for  its  share  of  the  cost  of  any  dry  hole

52   previously drilled or wells previously abandoned) from so much of the following as is necessary to effect reimbursement:

53                    (a) Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expenses and lease

54   burdens  chargeable  hereunder  to  the  person  who  failed  to  make  payment,  previously  accrued  to  the  credit  of  the  lost  Lease  or

55   Interest, on an acreage basis, up to the amount of unrecovered costs;

56                    (b) Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable hereunder to the person who failed

57   to  make  payment,  up  to  the  amount  of  unrecovered  costs  attributable  to  that  portion  of  Oil  and  Gas  thereafter  produced  and

58   marketed  (excluding  production  from  any  wells  thereafter  drilled)  which,  in  the  absence  of  such  Lease  or  Interest  termination,

59   would  be  attributable  to  the  lost  Lease  or  Interest  on  an  acreage  basis  and  which  as  a  result  of  such  Lease  or  Interest

60   termination  is  credited  to  other  parties,  the  proceeds  of  said  portion  of  the  Oil  and  Gas  to  be  contributed  by  the  other  parties

61   in proportion to their respective interests reflected on Exhibit "A"; and,

62                    (c) Any monies, up to the amount of unrecovered costs, that may be paid by any party who is, or becomes, the owner

63   of the Lease or Interest lost, for the privilege of participating in the Contract Area or becoming a party to this agreement.

64  3. Other  Losses:  All losses of Leases or Interests committed to this agreement, otherthanthosesetforthin Articles

65   IV.B.1.  and  IV.B.2.  above,  shall  be  joint  losses  and  shall  be  borne  by  all  parties  in  proportion  to  their  interests  shown  on

66   Exhibit  "A."    This  shall  include  but  not  be  limited  to  the  loss  of  any  Lease  or  Interest  through  failure  to  develop  or  because

67   express  or  implied  covenants  have  not  been  performed  (other  than  performance  which  requires  only  the  payment  of  money),

68   and  the  loss  of  any  Lease  by  expiration  at  the  end  of  its  primary  term  if  it  is  not  renewed  or  extended.    There  shall  be  no

69   readjustment of interests in the remaining portion of the Contract Area on account of any joint loss.

70  4. CuringTitle: In the event of a Failure of Title / as set forthunderArticleIV.B.1.oralossoftitleunderArticleIV.B.2.above, any

71   Lease  or  Interest  acquired  by  any  party  hereto  (other  than  the  party  whose  interest  has  failed  or  was  lost)  during  the  ninety

72   (90)  day  period  / following discovery of such failureprovided  by  Article  IV.B.1.  and  Article  IV.B.2.  above  covering  all  or  a  portion  of  the  interest  that  has  failed

73   or  was  lost  shall  be  offered  at  cost  to  the  party  whose  interest  has  failed  or  was  lost,  and  the  provisions  of  Article  VIII.B.

74   shall not apply to such acquisition.

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 ARTICLE V.

2 OPERATOR

3 A. Designation and Responsibilities of Operator:

4   PetroShare Corp.  shall  be  the  Operator  of  the  Contract  Area,  and  shall  conduct

5 and  direct  and  have full control  of  all  operations  on  the Contract Area  as permitted and  required  by,  and  within  the  limits  of

6 this agreement.  In its performance of services hereunder for the Non-Operators, Operator  shall  be  an  independent  contractor

7 not  subject  to  the  control  or  direction  of  the  Non-Operators  except  as  to  the  type  of  operation  to  be  undertaken  in  accordance

8 with the election procedures contained in this agreement. Operator shall not be deemed, or hold itself out as, the agent of the

9 Non-Operators with authority to bind them to any obligation or liability assumed or incurred by Operator as to any third

10 party. Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike

11 manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and

12 regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred

13 except such as may result from gross negligence or willful misconduct.

14 B. Resignation or Removal of Operator and Selection of Successor:

15 1. Resignation or Removal of Operator: Operator may resign at any time by giving written notice thereof to Non-Operators.

16 If Operator terminates its legal existence, no longer owns an interest hereunder in the Contract Area, or is no longer capable of

17 serving as Operator, Operator shall be deemed to have resigned without any action by Non-Operators, except the selection of a

18 successor. Operator may be removed only for good cause by the affirmative vote of Non-Operators owning a majority interest

19 based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of Operator; such vote shall not be

20 deemed effective until a written notice has been delivered to the Operator by a Non-Operator detailing the alleged default and

21 Operator has failed to cure the default within thirty (30) days from its receipt of the notice or, if the default concerns an

22 operation then being conducted, within forty-eight (48) hours of its receipt of the notice.   For purposes hereof, "good cause" shall

23 mean not only gross negligence or willful misconduct but also the material breach of or inability to meet the standards of

24 operation contained in Article V.A. or material failure or inability to perform its obligations under this agreement.

25 Subject to Article VII.D.1., such resignation or removal shall not become effective until 7:00 o'clock A.M. on the first

26 day of the calendar month following the expiration of ninety (90) days after the giving of notice of resignation by Operator

27 or action by the Non-Operators to remove Operator, unless a successor Operator has been selected and assumes the duties of

28 Operator at an earlier date. Operator, after effective date of resignation or removal, shall be bound by the terms hereof as a

29 Non-Operator. A change of a corporate name or structure of Operator or transfer of Operator's interest to any single

30 subsidiary, parent or successor corporation shall not be the basis for removal of Operator.

31 2.   Selection of Successor Operator: Upon the resignation or removal of Operator under any provision of this agreement, a

32 successor Operator shall be selected by the parties. The successor Operator shall be selected from the parties owning an

33 interest in the Contract Area at the time such successor Operator is selected. The successor Operator shall be selected by the

34 affirmative vote of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A";

35 provided, however, if an Operator which has been removed or is deemed to have resigned fails to vote or votes only to

36 succeed itself, the successor Operator shall be selected by the affirmative vote of the party or parties owning a majority

37 interest based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of the Operator that was

38 removed or resigned. The former Operator shall promptly deliver to the successor Operator all records and data relating to

39 the operations conducted by the former Operator to the extent such records and data are not already in the possession of the

40 successor operator. Any cost of obtaining or copying the former Operator's records and data shall be charged to the joint

41 account.

42 3.   Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed in receivership, it shall be deemed to have

43 resigned without any action by Non-Operators, except the selection of a successor. If a petition for relief under the federal

44 bankruptcy laws is filed by or against Operator, and the removal of Operator is prevented by the federal bankruptcy court, all

45 Non-Operators and Operator shall comprise an interim operating committee to serve until Operator has elected to reject or

46 assume this agreement pursuant to the Bankruptcy Code, and an election to reject this agreement by Operator as a debtor in

47 possession, or by a trustee in bankruptcy, shall be deemed a resignation as Operator without any action by Non-Operators,

48 except the selection of a successor. During the period of time the operating committee controls operations, all actions shall

49 require the approval of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A." In

50 the event there are only two (2) parties to this agreement, during the period of time the operating committee controls

51 operations, a third party acceptable to Operator, Non-Operator and the federal bankruptcy court shall be selected as a

52 member of the operating committee, and all actions shall require the approval of two (2) members of the operating

53 committee without regard for their interest in the Contract Area based on Exhibit "A."

54 C.  Employees and Contractors:

55 The number of employees or contractors used by Operator in conducting operations hereunder, their selection, and the

56 hours of labor and the compensation for services performed shall be determined by Operator, and all such employees or

57 contractors shall be the employees or contractors of Operator.

58 D.  Rights and Duties of Operator:

59 1.  Competitive  Rates and Use of Affiliates: All wells drilled on the Contract Area shall be drilled on a competitive

60 contract basis at the usual rates prevailing in the area. If it so desires, Operator may employ its own tools and equipment in

61 the drilling of wells, but its charges therefor shall not exceed the prevailing rates in the area and the rate of such charges

62 shall be agreed upon by the parties in writing before drilling operations are commenced, and such work shall be performed by

63 Operator under the same terms and conditions as are customary and usual in the area in contracts of independent contractors

64 who are doing work of a similar nature. All work performed or materials supplied by affiliates or related parties of Operator

65 shall be performed or supplied at competitive rates, pursuant to written agreement, and in accordance with customs and

66 standards prevailing in the industry.

67 2. Discharge of Joint Account Obligations: Except as herein otherwise specifically provided, Operator shall promptly pay

68 and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall

69 charge each of the parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit "C."

70 Operator shall keep an accurate record of the joint account hereunder, showing expenses incurred and charges and credits

71 made and received.

72 3. Protection from Liens: Operator shall pay, or cause to be paid, as and when they become due and payable, all accounts

73 of contractors and suppliers and wages and salaries for services rendered or performed, and for materials supplied on, to or in

74 respect of the Contract Area or any operations for the joint account thereof, and shall keep the Contract Area free from

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1 liens and encumbrances resulting therefrom except for those resulting from a bona fide dispute as to services rendered or

2 materials supplied.

3 4. Custody of Funds: Operator shall hold for the account of the Non-Operators any funds of the Non-Operators advanced

4 or paid to the Operator, either for the conduct of operations hereunder or as a result of the sale of production from the

5 Contract Area, and such funds shall remain the funds of the Non-Operators on whose account they are advanced or paid until

6 used  for their intended purpose or otherwise delivered  to the Non-Operators or applied toward the payment of debts as

7 provided in Article VII.B.  Nothing in this paragraph shall be construed to establish a fiduciary relationship between Operator

8 and Non-Operators for any purpose other than to account for Non-Operator funds as herein specifically provided.  Nothing in

9 this paragraph shall require the maintenance by Operator of separate accounts for the funds of Non-Operators unless the

10 parties otherwise specifically agree.

11 5. Access to Contract Area and Records: Operator shall, except as otherwise provided herein, permit each Non-Operator

12 or its duly authorized representative, at the Non-Operator's sole risk and cost, full and free access at all reasonable times to

13 all operations of every kind and character being conducted for the joint account on the Contract Area and to the records of

14 operations conducted thereon or production therefrom, including Operator's books and records relating thereto.  Such access

15 rights shall not be exercised in a manner interfering with Operator's conduct of an operation hereunder and shall not obligate

16 Operator  to  furnish  any  geologic  or  geophysical  data  of  an  interpretive  nature  unless  the  cost  of  preparation  of  such

17 interpretive data was charged to the joint account.  Operator will furnish to each Non-Operator upon request copies of any

18 and  all reports and  information obtained by Operator in connection  with production  and  related  items,  including,  without

19 limitation,  meter and chart  reports,  production purchaser statements,  run  tickets and  monthly gauge  reports,  but  excluding

20 purchase contracts and pricing information to the extent not applicable to the production of the Non-Operator seeking the

21 information.Any audit of Operator's records relating to amounts expended and the appropriateness of such expenditures

22 shall be conducted in accordance with the audit protocol specified in Exhibit "C."

23 6. Filing and Furnishing Governmental Reports: Operator will file, and upon written request promptly furnish copies to

24 each  requesting  Non-Operator  not  in  default  of  its  payment  obligations,  all  operational  notices,  reports  or  applications

25 required to be filed by local, State, Federal or Indian agencies or authorities having jurisdiction over operations hereunder.

26 Each Non-Operator shall provide to Operator on a timely basis all information necessary to Operator to make such filings.

27 7. Drilling and Testing Operations: The following provisions shall apply to each well drilled hereunder, including but not

28 limited to the Initial Well:

29 (a) Operator will promptly advise Non-Operators of the date on which the well is spudded, or the date on which

30 drilling operations are commenced.

31 (b) Operator will send to Non-Operators such reports, test results and notices regarding the progress of operations on the well

32 as the Non-Operators shall reasonably request, including, but not limited to, daily drilling reports, completion reports, and well logs.

33 (c) Operator shall adequately test all Zones encountered which may reasonably be expected to be capable of producing

34 Oil and Gas in paying quantities as a result of examination of the electric log or any other logs or cores or tests conducted

35 hereunder.

36 8. Cost Estimates: Upon request of any Consenting Party, Operator shall furnish estimates of current and cumulative costs

37 incurred  for  the  joint  account  at  reasonable  intervals  during  the  conduct  of  any  operation  pursuant  to  this  agreement.

38 Operator shall not be held liable for errors in such estimates so long as the estimates are made in good faith.

39 9.  Insurance:  At  all  times  while  operations  are  conducted  hereunder,  Operator  shall  comply  with  the  workers

40 compensation law of the state where the operations are being conducted; provided, however, that Operator may be a self-

41 insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account shall

42 be as provided in Exhibit "C."  Operator shall also carry or provide insurance for the benefit of the joint account of the parties

43 as outlined in Exhibit "D" attached hereto and made a part hereof.  Operator shall require all contractors engaged in work on

44 or for the Contract Area to comply with the workers compensation law of the state where the operations are being conducted

45 and to maintain such other insurance as Operator may require.

46 In the event automobile liability insurance is specified in said Exhibit "D," or subsequently receives the approval of the

47 parties,  no  direct  charge  shall  be  made  by  Operator  for  premiums  paid  for  such  insurance  for  Operator's  automotive

48 equipment.

49 ARTICLE VI.

50 DRILLING AND DEVELOPMENT

51 A.  Initial Well:

52 On or before the______ day of   ______________  ,  ____ , Operator shall commence the drilling of the Initial

53 Well at  the following location: a location on the Contract Area of Operator’s choosing

54

55

56

57

58

59

60  and shall thereafter continue the drilling of the well with due diligence to a depth sufficient to test the Niobrara formation or to a true vertical depth of 7,855 feet, whichever is the lesser depth.

61

62

63

64

65

66

67 The drilling of the Initial Well and the participation therein by all parties is obligatory, subject to Article VI.C.1. as to participation

68 in Completion operations and Article VI.F. as to termination of operations and Article XI as to occurrence of force majeure.

69 B.Subsequent Operations:

70 1. Proposed Operations: If any party hereto should desire to drill any well on the Contract Area other than the Initial Well, or

71  if  any party should  desire to  /  complete the Initial Well as a horizontal well or to Rework,  Sidetrack,  Deepen,  Recomplete or Plug Back  a  dry hole  or  a  well  no  longer  capable of

72 producing in paying quantities in which such party has not otherwise relinquished its interest in the proposed objective Zone under

73 this agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or Plug Back such a well shall give written

74 notice  of  the  proposed  operation  to  the  parties  who  have  not  otherwise  relinquished  their  interest  in  such  objective  Zone

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 under this agreement and to all other parties in the case of a proposal for Sidetracking or Deepening, specifying the work to be

2 performed, the location, proposed depth, objective Zone and the estimated cost of the operation.  The parties to whom such a

3 notice is delivered shall have thirty (30) days after receipt of the notice within which to notify the party proposing to do the work

4 whether they elect to participate in the cost of the proposed operation.  If a drilling rig is on location, notice of a proposal to

5 Rework, Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone and the response period shall be limited to forty-

6 eight (48) hours, exclusive of Saturday, Sunday and legal holidays.  Failure of a party to whom such notice is delivered to reply

7 within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation.

8 Any proposal by a party to conduct an operation conflicting with the operation initially proposed shall be delivered to all parties

9 within the time and in the manner provided in Article VI.B.6.

10 If all parties to whom such notice is delivered elect to participate in such a proposed operation, the parties shall be

11 contractually committed to participate therein provided such operations are commenced within the time period hereafter set

12 forth, and Operator shall, no later than ninety (90) days after expiration of the notice period of thirty (30) days (or as

13 promptly as practicable after the expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case

14 may be), actually commence the proposed operation and thereafter complete it with due diligence at the risk and expense of

15 the parties participating therein; provided, however, said commencement date may be extended upon written notice of same

16 by Operator to the other parties, for a period of up to thirty (30) additional days if, in the sole opinion of Operator, such

17 additional time is reasonably necessary to obtain permits from governmental authorities, surface rights (including rights-of-

18 way) or appropriate drilling equipment,  or to complete title examination  or curative matter required  for title approval or

19 acceptance.  If the actual operation has not been commenced within the time provided (including any extension thereof as

20 specifically permitted herein or in the force majeure provisions of Article XI) and if any party hereto still desires to conduct

21 said operation, written notice proposing same must be resubmitted to the other parties in accordance herewith as if no prior

22 proposal had been made.  Those parties that did not participate in the drilling of a well for which a proposal to Deepen or

23 Sidetrack is made hereunder shall, if such parties desire to participate in the proposed Deepening or Sidetracking operation,

24 reimburse the Drilling Parties in accordance with Article VI.B.4. in the event of a Deepening operation and in accordance

25 with Article VI.B.5. in the event of a Sidetracking operation.

26 2. Operations by Less Than All Parties:

27 (a) Determination of Participation.  If any party to whom such notice is delivered as provided in Article VI.B.1. or

28 VI.C.1. (Option No. 2) elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this

29 Article, the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, no

30 later than ninety (90) days after the expiration of the notice period of thirty (30) days (or as promptly as practicable after the

31 expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case may be) actually commence the

32 proposed operation and complete it with due diligence. Operator shall perform all work for the account of the Consenting

33 Parties; provided, however, if no drilling rig or other equipment is on location, and if Operator is a Non-Consenting Party,

34 the Consenting Parties shall either: (i) request Operator to perform the work required by such proposed operation for the

35 account of the Consenting Parties, or (ii) designate one of the Consenting Parties as Operator to perform such work. The

36 rights and duties granted to and imposed upon the Operator under this agreement are granted to and imposed upon the party

37 designated as Operator for an operation in which the original Operator is a Non-Consenting Party.  Consenting Parties, when

38 conducting operations on the Contract Area pursuant to this Article VI.B.2., shall comply with all terms and conditions of this

39 agreement.

40 If less than all parties approve any proposed operation, the proposing party, immediately after the expiration of the

41 applicable  notice  period,  shall  advise  all  Parties  of  the  total  interest  of  the  parties  approving  such  operation  and  its

42 recommendation as to whether the Consenting Parties should proceed with the operation as proposed.  Each Consenting Party,

43 within forty-eight (48) hours (exclusive of Saturday, Sunday, and legal holidays) after delivery of such notice, shall advise the

44 proposing party of its desire to (i) limit participation to such party's interest as shown on Exhibit "A" or (ii) carry only its

45 proportionate part (determined by dividing such party's interest in the Contract Area by the interests of all Consenting Parties in

46 the Contract Area) of Non-Consenting Parties' interests, or (iii) carry its proportionate part (determined as provided in (ii)) of

47 Non-Consenting  Parties'  interests  together  with  all  or  a  portion  of  its  proportionate  part  of  any  Non-Consenting  Parties'

48 interests that any Consenting Party did not elect to take.   Any interest of Non-Consenting Parties that is not carried by a

49 Consenting Party shall be deemed to be carried by the party proposing the operation if such party does not withdraw its

50 proposal.  Failure to advise the proposing party within the time required shall be deemed an election under (i). In the event a

51 drilling rig is on location, notice may be given by telephone, and the time permitted for such a response shall not exceed a

52 total of forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays).  The proposing party, at its election, may

53 withdraw such proposal if there is less than 100% participation and shall notify all parties of such decision within ten (10)

54 days, or within twenty-four (24) hours if a drilling rig is on location, following expiration of the applicable response period.

55 If 100% subscription to the proposed operation is obtained, the proposing party shall promptly notify the Consenting Parties

56 of their proportionate interests in the operation and the party serving as Operator shall commence such operation within the

57 period provided in Article VI.B.1., subject to the same extension right as provided therein.

58 (b) Relinquishment of Interest for Non-Participation. The entire cost and risk of conducting such operations shall be

59 borne  by  the  Consenting  Parties  in  the  proportions  they  have  elected  to  bear  same  under  the  terms  of  the  preceding

60 paragraph.  Consenting Parties shall keep the leasehold estates involved in such operations free and clear of all liens and

61 encumbrances of every kind created by or arising from the operations of the Consenting Parties.  If such an operation results

62 in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall plug and abandon the well and restore

63 the  surface  location  at  their  sole  cost,  risk  and  expense;  provided,  however,  that  those  Non-Consenting  Parties  that

64 participated in the drilling, Deepening or Sidetracking of the well shall remain liable for, and shall pay, their proportionate

65 shares of the cost of plugging and abandoning the well and restoring the surface location insofar only as those costs were not

66 increased by the subsequent operations of the Consenting Parties.   If any well drilled, Reworked, Sidetracked, Deepened,

67 Recompleted or Plugged Back under the provisions of this Article results in a well capable of producing Oil and/or Gas in

68 paying quantities, the Consenting Parties shall Complete and equip the well to produce at their sole cost and risk, and the

69 well shall then be turned over to Operator (if the Operator did not conduct the operation) and shall be operated by it at the

70 expense and for the account  of the Consenting Parties.   Upon commencement  of operations for the drilling, Reworking,

71 Sidetracking, Recompleting, Deepening or Plugging Back of any such well by Consenting Parties in accordance with the

72 provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the

73 Consenting  Parties  shall  own  and  be  entitled  to  receive,  in  proportion  to  their  respective  interests,  all  of  such  Non-

74 Consenting Party's interest  in  the well and  share of production  therefrom  or,  in  the case of  a  Reworking,  Sidetracking,

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1 Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article VI.C.1.  Option No. 2, all of such Non-

2 Consenting Party's interest in the production obtained from the operation in which the Non-Consenting Party did not elect

3 to participate.  Such relinquishment shall be effective until the proceeds of the sale of such share, calculated at the well, or

4 market value thereof if such share is not sold (after deducting applicable ad valorem, production, severance, and excise taxes,

5 royalty, overriding royalty and other interests not excepted by Article III.C. payable out of or measured by the production

6 from such well accruing with respect to such interest until it reverts), shall equal the total of the following:

7 (i)   100% of each such Non-Consenting Party's share of the cost of any newly acquired surface equipment

8 beyond  the  wellhead  connections  (including  but  not  limited  to  stock  tanks,  separators,  treaters,  pumping  equipment  and

9 piping), plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first

10 production  and  continuing  until  each  such  Non-Consenting  Party's  relinquished  interest  shall  revert  to  it  under  other

11 provisions of this Article, it being agreed that each Non-Consenting Party's share of such costs and equipment will be that

12 interest which would have been chargeable to such Non-Consenting Party had it participated in the well from the beginning

13 of the operations; and

14 (ii)  400%  of (a) that portion of  the costs and expenses of drilling, Reworking, Sidetracking, Deepening,

15 Plugging Back, testing, Completing, and Recompleting, after deducting any cash contributions received under Article VIII.C.,

16 and of (b) that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections),

17 which would have been chargeable to such Non-Consenting Party if it had participated therein.

18 Notwithstanding anything to the contrary in this Article VI.B., if the well does not reach the deepest objective Zone

19 described  in  the notice proposing the well  for reasons other than  the encountering of granite or practically impenetrable

20 substance or other condition in the hole rendering further operations impracticable, Operator shall give notice thereof to each

21 Non-Consenting  Party  who  submitted  or  voted  for  an  alternative  proposal  under  Article  VI.B.6.  to  drill  the  well  to  a

22 shallower Zone than the deepest objective Zone proposed in the notice under which the well was drilled, and each such Non-

23 Consenting Party shall have the option to participate in the initial proposed Completion of the well by paying its share of the

24 cost of drilling the well to its actual depth, calculated in the manner provided in Article VI.B.4. (a).  If any such Non-

25 Consenting Party does not elect to participate in the first Completion proposed for such well, the relinquishment provisions

26 of this Article VI.B.2. (b) shall apply to such party's interest.

27 (c)  Reworking,  Recompleting  or  Plugging  Back.  An  election  not  to  participate  in  the  drilling,  Sidetracking  or

28 Deepening of a well shall be deemed an election not to participate in any Reworking or Plugging Back operation proposed in

29 such a well, or portion thereof, to which the initial non-consent election applied that is conducted at any time prior to full

30 recovery  by  the  Consenting  Parties  of  the  Non-Consenting  Party's  recoupment  amount.  Similarly,  an  election  not  to

31 participate in the Completing or Recompleting of a well shall be deemed an election not to participate in any Reworking

32 operation proposed in such a well, or portion thereof, to which the initial non-consent election applied that is conducted at

33 any time prior to full recovery by the Consenting Parties of the Non-Consenting Party's recoupment amount. Any such

34 Reworking, Recompleting or Plugging Back operation conducted during the recoupment period shall be deemed part of the

35 cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties400% of

36 that portion of the costs of the Reworking, Recompleting or Plugging Back operation which would have been chargeable to

37 such Non-Consenting Party had it participated therein.  If such a Reworking, Recompleting or Plugging Back operation is

38 proposed during such recoupment period, the provisions of this Article VI.B. shall be applicable as between said Consenting

39 Parties in said well.

40 (d) Recoupment Matters. During the period of time Consenting Parties are entitled to receive Non-Consenting Party's

41 share of production, or the proceeds therefrom, Consenting Parties shall be responsible for the payment of all ad valorem,

42 production, severance, excise, gathering and other taxes, and all royalty, overriding royalty and other burdens applicable to

43 Non-Consenting Party's share of production not excepted by Article III.C.

44 In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or Deepening operation, the Consenting

45 Parties shall be permitted to use, free of cost, all casing, tubing and other equipment in the well, but the ownership of all

46 such equipment shall remain unchanged; and upon abandonment of a well after such Reworking, Sidetracking, Plugging Back,

46 Recompleting or Deepening, the Consenting Parties shall account for all such equipment to the owners thereof, with each

48 party receiving its proportionate part in kind or in value, less cost of salvage.

49 Within ninety (90) days after the completion of any operation under this Article, the party conducting the operations

50 for the Consenting Parties shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to

51 the well, and  an  itemized  statement of the cost of drilling, Sidetracking, Deepening, Plugging Back, testing, Completing,

52 Recompleting, and equipping the well for production; or, at its option, the operating party, in lieu of an itemized statement

53 of such costs of operation, may submit a detailed statement of monthly billings.  Each month thereafter, during the time the

54 Consenting Parties are being reimbursed as provided above, the party conducting the operations for the Consenting Parties

55 shall furnish the Non-Consenting Parties with an itemized statement of all costs and liabilities incurred in the operation of

56 the well, together with a statement of the quantity of Oil and Gas produced from it and the amount of proceeds realized from

57 the sale of the well's working interest production during the preceding month.  In determining the quantity of Oil and Gas

58 produced during any month, Consenting Parties shall use industry accepted methods such as but not limited to metering or

59 periodic well tests.  Any amount realized from the sale or other disposition of equipment newly acquired in connection with

60 any such operation which would have been owned by a Non-Consenting Party had it participated therein shall be credited

61 against the total unreturned costs of the work done and of the equipment purchased in determining when the interest of such

62 Non-Consenting Party shall revert to it as above provided; and if there is a credit balance, it shall be paid to such Non-

63 Consenting Party.

64 If and when the Consenting Parties recover from a Non-Consenting Party's relinquished interest the amounts provided

65 for above, the relinquished interests of such Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on the day

66 following the day on which such recoupment occurs, and, from and after such reversion, such Non-Consenting Party shall

67 own the same interest in such well, the material and equipment in or pertaining thereto, and the production therefrom as

68 such  Non-Consenting  Party  would  have  been  entitled  to  had  it  participated  in  the  drilling,  Sidetracking,  Reworking,

69 Deepening, Recompleting or Plugging Back of said well. Thereafter, such Non-Consenting Party shall be charged with and

70 shall pay its proportionate part of the further costs of the operation of said well in accordance with the terms of this

71 agreement and Exhibit "C" attached hereto.

72 3. Stand-By Costs: When a well which has been drilled or Deepened has reached its authorized depth and all tests have

73 been  completed  and  the  results  thereof  furnished  to  the  parties,  or  when  operations  on  the  well  have  been  otherwise

74 terminated pursuant to Article VI.F., stand-by costs incurred pending response to a party's notice proposing a Reworking,

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1 Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in such a well (including the period required

2 under Article VI.B.6. to resolve competing proposals) shall be charged and borne as part of the drilling or Deepening

3 operation just completed. Stand-by costs subsequent to all parties responding, or expiration of the response time permitted,

4 whichever first occurs, and prior to agreement as to the participating interests of all Consenting Parties pursuant to the terms

5 of the second grammatical paragraph of Article VI.B.2. (a), shall be charged to and borne as part of the proposed operation,

6 but if the proposal is subsequently withdrawn because of insufficient participation, such stand-by costs shall be allocated

7 between the Consenting Parties in the proportion each Consenting Party's interest as shown on Exhibit "A" bears to the total

8 interest as shown on Exhibit "A" of all Consenting Parties.

9 In the event that notice for a Sidetracking operation is given while the drilling rig to be utilized is on location, any party

10 may request and receive up to five (5) additional days after expiration of the forty-eight hour response period specified in

11 Article VI.B.1. within which to respond by paying for all stand-by costs and other costs incurred during such extended

12 response period; Operator may require such party to pay the estimated stand-by time in advance as a condition to extending

13 the response period. If more than one party elects to take such additional time to respond to the notice, standby costs shall be

14 allocated between the parties taking additional time to respond on a day-to-day basis in the proportion each electing party's

15 interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the electing parties.

16 4. Deepening: If less than all parties elect to participate in a drilling, Sidetracking, or Deepening operation proposed

17 pursuant to Article VI.B.1., the interest relinquished by the Non-Consenting Parties to the Consenting Parties under Article

18 VI.B.2. shall relate only and be limited to the lesser of (i) the total depth actually drilled or (ii) the objective depth or Zone

19 of which the parties were given notice under Article VI.B.1. ("Initial Objective"). Such well shall not be Deepened beyond the

20 Initial Objective without first complying with this Article to afford the Non-Consenting Parties the opportunity to participate

21 in the Deepening operation.

22 In the event any Consenting Party desires to drill or Deepen a Non-Consent Well to a depth below the Initial Objective,

23 such party shall give notice thereof, complying with the requirements of Article VI.B.1., to all parties (including Non-

24 Consenting Parties). Thereupon, Articles VI.B.1. and 2. shall apply and all parties receiving such notice shall have the right to

25 participate or not participate in the Deepening of such well pursuant to said Articles VI.B.1. and 2. If a Deepening operation

26 is approved pursuant to such provisions, and if any Non-Consenting Party elects to participate in the Deepening operation,

27 such Non-Consenting party shall pay or make reimbursement (as the case may be) of the following costs and expenses.

28 (a) If the proposal to Deepen is made prior to the Completion of such well as a well capable of producing in paying

29 quantities, such Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the case may be) that share of costs

30 and expenses incurred in connection with the drilling of said well from the surface to the Initial Objective which Non-

31 Consenting Party would have paid had such Non-Consenting Party agreed to participate therein, plus the Non-Consenting

32 Party's share of the cost of Deepening and of participating in any further operations on the well in accordance with the other

33 provisions of this Agreement; provided, however, all costs for testing and Completion or attempted Completion of the well

34 incurred by Consenting Parties prior to the point of actual operations to Deepen beyond the Initial Objective shall be for the

35 sole account of Consenting Parties.

36 (b) If the proposal is made for a Non-Consent Well that has been previously Completed as a well capable of producing

37 in paying quantities, but is no longer capable of producing in paying quantities, such Non-Consenting Party shall pay (or

38 reimburse Consenting Parties for, as the case may be) its proportionate share of all costs of drilling, Completing, and

39 equipping said well from the surface to the Initial Objective, calculated in the manner provided in paragraph (a) above, less

40 those costs recouped by the Consenting Parties from the sale of production from the well. The Non-Consenting Party shall

41 also pay its proportionate share of all costs of re-entering said well. The Non-Consenting Parties' proportionate part (based

42 on the percentage of such well Non-Consenting Party would have owned had it previously participated in such Non-Consent

43 Well) of the costs of salvable materials and equipment remaining in the hole and salvable surface equipment used in

44 connection with such well shall be determined in accordance with Exhibit "C." If the Consenting Parties have recouped the

45 cost of drilling, Completing, and equipping the well at the time such Deepening operation is conducted, then a Non-

46 Consenting Party may participate in the Deepening of the well with no payment for costs incurred prior to re-entering the

47 well for Deepening

48 The foregoing shall not imply a right of any Consenting Party to propose any Deepening for a Non-Consent Well prior

49 to the drilling of such well to its Initial Objective without the consent of the other Consenting Parties as provided in Article

50 VI.F.

51 5. Sidetracking: Any party having the right to participate in a proposed Sidetracking operation that does not own an

52 interest in the affected wellbore at the time of the notice shall, upon electing to participate, tender to the wellbore owners its

53 proportionate share (equal to its interest in the Sidetracking operation) of the value of that portion of the existing wellbore

54 to be utilized as follows:

55 (a) If the proposal is for Sidetracking an existing dry hole, reimbursement shall be on the basis of the actual costs

56 incurred in the initial drilling of the well down to the depth at which the Sidetracking operation is initiated.

57 (b) If the proposal is for Sidetracking a well which has previously produced, reimbursement shall be on the basis of

58 such party's proportionate share of drilling and equipping costs incurred in the initial drilling of the well down to the depth

59 at which the Sidetracking operation is conducted, calculated in the manner described in Article VI.B.4(b) above. Such party's

60 proportionate share of the cost of the well's salvable materials and equipment down to the depth at which the Sidetracking

61 operation is initiated shall be determined in accordance with the provisions of Exhibit "C."

62 6. Order of Preference of Operations. Except as otherwise specifically provided in this agreement, if any party desires to

63 propose the conduct of an operation that conflicts with a proposal that has been made by a party under this Article VI, such

64 party shall have fifteen (15) days from delivery of the initial proposal, in the case of a proposal to drill a well or to perform

65 an operation on a well where no drilling rig is on location, or twenty-four (24) hours, exclusive of Saturday, Sunday and legal

66 holidays, from delivery of the initial proposal, if a drilling rig is on location for the well on which such operation is to be

67 conducted, to deliver to all parties entitled to participate in the proposed operation such party's alternative proposal, such

68 alternate proposal to contain the same information required to be included in the initial proposal. Each party receiving such

69 proposals shall elect by delivery of notice to Operator within five (5) days after expiration of the proposal period, or within

70 twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays) if a drilling rig is on location for the well that is the

71 subject of the proposals, to participate in one of the competing proposals. Any party not electing within the time required

72 shall be deemed not to have voted. The proposal receiving the vote of parties owning the largest aggregate percentage

73 interest of the parties voting shall have priority over all other competing proposals; in the case of a tie vote, the

74

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1 initial proposal shall prevail. Operator shall deliver notice of such result to all parties entitled to participate in the operation

2 within five (5) days after expiration of the election period (or within twenty-four (24) hours, exclusive of Saturday, Sunday

3 and legal holidays, if a drilling rig is on location).  Each party shall then have two (2) days (or twenty-four (24) hours if a rig

4 is on location) from receipt of such notice to elect by delivery of notice to Operator to participate in such operation or to

5 relinquish interest in the affected well pursuant to the provisions of Article VI.B.2.; failure by a party to deliver notice within

6 such period shall be deemed an election not to participate in the prevailing proposal.

7 7. Conformity to Spacing Pattern. Notwithstanding the provisions of this Article VI.B.2., it is agreed that no wells shall be

8 proposed to be drilled to or Completed in or produced from a Zone from which a well located elsewhere on the Contract

9 Area is producing, unless such well conforms to the then-existing well spacing pattern for such Zone.

10 8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging Back, Completion, Recompletion, or

11 Sidetracking operation under this agreement with respect to any well then capable of producing in paying quantities except

12 with the consent of all parties that have not relinquished interests in the well at the time of such operation.

13 C. Completion of Wells; Reworking and Plugging Back:

14 1. Completion: Without the consent of all parties, no well shall be drilled, Deepened or Sidetracked, except any well

15 drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.  Consent to the drilling,

16 Deepening or Sidetracking shall include:

17 o    Option  No.  1:  All  necessary  expenditures  for  the  drilling,  Deepening  or  Sidetracking,  testing,  Completing  and

18 equipping of the well, including necessary tankage and/or surface facilities.

19 þ    Option No. 2: All necessary expenditures for the drilling, Deepening or Sidetracking and testing of the well. When

20 such well has reached its authorized depth, and all logs, cores and other tests have been completed, and the results

21 thereof furnished to the parties, Operator shall give immediate notice to the Non-Operators having the right to

22 participate  in  a  Completion  attempt  whether  or  not  Operator  recommends  attempting  to  Complete  the  well,

23 together with Operator's AFE for Completion costs if not previously provided.  The parties receiving such notice

24 shall have forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) in which to elect by delivery of

25 notice to Operator to participate in a recommended Completion attempt or to make a Completion proposal with an

26 accompanying AFE.  Operator shall deliver any such Completion proposal, or any Completion proposal conflicting

27 with Operator's proposal, to the other parties entitled to participate in such Completion in accordance with the

28 procedures specified in Article VI.B.6.  Election to participate in a Completion attempt shall include consent to all

29 necessary expenditures for the Completing and equipping of such well, including necessary tankage and/or surface

30 facilities but excluding any stimulation  operation  not  contained  on the Completion  AFE. Failure  of any party

31 receiving  such  notice to  reply  within  the period  above  fixed  shall  constitute  an  election  by that party not to

32 participate  in  the  cost  of  the  Completion  attempt;  provided,  that  Article  VI.B.6.  shall  control  in  the  case  of

33 conflicting Completion proposals.  If one or more, but less than all of the parties, elect to attempt a Completion, the

34 provision  of  Article  VI.B.2.  hereof  (the  phrase  "Reworking,  Sidetracking,  Deepening,  Recompleting  or  Plugging

35 Back"  as contained  in  Article  VI.B.2.  shall  be  deemed  to  include  "Completing")  shall  apply to  the  operations

36 thereafter conducted by less than all parties; provided, however, that Article VI.B.2. shall apply separately to each

37 separate Completion or Recompletion attempt undertaken hereunder, and an election to become a Non-Consenting

38 Party as to one Completion or Recompletion attempt shall not prevent a party from becoming a Consenting Party

39 in  subsequent  Completion  or  Recompletion  attempts  regardless  whether  the  Consenting  Parties  as  to  earlier

40 Completions  or  Recompletion  have  recouped  their  costs  pursuant  to  Article  VI.B.2.;  provided  further,  that  any

41 recoupment of costs by a Consenting Party shall be made solely from the production attributable to the Zone in

42 which the Completion attempt is made.  Election by a previous Non-Consenting party to participate in a subsequent

43 Completion or Recompletion attempt shall require such party to pay its proportionate share of the cost of salvable

44 materials  and  equipment  installed  in  the  well  pursuant  to  the  previous  Completion  or  Recompletion  attempt,

45 insofar and only insofar as such materials and equipment benefit the Zone in which such party participates in a

46 Completion attempt.

47 2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted or Plugged Back except a well Reworked,

48 Recompleted, or Plugged Back pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the Reworking,

49 Recompleting  or  Plugging  Back  of  a  well  shall  include  all  necessary  expenditures  in  conducting  such  operations  and

50 Completing and equipping of said well, including necessary tankage and/or surface facilities.

51 D. Other Operations:

52 Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of

53  Twenty-five thousandDollars ($ 25,000.00) except in connection with the

54 drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or Plugging Back of a well that has been previously

55 authorized  by or  pursuant  to  this  agreement;  provided,  however,  that,  in  case  of  explosion,  fire,  flood  or  other  sudden

56 emergency, whether of the same or different nature, Operator may take such steps and incur such expenses as in its opinion

57 are required to deal with the emergency to safeguard life and property but Operator, as promptly as possible, shall report the

58 emergency to the other parties. If Operator prepares an AFE for its own use, Operator shall furnish any Non-Operator so

59 requesting an information copy thereof for any single project costing in excess of   Twenty-five thousand Dollars

60 ($ 25,000.00 ). Any party who has not relinquished its interest in a well shall have the right to propose that

61 Operator perform repair work or undertake the installation of artificial lift equipment or ancillary production facilities such as

62 salt water disposal wells or to conduct additional work with respect to a well drilled hereunder or other similar project (but

63 not including the installation of gathering lines or other transportation or marketing facilities, the installation of which shall

64 be governed  by separate agreement between  the parties) reasonably estimated to require an  expenditure in  excess of the

65 amount first set forth above in this Article VI.D. (except in connection with an operation required to be proposed under

66 Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed exclusively be those Articles).  Operator shall deliver such

67 proposal to all parties entitled to participate therein. If within thirty (30) days thereof Operator secures the written consent

68 of any party or parties owning at least 75% of the interests of the parties entitled to participate in such operation,

69 each party having the right to participate in such project shall be bound by the terms of such proposal and shall be obligated

70 to pay its proportionate share of the costs of the proposed project as if it had consented to such project pursuant to the terms

71 of the proposal.

72 E. Abandonment of Wells:

73 1.  Abandonment of Dry Holes: Except for any well drilled or Deepened pursuant to Article VI.B.2., any well which has

74 been drilled or Deepened under the terms of this agreement and is proposed to be completed as a dry hole shall not be

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1 plugged and abandoned without the consent of all parties. Should Operator, after diligent effort, be unable to contact any

2  party, or should any party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after

3 delivery of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the

4 proposed abandonment.  All such wells shall be plugged and abandoned in accordance with applicable regulations and at the

5 cost, risk and expense of the parties who participated in the cost of drilling or Deepening such well.  Any party who objects to

6 plugging and abandoning such  well by notice delivered  to Operator within  forty-eight  (48) hours (exclusive of Saturday,

7 Sunday and legal holidays) after delivery of notice of the proposed plugging shall take over the well as of the end of such

8 forty-eight (48) hour notice period and conduct further operations in search of Oil and/or Gas subject to the provisions of

9 Article VI.B.; failure of such party to provide proof reasonably satisfactory to Operator of its financial capability to conduct

10 such operations or to take over the well within such period or thereafter to conduct operations on such well or plug and

11 abandon such well shall entitle Operator to retain or take possession of the well and plug and abandon the well.  The party

12 taking over the well shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties against

13 liability for any further operations conducted on such well except for the costs of plugging and abandoning the well and

14 restoring the surface, for which the abandoning parties shall remain proportionately liable.

15 2.  Abandonment  of  Wells  That  Have  Produced:  Except  for  any  well  in  which  a  Non-Consent  operation  has  been

16 conducted hereunder for which the Consenting Parties have not been fully reimbursed as herein provided, any well which has

17 been completed as a producer shall not be plugged and abandoned without the consent of all parties.  If all parties consent to

18 such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk

19 and expense of all the parties hereto.  Failure of a party to reply within sixty (60) days of delivery of notice of proposed

20 abandonment shall be deemed an election to consent to the proposal.  If, within sixty (60) days after delivery of notice of the

21 proposed abandonment of any well, all parties do not agree to the abandonment of such well, those wishing to continue its

22 operation  from the Zone then  open  to production  shall be obligated  to take over the well as  of the expiration  of the

23 applicable notice period and shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties

24 against liability for any further operations on the well conducted by such parties.  Failure of such party or parties to provide

25 proof reasonably satisfactory to Operator of their financial capability to conduct such operations or to take over the well

26 within the required period or thereafter to conduct operations on such well shall entitle operator to retain or take possession

27 of such well and plug and abandon the well.

28 Parties taking over a well as provided herein shall tender to each of the other parties its proportionate share of the value of

29 the well's salvable material and equipment, determined in accordance with the provisions of Exhibit "C," less the estimated cost

30 of salvaging and the estimated cost of plugging and abandoning and restoring the surface; provided, however, that in the event

31 the estimated plugging and abandoning and surface restoration costs and the estimated cost of salvaging are higher than the

32 value of the well's salvable material and equipment, each of the abandoning parties shall tender to the parties continuing

33 operations their proportionate shares of the estimated excess cost.  Each abandoning party shall assign to the non-abandoning

34 parties, without warranty, express or implied, as to title or as to quantity, or fitness for use of the equipment and material, all

35 of its interest in the wellbore of the well and related equipment, together with its interest in the Leasehold insofar and only

36 insofar as such Leasehold covers the right to obtain production from that wellbore in the Zone then open to production.  If the

37 interest of the abandoning party is or includes and Oil and Gas Interest, such party shall execute and deliver to the non-

38 abandoning party or parties an oil and gas lease, limited to the wellbore and the Zone then open to production, for a term of

39 one (1) year and so long thereafter as Oil and/or Gas is produced from the Zone covered thereby, such lease to be on the form

40 attached as Exhibit "B."  The assignments or leases so limited shall encompass the Drilling Unit upon which the well is located.

41 The payments by, and the assignments or leases to, the assignees shall be in a ratio based upon the relationship of their

42 respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract

43 Area of all assignees. There shall be no readjustment of interests in the remaining portions of the Contract Area.

44 Thereafter, abandoning parties shall have no further responsibility, liability, or interest in the operation of or production

45 from the well in the Zone then open other than the royalties retained in any lease made under the terms of this Article.  Upon

46 request, Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and

47 charges contemplated by this agreement, plus any additional cost and charges which may arise as the result of the separate

48 ownership of the assigned well.  Upon proposed abandonment of the producing Zone assigned or leased, the assignor or lessor

49 shall then have the option to repurchase its prior interest in the well (using the same valuation formula) and participate in

50 further operations therein subject to the provisions hereof.

51 3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1. or VI.E.2. above shall be applicable as

52 between Consenting Parties in the event of the proposed abandonment of any well excepted from said Articles; provided,

53 however, no well shall be permanently plugged and abandoned unless and until all parties having the right to conduct further

54 operations therein have been notified of the proposed abandonment and afforded the opportunity to elect to take over the well

55 in accordance with the provisions of this Article VI.E.; and provided further, that Non-Consenting Parties who own an interest

56 in a portion of the well shall pay their proportionate shares of abandonment and surface restoration cost for such well as

57 provided in Article VI.B.2.(b).

58 F. Termination of Operations:

59 Upon the commencement of an operation for the drilling, Reworking, Sidetracking, Plugging Back, Deepening, testing,

60 Completion or plugging of a well, including but not limited to the Initial Well, such operation shall not be terminated without

61 consent of parties bearing 75% of the costs of such operation; provided, however, that in the event granite or other

62 practically  impenetrable  substance  or  condition  in  the  hole  is  encountered  which  renders  further  operations  impractical,

63 Operator may discontinue operations and give notice of such condition in the manner provided in Article VI.B.1, and the

64 provisions of Article VI.B. or VI.E. shall thereafter apply to such operation, as appropriate.

65 G. Taking Production in Kind:

66 o   Option No. 1: Gas Balancing Agreement Attached

67 Each  party  shall  take  in  kind  or  separately  dispose  of  its  proportionate  share  of  all  Oil  and  Gas  produced  from  the

68 Contract Area, exclusive of production which may be used in development and producing operations and in preparing and

69 treating Oil and Gas for marketing purposes and production unavoidably lost.   Any extra expenditure incurred in the taking

70 in kind or separate disposition by any party of its proportionate share of the production shall be borne by such party.   Any

71 party  taking  its  share  of  production  in  kind  shall  be  required  to  pay  for  only  its  proportionate  share  of  such  part  of

72 Operator's surface facilities which it uses.

73  Each  party  shall  execute  such  division  orders  and  contracts  as  may  be  necessary  for  the  sale  of  its  interest  in

74 production  from  the  Contract  Area,  and,  except  as  provided  in  Article  VII.B.,  shall  be  entitled  to  receive  payment

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1 directly from the purchaser thereof for its share of all production.

2 If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate

3 share of the Oil produced from the Contract Area, Operator shall have the right, subject to the revocation at will by

4 the party owning it, but not the obligation, to purchase such Oil or sell it to others at any time and from time to

5 time,  for  the  account  of  the  non-taking  party.  Any  such  purchase or  sale  by Operator  may  be  terminated  by

6 Operator upon at least ten (10) days written notice to the owner of said production and shall be subject always to

7 the right of the owner of the production upon at least ten (10) days written notice to Operator to exercise at any

8 time its right to take in kind, or separately dispose of, its share of all Oil not previously delivered to a purchaser.

9 Any purchase or sale by Operator of any other party's share of Oil shall be only for such reasonable periods of time

10 as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a

11 period in excess of one (1) year.

12 Any such sale by Operator shall be in a manner commercially reasonable under the circumstances but Operator

13 shall have no duty to share any existing market or to obtain a price equal to that received under any existing

14 market.   The sale or delivery by Operator of a non-taking party's share of Oil under the terms of any existing

15 contract of Operator shall not give the non-taking party any interest in or make the non-taking party a party to said

16 contract.   No purchase shall be made by Operator without first giving the non-taking party at least ten (10) days

17 written notice of such intended purchase and the price to be paid or the pricing basis to be used.

18 All  parties shall give timely  written  notice to Operator of their  Gas marketing arrangements for the following

19 month,  excluding  price,  and  shall  notify  Operator  immediately  in  the  event  of  a  change  in  such  arrangements.

20 Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which

21 records shall be made available to Non-Operators upon reasonable request.

22 In the event one or more parties' separate disposition of its share of the Gas causes split-stream deliveries to separate

23 pipelines and/or deliveries which on a day-to-day basis for any reason are not exactly equal to a party's respective proportion-

24 ate share of total Gas sales to be allocated to it, the balancing or accounting between the parties shall be in accordance with

25 any Gas balancing agreement between the parties hereto, whether such an agreement is attached as Exhibit "E" or is a

26 separate agreement.  Operator shall give notice to all parties of the first sales of Gas from any well under this agreement.

27 þ Option No. 2: No Gas Balancing Agreement:

28 Each partyshall /  may take in kind or separately dispose of its proportionate share of all Oil and Gas produced from

29 the  Contract  Area,  exclusive of  production  which  may be  used  in  development  and  producing  operations  and  in

30 preparing and treating Oil and Gas for marketing purposes and production unavoidably lost.Any extra expenditures

31 incurred in the taking in kind or separate disposition by any party of its proportionate share of the production shall

32 be borne by such party.  Any party taking its share of production in kind shall be required to pay for only its

33 proportionate share of such part of Operator's surface facilities which it uses.

34 Each party shall execute such division orders and contracts as may be necessary for the sale of its interest in

35 production from the Contract Area, and, except as provided in Article VII.B., shall be entitled to receive payment

36 directly from the purchaser thereof for its share of all production.

37 If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate

38 share  of  the  Oil  and/or  Gas  produced  from  the  Contract  Area,  Operator shall  have  the  right,  subject  to  the

39 revocation at will by the party owning it,but not the obligation, to purchase such Oil and/or Gas or  sell sell such Oil and/or Gas sell / it to others

40 at any time and from time to time, for the account of the non-taking party.  Any such purchase or sale by Operator

41 may be terminated by Operator upon at least ten (10) days written notice to the owner of said production and shall

42 be subject always to the right of the owner of the production upon at least ten (10) days written notice to Operator

43 to exercise its right to take in kind, or separately dispose of, its share of all Oil and/or Gas not previously delivered

44 to  a purchaser;  provided, however,  that the effective date of  any  such  revocation  may be deferred  at  Operator's

45 election  for  a  period  not  to  exceed  ninety  (90)  days  if  Operator  has  committed  such  production  to  a  purchase

46 contract having a term extending beyond such ten (10) -day period. Any purchase or sale by Operator of any other

47 party's  share  of  Oil  and/or  Gas  shall  be  only  for  such  reasonable  periods  of  time  as  are  consistent  with  the

48 minimum needs of the industry under the particular circumstances, but in no event for a period in excess of one (1)

49 year.

50 Any such sale by Operator shall be in a manner commercially reasonable under the circumstances, but Operator

51 shall have no duty to share any existing market or transportation arrangement or to obtain a price or transportation

52 fee  equal  to  that  received  under  any  existing  market  or  transportation  arrangement.The  sale  or  delivery  by

53 Operator of a non-taking party's share of production under the terms of any existing contract of Operator shall not

54 give the non-taking party any interest in or make the non-taking party a party to said contract.  No purchase of Oil

55 and Gas and no sale of Gas shall be made by Operator without first giving the non-taking party ten days written

56 notice of such intended purchase or sale and the price to be paid or the pricing basis to be used. Operator shall give

57 notice to all parties of the first sale of Gas from any well under this Agreement.

58 All  parties shall give timely  written  notice to Operator of their  Gas marketing arrangements for the following

59 month,  excluding  price,  and  shall  notify  Operator  immediately  in  the  event  of  a  change  in  such  arrangements.

60 Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which

61 records shall be made available to Non-Operators upon reasonable request.

62 ARTICLE VII.

63 EXPENDITURES AND LIABILITY OF PARTIES

64 A. Liability of Parties:

65 The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations,

66 and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area.  Accordingly, the

67 liens granted among the parties in Article VII.B. are given to secure only the debts of each severally, and no party shall have

68 any liability to third parties hereunder to satisfy the default of any other party in the payment of any expense or obligation

69 hereunder.  It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other

70 partnership,  joint  venture,  agency  relationship  or  association,  or  to  render  the  parties  liable  as  partners,  co-venturers,  or

71 principals.  In their relations with each other under this agreement, the parties shall not be considered fiduciaries or to have

72 established a confidential relationship but rather shall be free to act on an arm's-length basis in accordance with their own

73 respective self-interest, subject, however, to the obligation of the parties to act in good faith in their dealings with each other

74 with respect to activities hereunder.

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1 B. Liens and Security Interests:

2 Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas

3 Leases and Oil and Gas Interests in the Contract Area, and a security interest and/or purchase money security interest in any

4 interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for use in connection

5 therewith, to secure performance of all of its obligations under this agreement including but not limited to payment of expense,

6 interest and fees, the proper disbursement of all monies paid hereunder, the assignment or relinquishment of interest in Oil

7 and Gas Leases as required hereunder, and the proper performance of operations hereunder.  Such lien and security interest

8 granted by each party hereto shall include such party's leasehold interests, working interests, operating rights, and royalty and

9 overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or

10 otherwise becoming subject to this agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or

11 used or obtained for use in connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts

12 (including, without limitation, accounts arising from gas imbalances or from the sale of Oil and/or Gas at the wellhead),

13 contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the

14 foregoing.

15 To perfect the lien and security agreement provided herein, each party hereto shall execute and acknowledge the recording

16 supplement and/or any financing statement prepared and submitted by any party hereto in conjunction herewith or at any time

17 following execution hereof, and Operator is authorized to file this agreement or the recording supplement executed herewith as

18 a lien or mortgage in the applicable real estate records and as a financing statement with the proper officer under the Uniform

19 Commercial Code in the state in which the Contract Area is situated and such other states as Operator shall deem appropriate

20 to perfect the security interest granted hereunder.  Any party may file this agreement, the recording supplement executed

21 herewith, or such other documents as it deems necessary as a lien or mortgage in the applicable real estate records and/or a

22 financing statement with the proper officer under the Uniform Commercial Code.

23 Each party represents and warrants to the other parties hereto that the lien and security interest granted by such party to

24 the other parties shall be a first and prior lien, and each party hereby agrees to maintain the priority of said lien and security

25 interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement by, through or

26 under such party.  All parties acquiring an interest in Oil and Gas Leases and Oil and Gas Interests covered by this agreement,

27 whether  by  assignment,  merger,  mortgage,  operation  of  law,  or  otherwise,  shall  be  deemed  to  have  taken  subject

28 to the lien and security interest granted by this Article VII.B. as to all obligations attributable to such interest hereunder

29 whether or not such obligations arise before or after such interest is acquired.

30 To  the  extent  that  parties  have  a  security  interest  under  the  Uniform  Commercial  Code  of  the  state  in  which  the

31 Contract Area is situated, they shall be entitled to exercise the rights and remedies of a secured party under the Code.

32 The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall not be deemed an

33 election  of  remedies  or  otherwise  affect  the  lien  rights  or  security  interest  as  security  for  the  payment  thereof.In

34 addition, upon default by any party in the payment of its share of expenses, interests or fees, or upon the improper use

35 of funds by the Operator, the other parties shall have the right, without prejudice to other rights or remedies, to collect

36 from the purchaser the proceeds from the sale of such defaulting party's share of Oil and Gas until the amount owed by

37 such  party,  plus interest  as provided  in  "Exhibit  C," has been  received,  and  shall  have  the  right  to  offset  the amount

38 owed against the proceeds from the sale of such defaulting party's share of Oil and Gas.  All purchasers of production

39 may rely on a notification of default from the non-defaulting party or parties stating the amount due as a result of the

40 default,  and  all  parties  waive  any  recourse  available  against  purchasers  for  releasing  production  proceeds  as  provided  in

41 this paragraph.

42 If any party fails to pay its share of cost within one hundred twenty (120) days after rendition of a statement therefor by

43 Operator,  the  non-defaulting  parties,  including  Operator,  shall  upon  request  by  Operator,  pay  the  unpaid  amount  in  the

44 proportion that the interest of each such party bears to the interest of all such parties.  The amount paid by each party so

45 paying its share of the unpaid amount shall be secured by the liens and security rights described in Article VII.B., and each

46 paying party may independently pursue any remedy available hereunder or otherwise.

47 If any party does not perform all of its obligations hereunder, and the failure to perform subjects such party to foreclosure

48 or execution proceedings pursuant to the provisions of this agreement, to the extent allowed by governing law, the defaulting

49 party waives any available right of redemption from and after the date of judgment, any required valuation or appraisement

50 of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshaling of assets

51 and any required bond in the event a receiver is appointed.  In addition, to the extent permitted by applicable law, each party

52 hereby grants to the other parties a power of sale as to any property that is subject to the lien and security rights granted

53 hereunder, such power to be exercised in the manner provided by applicable law or otherwise in a commercially reasonable

54 manner and upon reasonable notice.

55 Each party agrees that the other parties shall be entitled to utilize the provisions of Oil and Gas lien law or other lien

56 law of any state in which the Contract Area is situated to enforce the obligations of each party hereunder.  Without limiting

57 the generality of the foregoing, to the extent permitted by applicable law, Non-Operators agree that Operator may invoke or

58 utilize the mechanics' or materialmen's lien law of the state in which the Contract Area is situated in order to secure the

59 payment  to  Operator  of  any  sum  due  hereunder  for  services  performed  or  materials  supplied  by  Operator.

60 C. Advances:

61 Operator, at its election, shall have the right from time to time to demand and receive from one or more of the other

62 parties payment in advance of their respective shares of the estimated amount of the expense to be incurred in operations

63 hereunder during the next succeeding month, which right may be exercised only by submission to each such party of an

64 itemized statement of such estimated expense, together with an invoice for its share thereof.  Each such statement and invoice

65 for the payment in advance of estimated expense shall be submitted on or before the 20th day of the next preceding month.

66 Each party shall pay to Operator its proportionate share of such estimate within fifteen (15) days after such estimate and

67 invoice is received.  If any party fails to pay its share of said estimate within said time, the amount due shall bear interest as

68 provided in Exhibit "C" until paid.  Proper adjustment shall be made monthly between advances and actual expense to the end

69 that each party shall bear and pay its proportionate share of actual expenses incurred, and no more.

70 D. Defaults and Remedies:

71 If any party fails to discharge any financial obligation under this agreement, including without limitation the failure to

72 make any advance under the preceding Article VII.C. or any other provision of this agreement, within the period required for

73 such payment hereunder, then in addition to the remedies provided in Article VII.B. or elsewhere in this agreement, the

74 remedies specified below shall be applicable.  For purposes of this Article VII.D., all notices and elections shall be delivered

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1 only by Operator, except that Operator shall deliver any such notice and election requested by a non-defaulting Non-Operator,

2 and  when  Operator  is  the party  in  default,  the applicable notices  and  elections  can  be delivered  by any Non-Operator.

3 Election of any one or more of the following remedies shall not preclude the subsequent use of any other remedy specified

4 below or otherwise available to a non-defaulting party.

5 1. Suspension of Rights: Any party may deliver to the party in default a Notice of Default, which shall specify the default,

6 specify the action to be taken to cure the default, and specify that failure to take such action will result in the exercise of one

7 or more of the remedies provided in this Article.  If the default is not cured within thirty (30) days of the delivery of such

8 Notice of Default, all of the rights of the defaulting party granted by this agreement may upon notice be suspended until the

9 default is cured, without prejudice to the right of the non-defaulting party or parties to continue to enforce the obligations of

10 the defaulting party previously accrued or thereafter accruing under this agreement. If Operator is the party in default, the

11 Non-Operators shall have in addition the right, by vote of Non-Operators owning a majority in interest in the Contract Area

12 after excluding the voting interest of Operator, to appoint a new Operator effective immediately.  The rights of a defaulting

13 party that may be suspended hereunder at the election of the non-defaulting parties shall include, without limitation, the right

14 to receive information  as to any operation  conducted  hereunder during the period  of such  default, the right to elect to

15 participate in an operation proposed under Article VI.B. of this agreement, the right to participate in an operation being

16 conducted under this agreement even if the party has previously elected to participate in such operation, and the right to

17 receive proceeds of production from any well subject to this agreement.

18 2.  Suit  for  Damages:  Non-defaulting  parties  or  Operator  for  the  benefit  of  non-defaulting  parties  may  sue  (at  joint

19 account expense) to collect the amounts in default, plus interest accruing on the amounts recovered from the date of default

20 until the date of collection at the rate specified in Exhibit "C" attached hereto.  Nothing herein shall prevent any party from

21 suing any defaulting party to collect consequential damages accruing to such party as a result of the default.

22 3.  Deemed  Non-Consent:  The  non-defaulting  party  may  deliver  a  written  Notice  of  Non-Consent  Election  to  the

23 defaulting party at any time after the expiration of the thirty-day cure period following delivery of the Notice of Default, in

24 which event if the billing is for the drilling a new well or the Plugging Back, Sidetracking, Reworking or Deepening of a

25 well which is to be or has been plugged as a dry hole, or for the Completion or Recompletion of any well, the defaulting

26 party will be conclusively deemed to have elected not to participate in the operation and to be a Non-Consenting Party with

27 respect  thereto  under  Article  VI.B.  or  VI.C.,  as  the  case  may  be,  to  the  extent  of  the  costs  unpaid  by  such  party,

28 notwithstanding any election to participate theretofore made. If election is made to proceed under this provision, then the

29 non-defaulting parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.

30 Until the delivery of such Notice of Non-Consent Election to the defaulting party, such party shall have the right to cure

31 its default by paying its unpaid share of costs plus interest at the rate set forth in Exhibit "C," provided, however, such

32 payment shall not prejudice the rights of the non-defaulting parties to pursue remedies for damages incurred by the non-

33 defaulting parties as a result of the default.  Any interest relinquished pursuant to this Article VII.D.3. shall be offered to the

34 non-defaulting parties in proportion to their interests, and the non-defaulting parties electing to participate in the ownership

35 of such interest shall be required to contribute their shares of the defaulted amount upon their election to participate therein.

36 4. Advance Payment: If a default is not cured within thirty (30) days of the delivery of a Notice of Default, Operator, or

37 Non-Operators  if  Operator  is  the  defaulting  party,  may  thereafter  require  advance  payment  from  the  defaulting

38 party of such defaulting party's anticipated share of any item of expense for which Operator, or Non-Operators, as the case may

39 be, would be entitled to reimbursement under any provision of this agreement, whether or not such expense was the subject of

40 the previous default.  Such right includes, but is not limited to, the right to require advance payment for the estimated costs of

41 drilling a well or Completion of a well as to which an election to participate in drilling or Completion has been made.  If the

42 defaulting party fails to pay the required advance payment, the non-defaulting parties may pursue any of the remedies provided

43 in the Article VII.D. or any other default remedy provided elsewhere in this agreement.  Any excess of funds advanced remaining

44 when the operation is completed and all costs have been paid shall be promptly returned to the advancing party.

45 5. Costs and Attorneys' Fees: In the event any party is required to bring legal proceedings to enforce any financial

46 obligation of a party hereunder, the prevailing party in such action shall be entitled to recover all court costs, costs of

47 collection, and a reasonable attorney's fee, which the lien provided for herein shall also secure.

48 E. Rentals, Shut-in Well Payments and Minimum Royalties:

49 Rentals, shut-in well payments and minimum royalties which may be required under the terms of any lease shall be paid

50 by the party or parties who subjected such lease to this agreement at its or their expense.  In the event two or more parties

51 own and have contributed interests in the same lease to this agreement, such parties may designate one of such parties to

52 make said payments for and on behalf of all such parties.  Any party may request, and shall be entitled to receive, proper

53 evidence of all such payments.  In the event of failure to make proper payment of any rental, shut-in well payment or

54 minimum royalty through mistake or oversight where such payment is required to continue the lease in force, any loss which

55 results from such non-payment shall be borne in accordance with the provisions of Article IV.B.2.

56 Operator  shall  notify Non-Operators  of  the  anticipated  completion  of  a  shut-in  well,  or  the  shutting  in  or  return  to

57 production of a producing well, at least five (5) days (excluding Saturday, Sunday, and legal holidays) prior to taking such

58 action, or at the earliest opportunity permitted by circumstances, but assumes no liability for failure to do so.  In the event of

59 failure by Operator to so notify Non-Operators, the loss of any lease contributed hereto by Non-Operators for failure to make

60 timely payments of any shut-in well payment shall be borne jointly by the parties hereto under the provisions of Article 61

61  IV.B.3.

62 F. Taxes:

63 Beginning with the first calendar year after the effective date hereof, Operator shall render for ad valorem taxation all

64 property subject to this agreement which by law should be rendered for such taxes, and it shall pay all such taxes assessed

65 thereon before they become delinquent.  Prior to the rendition date, each Non-Operator shall furnish Operator information as

66 to burdens (to include, but not be limited to, royalties, overriding royalties and production payments) on Leases and Oil and

67 Gas Interests contributed by such Non-Operator. If the assessed valuation of any Lease is reduced by reason of its being

68 subject  to  outstanding  excess  royalties,  overriding  royalties  or  production  payments,  the  reduction  in  ad  valorem  taxes

69 resulting therefrom shall inure to the benefit of the owner or owners of such Lease, and Operator shall adjust the charge to

70 such owner or owners so as to reflect the benefit of such reduction.  If the ad valorem taxes are based in whole or in part

71 upon separate valuations of each party's working interest, then notwithstanding anything to the contrary herein, charges to

72 the joint account shall be made and paid by the parties hereto in accordance with the tax value generated by each party's

73 working interest. Operator shall bill the other parties for their proportionate shares of all tax payments in  the manner

74 provided in Exhibit "C."

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1 If Operator considers any tax assessment improper, Operator may, at its discretion, protest within the time and manner

2 prescribed by law, and prosecute the protest to a final determination, unless all parties agree to abandon the protest prior to final

3 determination.  During the pendency of administrative or judicial proceedings, Operator may elect to pay, under protest, all such taxes

4 and any interest and penalty.  When any such protested assessment shall have been finally determined, Operator shall pay the tax for

5 the joint account, together with any interest and penalty accrued, and the total cost shall then be assessed against the parties, and be

6 paid by them, as provided in Exhibit "C."

7 Each party shall pay or cause to be paid all production, severance, excise, gathering and other taxes imposed upon or with respect

8 to the production or handling of such party's share of Oil and Gas produced under the terms of this agreement.

9 ARTICLE VIII.

10 ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

11 A. Surrender of Leases:

12 The Leases covered by this agreement, insofar as they embrace acreage in the Contract Area, shall not be surrendered in whole

13 or in part unless all parties consent thereto.

14 However, should any party desire to surrender its interest in any Lease or in any portion thereof, such party shall give written

15 notice of the proposed surrender to all parties, and the parties to whom such notice is delivered shall have thirty (30) days after

16 delivery of the notice within which to notify the party proposing the surrender whether they elect to consent thereto.  Failure of a

17 party to whom such notice is delivered to reply within said 30-day period shall constitute a consent to the surrender of the Leases

18 described in the notice.  If all parties do not agree or consent thereto, the party desiring to surrender shall assign, without express or

19 implied warranty of title, all of its interest in such Lease, or portion thereof, and any well, material and equipment which may be

20 located thereon and any rights in production thereafter secured, to the parties not consenting to such surrender.  If the interest of the

21 assigning party is or includes an Oil and Gas Interest, the assigning party shall execute and deliver to the party or parties not

22 consenting to such surrender an oil and gas lease covering such Oil and Gas Interest for a term of one (1) year and so long

23 thereafter as Oil and/or Gas is produced from the land covered thereby, such lease to be on the form attached hereto as Exhibit "B."

24 Upon such assignment or lease, the assigning party shall be relieved from all obligations thereafter accruing, but not theretofore

25 accrued, with respect to the interest assigned or leased and the operation of any well attributable thereto, and the assigning party

26 shall have no further interest in the assigned or leased premises and its equipment and production other than the royalties retained

27 in any lease made under the terms of this Article.  The party assignee or lessee shall pay to the party assignor or lessor the

28 reasonable salvage value of the latter's interest in any well's salvable materials and equipment attributable to the assigned or leased

29 acreage.  The value of all salvable materials and equipment shall be determined in accordance with the provisions of Exhibit "C," less

30 the estimated cost of salvaging and the estimated cost of plugging and abandoning and restoring the surface.  If such value is less

31 than such costs, then the party assignor or lessor shall pay to the party assignee or lessee the amount of such deficit.  If the

32 assignment or lease is in favor of more than one party, the interest shall be shared by such parties in the proportions that the

33 interest of each bears to the total interest of all such parties.  If the interest of the parties to whom the assignment is to be made

34 varies according to depth, then the interest assigned shall similarly reflect such variances.

35 Any assignment, lease or surrender made under this provision shall not reduce or change the assignor's, lessor's or surrendering

36 party's interest as it was immediately before the assignment, lease or surrender in the balance of the Contract Area; and the acreage

37 assigned, leased or surrendered, and subsequent operations thereon, shall not thereafter be subject to the terms and provisions of this

38 agreement but shall be deemed subject to an Operating Agreement in the form of this agreement.

39 B. Renewal or Extension of Leases:

40 If any party secures a renewal or replacement of an Oil and Gas Lease or Interest subject to this agreement, then all other parties

41 shall be notified promptly upon such acquisition or, in the case of a replacement Lease taken before expiration of an existing Lease,

42 promptly upon expiration of the existing Lease.  The parties notified shall have the right for a period of thirty (30) days following

43 delivery of such notice in which to elect to participate in the ownership of the renewal or replacement Lease, insofar as such Lease

44 affects lands within the Contract Area, by paying to the party who acquired it their proportionate shares of the acquisition cost

45 allocated to that part of such Lease within the Contract Area, which shall be in proportion to the interest held at that time by the

46 parties in the Contract Area.  Each party who participates in the purchase of a renewal or replacement Lease shall be given an

47 assignment of its proportionate interest therein by the acquiring party.

48 If some, but less than all, of the parties elect to participate in the purchase of a renewal or replacement Lease, it shall be owned

49 by the parties who elect to participate therein, in a ratio based upon the relationship of their respective percentage of participation in

50 the Contract Area to the aggregate of the percentages of participation in the Contract Area of all parties participating in the

51 purchase of such renewal or replacement Lease.  The acquisition of a renewal or replacement Lease by any or all of the parties hereto

52 shall not cause a readjustment of the interests of the parties stated in Exhibit "A," but any renewal or replacement Lease in which

53 less than all parties elect to participate shall not be subject to this agreement but shall be deemed subject to a separate Operating

54 Agreement in the form of this agreement.

55 If the interests of the parties in the Contract Area vary according to depth, then their right to participate proportionately in

56 renewal or replacement Leases and their right to receive an assignment of interest shall also reflect such depth variances.

57 The provisions of this Article shall apply to renewal or replacement Leases whether they are for the entire interest covered by

58 the expiring Lease or cover only a portion of its area or an interest therein.  Any renewal or replacement Lease taken before the

59 expiration of its predecessor Lease, or taken or contracted for or becoming effective within six (6) months after the expiration of the

60 existing Lease, shall be subject to this provision so long as this agreement is in effect at the time of such acquisition or at the time

61 the renewal or replacement Lease becomes effective; but any Lease taken or contracted for more than six (6) months after the

62 expiration of an existing Lease shall not be deemed a renewal or replacement Lease and shall not be subject to the provisions of this

63 agreement.

64 The provisions in this Article shall also be applicable to extensions of Oil and Gas Leases.

65 C. Acreage or Cash Contributions:

66 While this agreement is in force, if any party contracts for a contribution of cash towards the drilling of a well or any other

67 operation on the Contract Area, such contribution shall be paid to the party who conducted the drilling or other operation and shall

68 be applied by it against the cost of such drilling or other operation.  If the contribution be in the form of acreage, the party to whom

69 the contribution is made shall promptly tender an assignment of the acreage, without warranty of title, to the Drilling Parties in the

70 proportions said Drilling Parties shared the cost of drilling the well. Such acreage shall become a separate Contract Area and, to  the

71 extent possible, be governed by provisions identical to this agreement.  Each party shall promptly notify all other parties of any

72 acreage or cash contributions it may obtain in support of any well or any other operation on the Contract Area.  The above

73 provisions shall also be applicable to optional rights to earn acreage outside the Contract Area which are in support of well drilled

74 inside Contract Area.

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1 If any party contracts for any consideration relating to disposition of such party's share of substances produced hereunder,

2 such consideration shall not be deemed a contribution as contemplated in this Article VIII.C.

3 D. Assignment; Maintenance of Uniform Interest:

4 For the purpose of maintaining uniformity of ownership in the Contract Area in the Oil and Gas Leases, Oil and Gas

5 Interests, wells, equipment and production covered by this agreement no party shall sell, encumber, transfer or make other

6 disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests embraced within the Contract Area or in wells,

7 equipment and production unless such disposition covers either:

8 1. the entire interest of the party in all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production; or

9 2. an equal undivided percent of the party's present interest in all Oil and Gas Leases, Oil and Gas Interests, wells,

10 equipment and production in the Contract Area.

11 Every sale, encumbrance, transfer or other disposition made by any party shall be made expressly subject to this agreement

12 and shall be made without prejudice to the right of the other parties, and any transferee of an ownership interest in any Oil and

13 Gas Lease or Interest shall be deemed a party to this agreement as to the interest conveyed from and after the effective date of

14 the  transfer  of  ownership;  provided,  however,  that  the  other  parties  shall  not  be  required  to  recognize  any  such  sale,

15 encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the

16 instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee.  No assignment or other

17 disposition of interest by a party shall relieve such party of obligations previously incurred by such party hereunder with respect

18 to the interest transferred, including without limitation the obligation of a party to pay all costs attributable to an operation

19 conducted hereunder in which such party has agreed to participate prior to making such assignment, and the lien and security

20 interest granted by Article VII.B. shall continue to burden the interest transferred to secure payment of any such obligations.

21 If, at any time the interest of any party is divided among and owned by four or more co-owners, Operator, at its discretion,

22 may require such co-owners to appoint a single trustee or agent with full authority to receive notices, approve expenditures,

23 receive billings for and approve and pay such party's share of the joint expenses, and to deal generally with, and with power to

24 bind, the co-owners of such party's interest within the scope of the operations embraced in this agreement; however, all such co-

25 owners shall have the right to enter into and execute all contracts or agreements for the disposition of their respective shares of

26 the Oil and Gas produced from the Contract Area and they shall have the right to receive, separately, payment of the sale

27 proceeds thereof.

28 E. Waiver of Rights to Partition:

29 If permitted by the laws of the state or states in which the property covered hereby is located, each party hereto owning an

30 undivided interest in the Contract Area waives any and all rights it may have to partition and have set aside to it in severalty its

31 undivided interest therein.

23 F. Preferential Right to Purchase:

33 o (Optional; Check if applicable.)

34 Should any party desire to sell all or any part of its interests under this agreement, or its rights and interests in the Contract

35 Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition, which

36 shall include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase

37 price, a legal description sufficient to identify the property, and all other terms of the offer.  The other parties shall then have an

38 optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated consideration on the

38 same terms and conditions the interest which the other party proposes to sell; and, if this optional right is exercised, the

40 purchasing parties shall share the purchased interest in the proportions that the interest of each bears to the total interest of all

41 purchasing parties.  However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage

42 its interests, or to transfer title to its interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests,

43 or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets

44 to any party, or by transfer of its interests to a subsidiary or parent company or to a subsidiary of a parent company, or to any

45 company in which such party owns a majority of the stock.

46 ARTICLE IX.

47 INTERNAL REVENUE CODE ELECTION

48 If, for federal income tax purposes, this agreement and the operations hereunder are regarded as a partnership, and if the

49 parties have not otherwise agreed to form a tax partnership pursuant to Exhibit "G" or other agreement between them, each

50 party thereby affected elects to be excluded from the application of all of the provisions of Subchapter "K," Chapter 1, Subtitle

51 "A," of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and authorized by Section 761 of the Code and

52 the regulations promulgated thereunder.  Operator is authorized and directed to execute on behalf of each party hereby affected

53 such evidence of this election as may be required by the Secretary of the Treasury of the United States or the Federal Internal

54 Revenue Service, including specifically, but not by way of limitation, all of the returns, statements, and the data required by

55 Treasury Regulation §1.761.   Should there be any requirement that each party hereby affected give further evidence of this

56 election, each such party shall execute such documents and furnish such other evidence as may be required by the Federal Internal

57 Revenue Service or as may be necessary to evidence this election.  No such party shall give any notices or take any other action

58 inconsistent with the election made hereby.  If any present or future income tax laws of the state or states in which the Contract

59 Area is located or any future income tax laws of the United States contain provisions similar to those in Subchapter "K," Chapter

60 1, Subtitle "A," of the Code, under which an election similar to that provided by Section 761 of the Code is permitted, each party

61 hereby affected shall make such election as may be permitted or required by such laws.  In making the foregoing election, each

62 such party states that the income derived by such party from operations hereunder can be adequately determined without the

63 computation of partnership taxable income.

64 ARTICLE X.

65 CLAIMS AND LAWSUITS

66 Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure

67 does not exceed Fifty thousand Dollars ($ 50,000.00) and if the payment is in complete settlement

68 of such claim or suit.  If the amount required for settlement exceeds the above amount, the parties hereto shall assume and take over

69 the further handling of the claim or suit, unless such authority is delegated to Operator.  All costs and expenses of handling settling,

70 or otherwise discharging such claim or suit shall be a the joint expense of the parties participating in the operation from which the

71 claim or suit arises.  If a claim is made against any party or if any party is sued on account of any matter arising from operations

72 hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall

73 immediately notify all other parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. 74

74

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 ARTICLE XI.

2 FORCE MAJEURE

3 If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other

4 than the obligation to indemnify or make money payments or furnish security, that party shall give to all other parties

5 prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the

6 party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the

7 continuance of the force majeure.  The term "force majeure," as here employed, shall mean an act of God, strike, lockout, or

8 other industrial disturbance, act of the public enemy, war, blockade, public riot, lightening, fire, storm, flood or other act of

9 nature, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other

10 cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party

11 claiming suspension.

12 The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The

13 requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes,

14 lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall

15 be entirely within the discretion of the party concerned.

16 ARTICLE XII.

17 NOTICES

18 All  notices  authorized  or  required  between  the  parties  by any of  the  provisions  of  this  agreement,  unless  otherwise

19 specifically provided, shall be in writing and delivered in person or by United States mail, courier service, telegram, telex,

20 telecopier or any other form of facsimile, postage or charges prepaid, and addressed to such parties at the addresses listed on

21 Exhibit "A."  All telephone or oral notices permitted by this agreement shall be confirmed immediately thereafter by written

22 notice.  The originating notice given under any provision hereof shall be deemed delivered only when received by the party to

23 whom such notice is directed, and the time for such party to deliver any notice in response thereto shall run from the date

24 the originating notice is received.  "Receipt" for purposes of this agreement with respect to written notice delivered hereunder

25 shall be actual delivery of the notice to the address of the party to be notified specified in accordance with this agreement, or

26 to the telecopy, facsimile or telex machine of such party.  The second or any responsive notice shall be deemed delivered when

27 deposited in the United States mail or at the office of the courier or telegraph service, or upon transmittal by telex, telecopy

28 or facsimile, or when personally delivered to the party to be notified, provided, that when response is required within 24 or

29  48 hours, such response shall be given orally or by telephone, telex, telecopy or other facsimile within such period. Each party

30 shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other

31 parties.  If a party is not available to receive notice orally or by telephone when a party attempts to deliver a notice required

32 to be delivered within 24 or 48 hours, the notice may be delivered in writing by any other method specified herein and shall

33 be deemed delivered in the same manner provided above for any responsive notice.

34 ARTICLE XIII.

35 TERM OF AGREEMENT

36 This agreement shall remain in full force and effect as to the Oil and Gas Leases and/or Oil and Gas Interests subject

37 hereto for the period of time selected below; provided, however, no party hereto shall ever be construed as having any right, title

38 or interest in or to any Lease or Oil and Gas Interest contributed by any other party beyond the term of this agreement.

39 o Option No. 1: So long as any of the Oil and Gas Leases subject to this agreement remain or are continued in

40 force as to any part of the Contract Area, whether by production, extension, renewal or otherwise.

41 þ Option No. 2: In the event the well described in Article VI.A., or any subsequent well drilled under any provision

42 of this agreement, results in the Completion of a well as a well capable of production of Oil and/or Gas in paying

43 quantities, this agreement shall continue in force so long as any such well is capable of production, and for an

44 additional  period  of     90    days  thereafter;  provided,  however,  if,  prior  to  the  expiration  of  such

45 additional period, one or more of the parties hereto are engaged in drilling, Reworking, Deepening, Sidetracking,

46 Plugging Back, testing or attempting to Complete or Re-complete a well or wells hereunder, this agreement shall

47 continue  in  force  until  such  operations  have  been  completed  and  if  production  results  therefrom,  this  agreement

48 shall continue in force as provided herein.  In the event the well described in Article VI.A., or any subsequent well

49 drilled  hereunder,  results  in  a  dry  hole,  and  no  other  well  is  capable  of  producing  Oil  and/or  Gas  from  the

50 Contract  Area,  this  agreement  shall  terminate  unless  drilling,  Deepening,  Sidetracking,  Completing,  Re-

51 completing, Plugging Back or Reworking operations are commenced within   180    days from the

52 date of abandonment of said well.  "Abandonment" for such purposes shall mean either (i) a decision by all parties

53 not  to  conduct  any  further  operations  on  the  well  or  (ii)  the  elapse  of  180  days  from  the  conduct  of  any

54 operations on the well, whichever first occurs.

55 The termination of this agreement shall not relieve any party hereto from any expense, liability or other obligation or any

56 remedy therefor which has accrued or attached prior to the date of such termination.

57 Upon termination of this agreement and the satisfaction of all obligations hereunder, in the event a memorandum of this

58 Operating Agreement has been filed of record, Operator is authorized to file of record in all necessary recording offices a

59 notice of termination, and each party hereto agrees to execute such a notice of termination as to Operator's interest, upon

60 request of Operator, if Operator has satisfied all its financial obligations.

61 ARTICLE XIV.

62 COMPLIANCE WITH LAWS AND REGULATIONS

63 A. Laws, Regulations and Orders:

64 This agreement shall be subject to the applicable laws of the state in which the Contract Area is located, to the valid rules,

65 regulations,  and  orders  of  any  duly  constituted  regulatory  body  of  said  state;  and  to  all  other  applicable  federal,  state,

66 and local laws, ordinances, rules, regulations and orders.

67 B. Governing Law:

68 This  agreement  and  all  matters  pertaining  hereto,  including  but  not  limited  to  matters  of  performance,  non-

69 performance,  breach,  remedies, procedures,  rights,  duties, and interpretation or  construction,  shall  be  governed and

70 determined by the law of the state in which the Contract Area is located.  If the Contract Area is in two or more states,

71 the law of the state of   Colorado shall govern.

72 C. Regulatory Agencies:

73 Nothing herein contained shall grant, or be construed to grant, Operator the right or authority to waive or release any

74 rights, privileges, or obligations which Non-Operators may have under federal or state laws or under rules, regulations or

-16 -

A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 orders promulgated under such laws in reference to oil, gas and mineral operations, including the location, operation, or

2 production of wells, on tracts offsetting or adjacent to the Contract Area.

3 With respect to the operations hereunder, Non-Operators agree to release Operator from any and all losses, damages,

4 injuries, claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation

5 or application of rules, rulings, regulations or orders of the Department of Energy or Federal Energy Regulatory Commission

6 or predecessor or successor agencies to the extent such interpretation or application was made in good faith and does not

7 constitute  gross  negligence.   Each  Non-Operator  further  agrees  to  reimburse  Operator  for  such  Non-Operator's  share  of

8 production or any refund, fine, levy or other governmental sanction that Operator may be required to pay as a result of such

9 an incorrect interpretation or application, together with interest and penalties thereon owing by Operator as a result of such

10  incorrect interpretation or application.

11 ARTICLE XV.

12 MISCELLANEOUS

13 A. Execution:

14 This  agreement  shall  be  binding  upon  each  Non-Operator  when  this  agreement  or  a  counterpart  thereof  has  been

15 executed by such Non-Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of

16 the parties to which it is tendered or which are listed on Exhibit "A" as owning an interest in the Contract Area or which

17 own, in fact, an interest in the Contract Area.   Operator may, however, by written notice to all Non-Operators who have

18 become bound by this agreement as aforesaid, given at any time prior to the actual spud date of the Initial Well but in no

19 event later than five days prior to the date specified in Article VI.A. for commencement of the Initial Well, terminate this

20 agreement  if Operator in its sole discretion  determines that there is insufficient participation to justify commencement of

21 drilling operations.  In the event of such a termination by Operator, all further obligations of the parties hereunder shall cease

22 as  of  such  termination.  In  the  event  any  Non-Operator  has  advanced  or  prepaid  any  share  of  drilling  or  other  costs

23 hereunder, all sums so advanced shall be returned to such Non-Operator without interest.In the event Operator proceeds

24 with drilling operations for the Initial Well without the execution hereof by all persons listed on Exhibit "A" as having a

25 current  working  interest  in  such  well,  Operator  shall  indemnify Non-Operators  with  respect  to all costs  incurred  for  the

26 Initial Well which would have been charged to such person under this agreement if such person had executed the same and

27 Operator shall receive all revenues which would have been received by such person under this agreement if such person had

28 executed the same.

29 B. Successors and Assigns:

30 This agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs,

31 devisees, legal representatives, successors and  assigns, and  the terms hereof shall be deemed  to  run  with the Leases  or

32 Interests included within the Contract Area.

33 C. Counterparts:

34 This instrument may be executed in any number of counterparts, each of which shall be considered an original for all

35 purposes.

36 D. Severability:

37 For the purposes of assuming or rejecting this agreement as an executory contract pursuant to federal bankruptcy laws,

38 this agreement shall not be severable, but rather must be assumed or rejected in its entirety, and the failure of any party to

39 this agreement to comply with all of its financial obligations provided herein shall be a material default.

40 ARTICLE XVI.

41 OTHER PROVISIONS

42

43 SEE ATTACHED PAGE 17

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

-17 -

A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 IN WITNESS WHEREOF, this agreement shall be effective as of the 30th day of September ,

2 2013 .

3 _____________________, who has prepared and circulated this form for execution, represents and warrants that the form was printed from and, with the exception(s) listed below, is identical to the AAPL Form 610-1989 Model Form

4 Operating Agreement, as published in computerized form by Forms On-A-Disk, Inc. No changes, alterations, or modifications, other than those made by strikethrough and/or insertion and that are clearly recognizable as changes in Articles

5 , have been made to the form.

6	ATTEST OR WITNESS:		OPERATOR
7			PETROSHARE CORP.
8	/s/ Fredrick J. Witsell	By:	/s/ Stephen J. Foley
9	Secretary		Stephen J. Foley
10			Type or print name
11			Title	CFO
12			Date	9/30/2013
13			Tax ID or S.S. No.	46-1454523
14

15	NON-OPERATORS
16
17			ROYALE INVESTMENTS, LLC
		By:	/s/ William W. Reid
18			William W. Reid
19			Type or print name
20			Title	Manager
21			Date	10/03/13
22			Tax ID or S.S. No.
23

24		RANCHER ENERGY CORP.
25
	By:	/s/ Jon Nicolaysen
26		Jon Nicolaysen
27		Type or print name
28		Title	President & CEO
29		Date	10/2/13
30		Tax ID or S.S. No.	98-0422451
31

32		U.S. Energy Development Co.
	By:	/s/ Douglas K. Walch
33		Douglas K. Walch
34		Type or print name MAW
35		Title	President
36		Date	9/30/2013
37		Tax ID or S.S. No.	16-1142489

-18 -

A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

1 ACKNOWLEDGMENTS

2 Note: The following forms of acknowledgment are the short forms approved by the Uniform Law on Notarial Acts.

3 The validity and effect of these forms in any state will depend upon the statutes of that state.

4

5 Individual acknowledgment:

6 State of Colorado )

7 State of _______________ ) ss.

8 County of Denver )

9 This instrument was acknowledged before me on

10 October 3, 2013 by William Reid, Manager of Royale Investments

11

12 (Seal, if any) JESSICA M. BROWNE___ _                              ____ /s/ Jessica M. Browne

13 NOTARY PUBLIC                                                                                Title (and Rank) Notary Public

14 STATE OF COLORADO                                                                      My commission expires: 5/16/2016

15 NOTARY ID 20124030931 / MY COMMISSION EXPIRES MAY 16, 2016

16 Acknowledgment in representative capacity:

17 State of New York )

18 State of _______________ ) ss.

19 County of Erie )

20 This instrument was acknowledged before me on

21 September 30, 2013 by Douglas K. Walch  as

22 President of U. S. Energy Development Corporation

23 _________ (Seal, if any) ____________________________________/s/ Michelle Anne Chambers

24 _________ (Seal, if any)____________________________________Title (and Rank) ___________________________

25 _________ (Seal, if any)____________________________________My commission expires: 11/14/13

26 Michele Anne Chambers

27 NOTARY PUBLIC, STATE OF NEW YORK

28 QUALIFIED IN ERIE COUNTY

29 NO 6136845

30 MY COMMISSION EXPIRES NOV 14, 2013

31

32

33

34

35

36

37

EXHIBIT A

Attached to that certain Operating Agreement dated effective September 30, 2013, between PetroShare Corp, as Operator, and Royale Investments LLC, Rancher Energy Corp, US Energy Development Co., as Non-Operators.

I. Oil and Gas Leases Subject to Agreement:

The Oil and Gas Leases more particularly described on Exhibit "A-1" attached hereto.

II. Participants and Addresses:

	ExpenseInterest
PetroShare Corp 7200 S. Alton Way, Suite B220 Centennial, CO 80111 Attn: Frederick J. Witsell (303) 500-1168 Office (303) 881-2157 Cell fwitsell@petrosharecorp.com		35.0000%
Rancher Energy Corp		30.0000%
c/o A.L. (Sid) Overton, Esq. 6950 E. Belleview Ave., Ste 202 Greenwood Village, CO 80111 Attn: Jon Nicolaysen, President (303) 779-5900 Office
(303) 779-6006 Fax sidoverton@oalaw.net
US Energy Development Co. 2350 North Forest Road Getzville, NY 14068 Attn: Douglas K.Walsh (716) 636-0401 ext. 310 (716) 636-0418 Fax		25.0000%
Royale Investments, LLC		10.0000%
_____________________ _____________________
Attn: Bill Reid
(303) 520-5127 Main
Email: billreid@goldresourcecorp.com

EXHIBIT A-1

Buck Peak Participation Agreement Leases dated September 30, 2013

BUCK PEAK LEASES AND EXPIRATION DATES
LESSOR NAME AND ADDRESS	DESCRIPTION	DATE AND TERM			GROSS ACRES		NET ACRES		NET REVENUE INTEREST			RECORDING
									to be delivered 8/8ths
West Half of Section 25
Jim F. Kowach	T6N-R90W, 6th P.M. Sec 25: W/2	10/31/2008 - 2014 6 years				335.54		167.77		78.5000	%		20104936
Barbara Wilaby	T6N-R90W, 6th P.M. Sec 25: W/2	10/31/2011 - 2014 3 years				335.54		167.77		78.5000	%		20103288
Sub Total - Kowach / Wilaby	W/2 Section 25, T6N R90W		100.00	%		335.54		335.54		78.5000	%			��
East Half of Section 25
Mark A Voloshin, PO Box 981, Craig, CO 81626	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9,10,15,16	5/12/2011- 2016 Five (5) Years				335.61		52.83		78.5000	%		20103153
Betty Arnone, 1713 South Vancouver Ct, Lakewood, CO 80228	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1,2,7,8,9,10,15 & 16	5/12/2011- 2016 Five (5) Years				335.61		26.41		78.5000	%		20102832
Helen McKee, 10436 Jacob Place, Littleton, CO 80125-8932	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9, 10, 15 & 16	5/12/2011- 2016 Five (5) Years				335.61		26.41		78.5000	%		20102839
Gary R Semro and Robert W. Semro, 6522 Trailhead Rd, Highlands Ranch, CO 80130	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9, 10, 15 & 16	5/12/2011- 2016 Five (5) Years				335.61		26.41		78.5000	%		20102847
Sharon Fitzgerald (Hebenstreit), 337 Coronado Drive, Sedalia, CO 80135	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9,10,15,16	5/12/2011- 2016 Five (5) Years				335.61		26.41		78.5000	%		20103140
Brad Ocker (Eugena Grace Voloshin), 9591 County Rd 33, Craig, CO 81625	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9,10,15,16	5/12/2011- 2016 Five (5) Years				335.61		8.55		78.5000	%		20102856
Sub Total - Semro / Voloshin	E/2 Section 25, T6N R90W		49.7661	%		335.61		167.02		78.5000	%
BCK LLC Charles S Keith	T6N-R90W, 6th P.M. A ssessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9,10,15,16	2/22/2011 - 2014 3 years + 2 yr ext				335.61		41.43		77.5000	%		20111728
Strontia springs Resources, LLC James Keith	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9,10,15,16	2/22/2011 - 2014 3 years + 2 yr ext				335.61		41.43		77.5000	%		20111730
JZTZ LLC Debra Ann Ziehm	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9,10,15,16	2/22/2011 - 2014 3 years + 2 yr ext				335.61		41.43		77.5000	%		20111729
MKRESOURCES LLC Margaret Keith	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1, 2, 7, 8, 9,10,15,16	2/22/2011 - 2014 3 years + 2 yr ext				335.61		26.41		77.5000	%		20111731
Sub Total - Keith	E/2 Section 25, T6N R90W		44.9075	%		335.61		150.71		77.5000	%
Quicksilver Resources Joanie Voloshin	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1,2,7,8,9,10,15,16		2/22/2011 - 2014 3 years + 2 yr ext			335.61		8.94		82.500	%		20111728
SWEPI thru Quicksilver Resources Joanie Voloshin	T6N-R90W, 6th P.M. Assessor's Tract # 74 Sec 25: Lots 1,2,7,8,9,10,15,16		2/22/2011 - 2014 3 years + 2 yr ext			335.61		8.94		81.000	%		20111728
		Ownership %			Gross Acres		Net Acres		NRI% Delivered
West Half of Section 25			100.000	%		335.54		335.54		78.5000	%
East Half of Section 25			100.000	%		335.61		335.61		78.2247	%
SECTION 25 TOTAL			100.000	%		671.15		671.15		78.3623	%

  COPAS 2005 Accounting Procedure Recommended by COPAS

Exhibit  “C”

ACCOUNTING PRODECURE

1		JOINT OPERATIONS
2	Attached to and made part of that certain Operating Agreement dated                                      , 20103, between PetroShare Corp, as Operator, and
3	Rancher Energy Corp. a Nevada Corporation, US Energy Development Co., Royale Investments, LLC as Non-Operator(s).
4
5
6
7
8		I. GENERAL PROVISIONS
9
10	IF THE PARTIES FAIL TO SELECT EITIIER ONE OF COMPETING "ALTERNATIVE'' PROVISIONS, OR SELECT ALL THE
11	COMPETING "ALTERNATIVE" PROVISIONS, ALTERNATIVE 1IN EACH SUCH INSTANCE SHALL BE DEEMED TO HAVE
12	BEEN ADOPTED BY THE PARTIES AS A RESULT OF ANY SUCH OMISSION OR DUPLICATE NOTATION.
13
14	IN THE EVENT THAT ANY "OPTIONAV' PROVISION OF TIIIS ACCOUNTING PROCEDURE IS NOT ADOPTED BY THE
15	PARTIES TO THE AGREEMENT BY A TYPED, PRINTED OR HANDWRITTEN INDICATION, SUCH PROVISION SHALL NOT
16	FORM A PART OF TIDS ACCOUNTING PROCEDURE, AND NO INFERENCE SHALL BE MADE CONCERNING THE INTENT
17	OF THE PARTIES IN SUCH EVENT.
18
19	1.	DEFINITIONS
20
21		All terms used in this Accounting Procedure shall have the following meaning, unless otherwise expressly defined in the Agreement:
22
23		"Affiliate'' means for a person, another person that controls, is controlled by, or is under common control with that person. In this
24		definition, (a) control means the ownership by one person, directly or indirectly, of more than fifty percent (50%) of the voting securities
25		of a corporation or, for other persons, the equivalent ownership interest (such as partnership interests), and (b) "person" means an
26		individual, corporation, partnership, trust, estate, unincorporated organization, association, or other legal entity.
27
28		"Agreement" means the operating agreement, farmout agreement, or other contract between the Parties to which this Accounting
29		Procedure is attached.
30
31		"Controllable Material" means Material that, at the time of acquisition or disposition by the Joint Account, as applicable, is so classified
32		in the Material Classification Manual most recently recommended by the Council of Petroleum Accountants Societies (COPAS).
33
34		"Equalized Freight" means the procedure of charging transportation  cost to the Joint Account based upon the distance from the nearest
35		Railway Receiving Point to the property.
36
37		"Excluded Amount" means a specified excluded trucking amount most recently recommended by COPAS.
38
39		"Field Office" means a structure, or portion of a structure, whether a temporary or permanent installation, the primary function of which is
40		to directly serve daily operation and maintenance activities of the Joint Property and which serves as a staging area for directly chargeable
41		field personnel.
42
43		"First Level Supervision" means those employees whose primary function in Joint Operations is the direct oversight of the Operator's
44		field employees and/or contract labor directly employed  On-site in a field operating  capacity.  First Level Supervision functions may
45		include, but are not limited to:
46
47		▪  Responsibility for field employees and contract labor engaged in activities that can include field operations, maintenance,
48		construction, well remedial work, equipment movement and drilling
49		▪  Responsibility for day-to-day direct oversight of rig operations
50		▪  Responsibility for day-to-day direct oversight of construction operations
51		▪  Coordination of job priorities and approval of work procedures
52		▪  Responsibility for optimal resource utilization (equipment, Materials, personnel)
53		▪  Responsibility for meeting production and field operating expense targets
54		▪  Representation of the Parties in local matters involving community, vendors, regulatory agents and landowners, as an incidental
55		part of the supervisor’s operating responsibilities
56		▪  Responsibility for all emergency responses with field staff
57		▪  Responsibility for implementing safety and environmental practices
58		▪  Responsibility for field adherence to company policy
59		▪  Responsibility for employment decisions and performance appraisals for field personnel
60		▪  Oversight of sub-groups for field functions such as electrical, safety, environmental, telecommunications, which may have group
61		or team leaders.
62
63		"Joint Account" means the account showing the charges paid and credits received in the conduct of the Joint Operations that are to be
64		shared by the Parties, but does not include proceeds attributable to hydrocarbons and by-products produced under the Agreement.
65
66		"Joint Operations" means all operations necessary or proper for the exploration, appraisal, development, production, protection, maintenance, repair, abandonment, and restoration of the Joint Property.

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COPAS 2005 Accounting Procedure Recommended by COPAS

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COPAS 2005 Accounting Procedure Recommended by COPAS

1		"Joint Property" means the real and personal property subject to the Agreement.
2
3		"Laws" means any laws, rules, regulations, decrees, and orders of the United States of America or any state thereof and all other
4		goverenental bodies, agencies, and other authorities having jurisdiction over or affecting the provisions contained in or the transactions
5		contemplated by the Agreement or the Parties and their operations, whether such laws now exist or are hereafter amended, enacted,
6		promulgated or issued.
7
8		"Material" means personal property, equipment, supplies, or consumables acquired or held for use by the Joint Property.
9
10		"Non-Operators" means the Parties to the Agreement other than the Operator.
11
12		"Offshore Facilities" means platforms, surface and subsea development and production systems, and other support systems such as oil and
13		gas handling facilities, living quarters, offices, shops, cranes, electrical supply equipment and systems, fuel and water storage and piping,
14		heliport, marine docking installations, communication facilities, navigation aids, and other similar facilities necessary in the conduct of
15		offshore operations, all of which are located offshore.
16
17		"Off-site" means any location that is not considered On-site as defined in this Accounting Procedure.
18
19		"On-site" means on the Joint Property when in direct conduct of Joint Operations. The term "On-site" shall also include that portion of
20		Offshore Facilities, Shore Base Facilities, fabrication yards, and staging areas from which Joint Operations are conducted, or other
21		facilities that directly control equipment on the Joint Property, regardless of whether such facilities are owned by the Joint Account.
22
23		"Operator" means the Party designated pursuant to the Agreement to conduct the Joint Operations.
24
25		"Parties" means legal entities signatory to the Agreement or their successors and assigns. Parties shall be referred to individually as
26		"Party."
27
28		"Participating Interest" means the percentage of the costs and risks of conducting an operation under the Agreement that a Party agrees,
29		or is otherwise obligated, to pay and bear.
30
31		"Participating Party" means a Party that approves a proposed operation or otherwise agrees, or becomes liable, to pay and bear a share of
32		the costs and risks of conducting an operation under the Agreement.
33
34		"Personal Expenses" means reimbursed costs for travel and temporary living expenses.
35
36		"Railway Receiving Point" means the railhead nearest the Joint Property for which freight rates are published, even though an actual
37		railhead may not exist.
38
39		"Shore Base Facilities" means onshore support facilities that during Joint Operations provide such services to the Joint Property as a
40		receiving and transshipment point for Materials; debarkation point for drilling and production personnel and services; communication,
41		scheduling and dispatching center; and other associated functions serving the Joint Property.
42
43		"Supply Store" means a recognized source or common stock point for a given Material item.
44
45		"Technical Services" means services providing specific engineering, geoscience, or other professional skills, such as those performed by
46		engineers, geologists, geophysicists, and technicians, required to handle specific operating conditions and problems for the benefit of Joint
47		Operations; provided, however, Technical Services shall not include those functions specifically identified as overhead under the second
48		paragraph of the introduction of Section III (Overhead). Technical Services may be provided by the Operator, Operator's Affiliate, Non-
49		Operator, Non-Operator Affiliates, and/or third parties.
50
51	2.	STATEMENTS AND BILLINGS
52
53		The Operator shall bill Non-Operators on or before the last day of the month for their proportionate share of the Joint Account for the
54		preceding month. Such bills shall be accompanied by statements that identify the AFE (authority for expenditure), lease or facility, and all
55		charges and credits summarized by appropriate categories of investment and expense. Controllable Material shall be separately identified
56		and fully described in detail, or at the Operator's option, Controllable Material may be summarized by major Material classifications.
57		Intangible drilling costs, audit adjustments, and unusual charges and credits shall be separately and clearly identified.
58
59		The Operator may make available to Non-Operators any statements and bills required under Section I.2 and/or Section I.3.A (Advances
60		and Payments by the Parties) via email, electronic data interchange, internet websites or other equivalent electronic media in lieu of paper
61		copies. The Operator shall provide the Non-Operators instructions and any necessary information to access and receive the statements and
62		bills within the timeframes specified herein. A statement or billing shall be deemed as delivered twenty-four (24) hours (exclusive of
63		weekends and holidays) after the Operator notifies the Non-Operator that the statement or billing is available on the website and/or sent via
64		email or electronic data interchange transmission. Each Non-Operator individually shall elect to receive statements and billings
65		electronically, if available from the Operator, or request paper copies. Such election may be changed upon thirty (30) days prior written
66		notice to the Operator.

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COPAS 2005 Accounting Procedure Recommended by COPAS

1	3.	ADVANCES AND PAYMENTS BY THE PARTIES
2
3		A.   Unless otherwise provided for in the Agreement, the Operator may require the Non-Operators to advance their share of the estimated
4		cash outlay for the succeeding month's operations within fifteen (15) days after receipt of the advance request or by the first day of
5		the month for which the advance is required, whichever is later. The Operator shall adjust each monthly billing to reflect advances
6		received from the Non-Operators for such month. If a refund is due, the Operator shall apply the amount to be refunded to the
7		subsequent month's billing or advance, unless the Non-Operator sends the Operator a written request for a cash refund. The Operator
8		shall remit the refund to the Non-Operator within fifteen (15) days of receipt of such written request.
9
10		B.    Except as provided below, each Party shall pay its proportionate share of all bills in full within fifteen (15) days of receipt date. If
11		payment is not made within such time, the unpaid balance shall bear interest compounded monthly at the prime rate published by the
12		Wall Street Journal on the first day of each month the payment is delinquent plus three percent (3%), per annum, or the maximum
13		contract rate permitted by the applicable usury Laws governing the Joint Property, whichever is the lesser, plus attorney's fees, court
14		costs, and other costs in connection with the collection of unpaid amounts. If the Wall Street Journal ceases to be published or
15		discontinues publishing a prime rate, the unpaid balance shall bear interest compounded monthly at the prime rate published by the
16		Federal Reserve plus three percent (3%), per annum. Interest shall begin accruing on the first day of the month in which the payment
17		was due. Payment shall not be reduced or delayed as a result of inquiries or anticipated credits unless the Operator has agreed.
18		Notwithstanding the foregoing, the Non-Operator may reduce payment, provided it furnishes documentation and explanation to the
19		Operator at the time payment is made, to the extent such reduction is caused by:
20
21		(1)   being billed at an incorrect working interest or Participating Interest that is higher than such Non-Operator's actual working
22		interest or Participating Interest, as applicable; or
23		(2)   being billed for a project or AFE requiring approval of the Parties under the Agreement that the Non-Operator has not approved
24		or is not otherwise obligated to pay under the Agreement; or
25		(3)   being billed for a property in which the Non-Operator no longer owns a working interest, provided the Non-Operator has
26		furnished the Operator a copy of the recorded assignment or letter in-lieu. Notwithstanding the foregoing, the Non-Operator
27		shall remain responsible for paying bills attributable to the interest it sold or transferred for any bills rendered during the thirty
28		(30) day period following the Operator's receipt of such written notice; or
29		(4)   charges outside the adjustment period, as provided in Section I.4 (Adjustments).
30
31	4.	ADJUSTMENTS
32
33		A.    Payment of any such bills shall not prejudice the right of any Party to protest or question the correctness thereof; however, all bills
34		and statements, including payout statements, rendered during any calendar year shall conclusively be presumed to be true and correct,
35		with respect only to expenditures, after twenty-four (24) months following the end of any such calendar year, unless within said
36		period a Party takes specific detailed written exception thereto making a claim for adjustment. The Operator shall provide a response
37		to all written exceptions, whether or not contained in an audit report, within the time periods prescribed in Section I.5 (Expenditure
38		Audits).
39
40		B.    All adjustments initiated by the Operator, except those described in items (1) through (4) of this Section I.4.B, are limited to the
41		twenty-four (24) month period following the end of the calendar year in which the original charge appeared or should have appeared
42		on the Operator's Joint Account statement or payout statement. Adjustments that may be made beyond the twenty-four (24) month
43		period are limited to adjustments resulting from the following:
44
45		(1)   a physical inventory of Controllable Material as provided for in Section V (Inventories of Controllable Material), or
46		(2)   an offsetting entry (whether in whole or in part) that is the direct result of a specific joint interest audit exception granted by the
47		Operator relating to another property, or
48		(3)   a government/regulatory audit, or
49		(4)   a working interest ownership or Participating Interest adjustment.
50
51	5.	EXPENDITURE AUDITS
52
53		A.   A Non-Operator, upon written notice to the Operator and all other Non-Operators, shall have the right to audit the Operator's
54		accounts and records relating to the Joint Account within the twenty-four (24) month period following the end of such calendar year in
55		which such bill was rendered; however, conducting an audit shall not extend the time for the taking of written exception to and the
56		adjustment of accounts as provided for in Section I.4 (Adjustments). Any Party that is subject to payout accounting under the
57		Agreement shall have the right to audit the accounts and records of the Party responsible for preparing the payout statements, or of
58		the Party furnishing information to the Party responsible for preparing payout statements. Audits of payout accounts may include the
59		volumes of hydrocarbons produced and saved and proceeds received for such hydrocarbons as they pertain to payout accounting
60		required under the Agreement. Unless otherwise provided in the Agreement, audits of a payout account shall be conducted within the
61		twenty-four (24) month period following the end of the calendar year in which the payout statement was rendered.
62
63		Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct a joint audit in a
64		manner that will result in a minimum of inconvenience to the Operator. The Operator shall bear no portion of the Non-Operators'
65		audit cost incurred under this paragraph unless agreed to by the Operator. The audits shall not be conducted more than once each year
66		without prior approval of the Operator, except upon the resignation or removal of the Operator, and shall be made at the expense of

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COPAS 2005 Accounting Procedure Recommended by COPAS

1		those Non-Operators approving such audit.
2
3		The Non-Operator leading the audit (hereinafter "lead audit company") shall issue the audit report within ninety (90) days after
4		completion of the audit testing and analysis; however, the ninety (90) day time period shall not extend the twenty-four (24) month
5		requirement for taking specific detailed written exception as required in Section I.4.A (Adjustments) above. All claims shall be
6		supported with sufficient documentation.
7
8		A timely filed written exception or audit report containing written exceptions (hereinafter "written exceptions") shall, with respect to
9		the claims made therein, preclude the Operator from asserting a statute of limitations defense against such claims, and the Operator
10		hereby waives its right to assert any statute of limitations defense against such claims for so long as any Non-Operator continues to
11		comply with the deadlines for resolving exceptions provided in this Accounting Procedure. If the Non-Operators fail to comply with
12		the additional deadlines in Section I.5.B or I.5.C, the Operator's waiver of its rights to assert a statute of limitations defense against
13		the claims brought by the Non-Operators shall lapse, and such claims shall then be subject to the applicable statute of limitations,
14		provided that such waiver shall not lapse in the event that the Operator has failed to comply with the deadlines in Section I.5.B or
15		I.5.C.
16
17		B.    The Operator shall provide a written response to all exceptions in an audit report within one hundred eighty (180) days after Operator
18		receives such report. Denied exceptions should be accompanied by a substantive response. If the Operator fails to provide substantive
19		response to an exception within this one hundred eighty (180) day period, the Operator will owe interest on that exception or portion
20		thereof, if ultimately granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section
21		I.3.B (Advances and Payments by the Parties).
22
23		C.    The lead audit company shall reply to the Operator's response to an audit report within ninety (90) days of receipt, and the Operator
24		shall reply to the lead audit company's follow-up response within ninety (90) days of receipt; provided, however, each Non-Operator
25		shall have the right to represent itself if it disagrees with the lead audit company's position or believes the lead audit company is not
26		adequately fulfilling its duties. Unless otherwise provided for in Section I.5.E, if the Operator fails to provide substantive response
27		to an exception within this ninety (90) day period, the Operator will owe interest on that exception or portion thereof, if ultimately
28		granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section I.3.B (Advances and
29		Payments by the Parties).
30
31		D.    If any Party fails to meet the deadlines in Sections I.5.B or I.5.C or if any audit issues are outstanding fifteen (15) months after
32		Operator receives the audit report, the Operator or any Non-Operator participating in the audit has the right to call a resolution
33		meeting, as set forth in this Section I.5.D or it may invoke the dispute resolution procedures included in the Agreement, if applicable.
34		The meeting will require one month's written notice to the Operator and all Non-Operators participating in the audit. The meeting
35		shall be held at the Operator's office or mutually agreed location, and shall be attended by representatives of the Parties with
36		authority to resolve such outstanding issues. Any Party who fails to attend the resolution meeting shall be bound by any resolution
37		reached at the meeting. The lead audit company will make good faith efforts to coordinate the response and positions of the
38		Non-Operator participants throughout the resolution process; however, each Non-Operator shall have the right to represent itself.
39		Attendees will make good faith efforts to resolve outstanding issues, and each Party will be required to present substantive information
40		supporting its position. A resolution meeting may be held as often as agreed to by the Parties. Issues unresolved at one meeting may
41		be discussed at subsequent meetings until each such issue is resolved.
42
43		If the Agreement contains no dispute resolution procedures and the audit issues cannot be resolved by negotiation, the dispute shall
44		shall choose a mutually acceptable mediator and share the costs of mediation services equally. The Parties shall each have present
45		be submitted to mediation. In such event, promptly following one Party's written request for mediation, the Parties to the dispute
46		at the mediation at least one individual who has the authority to settle the dispute. The Parties shall make reasonable efforts to
47		ensure that the mediation commences within sixty (60) days of the date of the mediation request. Notwithstanding the above, any
48		Party may file a lawsuit or complaint (1) if the Parties are unable after reasonable efforts, to commence mediation within sixty (60)
49		days of the date of the mediation request, (2) for statute of limitations reasons, or (3) to seek a preliminary injunction or other
50		provisional judicial relief, if in its sole judgment an injunction or other provisional relief is necessary to avoid irreparable damage or
51		to preserve the status quo. Despite such action, the Parties shall continue to try to resolve the dispute by mediation.
52
53		E.    o (Optional Provision- Forfeiture Penalties)
54		If the Non-Operators fail to meet the deadline in Section I.5.C, any unresolved exceptions that were not addressed by the Non­
55		Operators within one (1) year following receipt of the last substantive response of the Operator shall be deemed to have been
56		withdrawn by the Non-Operators. If the Operator fails to meet the deadlines in Section I.5.B or I.5.C, any unresolved exceptions that
57		were not addressed by the Operator within one ( 1) year following receipt of the audit report or receipt of the last substantive response
58		of the Non-Operators, whichever is later, shall be deemed to have been granted by the Operator and adjustments shall be made,
59		without interest, to the Joint Account.
60
61	6.	APPROVAL BY PARTIES
62
63		A.    GENERAL MATTERS
64
65		Where an approval or other agreement of the Parties or Non-Operators is expressly required under other Sections of this Accounting
66		Procedure and if the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, the

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COPAS 2005 Accounting Procedure Recommended by COPAS

1		Operator shall notify all Non-Operators of the Operator's proposal and the agreement or approval of a majority in interest of the
2		Non-Operators shall be controlling on all Non-Operators.
3
4		This Section I.6.A applies to specific situations of limited duration where a Party proposes to change the accounting for charges from
5		that prescribed in this Accounting Procedure. This provision does not apply to amendments to this Accounting Procedure, which are
6		covered by Section I.6.B.
7
8	B.	AMENDMENTS
9
10		If the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, this Accounting
11		Procedure can be amended by an affirmative vote of    One     (  1  ) or more Parties, one of which is the Operator,
12		having a combined working interest of at least     Seventy Six      percent   ( 76 %), which approval shall be binding on all Parties,
13		provided, however, approval of at least one (1) Non-Operator shall be required.
14
15	C.	AFFILIATES
16
17		For the purposes of administering the voting procedures in Section I.6.A and I.6.B, if Parties to this Agreement are Affiliates of each
18		other, then such Affiliates shall be combined and treated as a single Party having the combined working interest or Participating
19		Interest of such Affiliates.
20
21		For the purposes of administering the voting procedures in Section I.6.A, if a Non-Operator is an Affiliate of the Operator, votes
22		under Section I.6.A shall require the majority in interest of the Non-Operator(s) after excluding the interest of the Operator's
23		Affiliate.
24
25		II. DIRECT CHARGES
26
27		The Operator shall charge the Joint Account with the following items:
28
29	1.	RENTALS AND ROYALTIES
30
31		Lease rentals and royalties paid by the Operator, on behalf of all Parties, for the Joint Operations.
32
33	2.	LABOR
34
35		A.    Salaries and wages, including incentive compensation programs as set forth in COPAS MFI-37 ("Chargeability of Incentive
36		Compensation Programs"), for
37
38		(1)   Operator's field employees directly employed On-site in the conduct of Joint Operations,
39
40		(2)   Operator's employees directly employed on Shore Base Facilities, Offshore Facilities, or other facilities serving the Joint
41		Property if such costs are not charged under Section II.6 (Equipment and Facilities Furnished by Operator) or are not a
42		function covered under Section III (Overhead),
43
44		(3)   Operator's employees providing First Level Supervision,
45
46		(4)   Operator's employees providing On-site Technical Services for the Joint Property if such charges are excluded from the
47		overhead rates in Section III (Overhead),
48
49		(5)   Operator's employees providing Off-site Technical Services for the Joint Property if such charges are excluded from the
50		overhead rates in Section III (Overhead).
51
52		Charges for the Operator's employees identified in Section II.2.A may be made based on the employee's actual salaries and wages,
53		or in lieu thereof, a day rate representing the Operator's average salaries and wages of the employee's specific job category.
54
55		Charges for personnel chargeable under this Section II.2.A who are foreign nationals shall not exceed comparable compensation paid
56		to an equivalent U.S. employee pursuant to this Section II.2, unless otherwise approved by the Parties pursuant to Section
57		I.6.A (General Matters).
58
59		B.     Operator's cost of holiday, vacation, sickness, and disability benefits, and other customary allowances paid to employees whose
60		salaries and wages are chargeable to the Joint Account under Section II.2.A, excluding severance payments or other termination
61		allowances. Such costs under this Section II.2.B may be charged on a "when and as-paid basis" or by "percentage assessment" on the
62		amount of salaries and wages chargeable to the Joint Account under Section II.2.A. If percentage assessment is used, the rate shall
63		be based on the Operator's cost experience.
64
65		C.    Expenditures or contributions made pursuant to assessments imposed by governmental authority that are applicable to costs
66		chargeable to the Joint Account under Sections II.2.A and B

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COPAS 2005 Accounting Procedure Recommended by COPAS

1		D.    Personal Expenses of personnel whose salaries and wages are chargeable to the Joint Account under Section II.2.A when the
2		expenses are incurred in connection with directly chargeable activities.
3
4		E.    Reasonable relocation costs incurred in transferring to the Joint Property personnel whose salaries and wages are chargeable to the
5		Joint Account under Section 11.2.A. Notwithstanding the foregoing, relocation costs that result from reorganization or merger of a
6		Party, or that are for the primary benefit of the Operator, shall not be chargeable to the Joint Account. Extraordinary relocation
7		costs, such as those incurred as a result of transfers from remote locations, such as Alaska or overseas, shall not be charged to the
8		Joint Account unless approved by the Parties pursuant to Section I.6.A (General Matters).
9
10		F.    Training costs as specified in COPAS MFI-35 ("Charging of Training Costs to the Joint Account") for personnel whose salaries and
11		wages are chargeable under Section II.2.A. This training charge shall include the wages, salaries, training course cost, and Personal
12		Expenses incurred during the training session. The training cost shall be charged or allocated to the property or properties directly
13		benefiting from the training. The cost of the training course shall not exceed prevailing commercial rates, where such rates are
14		available.
15
16		G.   Operator's current cost of established plans for employee benefits, as described in COPAS MFI-27 ("Employee Benefits Chargeable
17		to Joint Operations and Subject to Percentage Limitation"), applicable to the Operator's labor costs chargeable to the Joint Account
18		under Sections II.2.A and B based on the Operator's actual cost not to exceed the employee benefits limitation percentage most
19		recently recommended by COPAS.
20
21		H.    Award payments to employees, in accordance with COPAS MFI-49 ("Awards to Employees and Contractors") for personnel whose
22		salaries and wages are chargeable under Section II.2.A.
23
24	3.	MATERIAL
25
26		Material purchased or furnished by the Operator for use on the Joint Property in the conduct of Joint Operations as provided under Section
27		IV (Material Purchases, Transfers, and Dispositions). Only such Material shall be purchased for or transferred to the Joint Property as
28		may be required for immediate use or is reasonably practical and consistent with efficient and economical operations. The accumulation
29		of surplus stocks shall be avoided.
30
31	4.	TRANSPORTATION
32
33		A.   Transportation of the Operator's, Operator's Affiliate's, or contractor's personnel necessary for Joint Operations.
34
35		B.    Transportation of Material between the Joint Property and another property, or from the Operator's warehouse or other storage point
36		to the Joint Property, shall be charged to the receiving property using one of the methods listed below. Transportation of Material
37		from the Joint Property to the Operator's warehouse or other storage point shall be paid for by the Joint Property using one of the
38		methods listed below:
39
40		(1)   If the actual trucking charge is less than or equal to the Excluded Amount the Operator may charge actual trucking cost or a
41		theoretical  charge from the Railway  Receiving  Point to the Joint Property.  The basis for the theoretical  charge is the per
42		hundred  weight  charge plus  fuel surcharges from the Railway Receiving  Point to  the Joint Property. The Operator  shall
43		consistently  apply the selected alternative.
44
45		(2)   If the actual trucking charge is greater than the Excluded Amount the Operator shall charge Equalized Freight. Accessorial
46		charges such as loading and unloading costs, split pick-up costs, detention, call out charges, and permit fees shall be charged
47		directly to the Joint Property and shall not be included when calculating the Equalized Freight.
48
49	5.	SERVICES
50
51		The cost of contract services, equipment, and utilities used in the conduct of Joint Operations, except for contract services, equipment, and
52		utilities covered by Section III (Overhead), or Section II.7 (Affiliates), or excluded under Section II.9 (Legal Expense). Awards paid to
53		contractors shall be chargeable pursuant to COPAS MFl-49 ("Awards to Employees and Contractors").
54
55		The costs of third party Technical Services are chargeable to the extent excluded from the overhead rates under Section III (Overhead).
56
57	6.	EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR
58
59		In the absence of a separately negotiated agreement, equipment and facilities furnished by the Operator will be charged as follows:
60
61		A.   The Operator  shall charge the Joint Account  for use of  Operator-owned  equipment  and facilities, including but  not limited to
62		production facilities, Shore Base Facilities, Offshore Facilities, and Field Offices, at rates commensurate with the costs of ownership
63		and operation. The cost of Field Offices shall be chargeable to the extent the Field Offices provide direct service to personnel who
64		are chargeable pursuant  to Section II.2.A (Labor). Such rates may include labor, maintenance,  repairs, other operating expense,
65		insurance, taxes, depreciation using straight line depreciation method, and interest on gross investment less accumulated depreciation
66		not to exceed       ten          percent (    10   %) per annum; provided, however, depreciation shall not be charged when the

7

COPAS 2005 Accounting Procedure Recommended by COPAS

1		equipment and facilities investment have been fully depreciated. The rate may include an element of the estimated cost for
2		abandonment, reclamation, and dismantlement. Such rates shall not exceed the average commercial rates currently prevailing in the
3		immediate area of the Joint Property.
4
5		B.    In lieu of charges in Section II.6.A above, the Operator may elect to use average commercial rates prevailing in the immediate area
6		of the Joint Property, less twenty percent (20%). If equipment and facilities are charged under this Section II.6.B, the Operator shall
7		adequately document and support commercial rates and shall periodically review and update the rate and the supporting
8		documentation. For automotive equipment, the Operator may elect to use rates published by the Petroleum Motor Transport
9		Association (PMTA) or such other organization recognized by COPAS as the official source of rates.
10
11	7.	AFFILIATES
12
13		A.   Charges for an Affiliate's goods and/or services used in operations requiring an AFE or other authorization from the Non-Operators
14		may be made without the approval of the Parties provided (i) the Affiliate is identified and the Affiliate goods and services are
15		specifically detailed in the approved AFE or other authorization, and (ii) the total costs for such Affiliate's goods and services billed
16		to such individual project do not exceed     $  5200.000.00          If the total costs for an Affiliate's goods and services charged to such
17		individual project are not specifically detailed in the approved AFE or authorization or exceed such amount, charges for such
18		Affiliate shall require approval of the Parties, pursuant to Section I.6.A (General Matters).
19
20		B.    For an Affiliate's goods and/or services used in operations not requiring an AFE or other authorization from the Non-Operators,
21		charges for such Affiliate's goods and services shall require approval of the Parties, pursuant to Section I.6.A (General Matters), if the
22		charges exceed   $  5200.000.00       in a given calendar year.
23
24		C.   The cost of the Affiliate's goods or services shall not exceed average commercial rates prevailing in the area of the Joint Property,
25		unless the Operator obtains the Non-Operators' approval of such rates. The Operator shall adequately document and support
26		commercial rates and shall periodically review and update the rate and the supporting documentation; provided, however,
27		documentation of commercial rates shall not be required if the Operator obtains Non-Operator approval of its Affiliate's rates or
28		charges prior to billing Non-Operators for such Affiliate's goods and services. Notwithstanding the foregoing, direct charges for
29		Affiliate-owned communication facilities or systems shall be made pursuant to Section II.12 (Communications).
30
31		If the Parties fail to designate an amount in Sections II.7.A or II.7.B, in each instance the amount deemed adopted by the Parties as a
32		result of such omission shall be the amount established as the Operator's expenditure limitation in the Agreement. If the Agreement
33		does not contain an Operator's expenditure limitation, the amount deemed adopted by the Parties as a result of such omission shall be
34		zero dollars ($ 0.00).
35
36	8.	DAMAGES AND LOSSES TO JOINT PROPERTY
37
38		All costs or expenses necessary for the repair or replacement of Joint Property resulting from damages or losses incurred, except to the
39		extent such damages or losses result from a Party's or Parties' gross negligence or willful misconduct, in which case such Party or Parties
40		shall be solely liable.
41
42		The Operator shall furnish the Non-Operator written notice of damages or losses incurred as soon as practicable after a report has been
43		received by the Operator.
44
45	9.	LEGAL EXPENSE
46
47		Recording fees and costs of handling, settling, or otherwise discharging litigation, claims, liens and title and regulatory work / incurred in or resulting from
48		operations under the Agreement, or necessary to protect or recover the Joint Property, to the extent permitted under the Agreement. Costs
49		of the Operator's or Affiliate's legal staff or outside attorneys, including fees and expenses, are not chargeable unless approved by the
50		Parties pursuant to Section I.6.A (General Matters) or otherwise provided for in the Agreement.
51
52		Notwithstanding the foregoing paragraph, costs for procuring abstracts, fees paid to outside attorneys for title examinations (including
53		preliminary, supplemental, shut-in royalty opinions, division order title opinions), and curative work shall be chargeable to the extent
54		permitted as a direct charge in the Agreement.
55
56
57	10.	TAXES AND PERMITS
58
59		All taxes and permitting fees of every kind and nature, assessed or levied upon or in connection with the Joint Property, or the production
60		therefrom, and which have been paid by the Operator for the benefit of the Parties, including penalties and interest, except to the extent the
61		penalties and interest result from the Operator's gross negligence or willful misconduct.
62
63		If ad valorem taxes paid by the Operator are based in whole or in part upon separate valuations of each Party's working interest, then
64		notwithstanding any contrary provisions, the charges to the Parties will be made in accordance with the tax value generated by each Party's
65		working interest.
66

8

COPAS 2005 Accounting Procedure Recommended by COPAS

1		Costs of tax consultants or advisors, the Operator's employees, or Operator's Affiliate employees in matters regarding ad valorem or other
2		tax matters, are not permitted as direct charges unless approved by the Parties pursuant to Section I.6.A (General Matters).
3
4		Charges to the Joint Account resulting from sales/use tax audits, including extrapolated amounts and penalties and interest, are permitted,
5		provided the Non-Operator shall be allowed to review the invoices and other underlying source documents which served as the basis for
6		tax charges and to determine that the correct amount of taxes were charged to the Joint Account. If the Non-Operator is not permitted to
7		review such documentation, the sales/use tax amount shall not be directly charged unless the Operator can conclusively document the
8		amount owed by the Joint Account.
9
10	11.	INSURANCE
11
12		Net premiums paid for insurance required to be carried for Joint Operations for the protection of the Parties. If Joint Operations are
13		conducted at locations where the Operator acts as self-insurer in regard to its worker's compensation and employer's liability insurance
14		obligation, the Operator shall charge the Joint Account manual rates for the risk assumed in its self-insurance program as regulated by the
15		jurisdiction governing the Joint Property. In the case of offshore operations in federal waters, the manual rates of the adjacent state shall be
16		used for personnel performing work On-site, and such rates shall be adjusted for offshore operations by the U.S. Longshoreman and
17		Harbor Workers (USL&H) or Jones Act surcharge, as appropriate.
18
19	12.	COMMUNICATIONS
20
21		Costs of acquiring, leasing, installing. operating. repairing. and maintaining communication facilities or systems, including satellite, radio
22		and microwave facilities, between the Joint Property and the Operator's office(s) directly responsible for field operations in accordance
23		with the provisions of COPAS MFI-44 ("Field Computer and Communication Systems"). If the communications facilities or systems
24		serving the Joint Property are Operator-owned, charges to the Joint Account shall be made as provided in Section II.6 (Equipment and
25		Facilities Furnished by Operator). If the communication facilities or systems serving the Joint Property are owned by the Operator's
26		Affiliate, charges to the Joint Account shall not exceed average commercial rates prevailing in the area of the Joint Property. The Operator
27		shall adequately document and support commercial rates and shall periodically review and update the rate and the supporting
28		documentation.
29
30	13.	ECOLOGICAL, ENVIRONMENTAL, AND SAFETY
31
32		Costs incurred for Technical Services and drafting to comply with ecological, environmental and safety Laws or standards recommended by
33		Occupational Safety and Health Administration (OSHA) or other regulatory authorities. All other labor and functions incurred for
34		ecological, environmental and safety matters, including management, administration, and permitting, shall be covered by Sections II.2
35		(Labor), II.5 (Services), or Section III (Overhead), as applicable.
36
37		Costs to provide or have available pollution containment and removal equipment plus actual costs of control and cleanup and resulting
38		responsibilities of oil and other spills as well as discharges from permitted outfalls as required by applicable Laws, or other pollution
39		containment and removal equipment deemed appropriate by the Operator for prudent operations, are directly chargeable.
40
41	14.	ABANDONMENT AND RECLAMATION
42
43		Costs incurred for abandonment and reclamation of the Joint Property, including costs required by lease agreements or by Laws.
44
45	15.	OTHER EXPENDITURES
46
47		Any other expenditure not covered or dealt with in the foregoing provisions of this Section II (Direct Charges), or in Section III
48		(Overhead) and which is of direct benefit to the Joint Property and is incurred by the Operator in the necessary and proper conduct of the
49		Joint Operations. Charges made under this Section II.1.5 shall require approval of the Parties, pursuant to Section I.6.A (General Matters).
50
51
52		III. OVERHEAD
53
54		As compensation for costs not specifically identified as chargeable to the Joint Account pursuant to Section II (Direct Charges), the Operator
55		shall charge the Joint Account in accordance with this Section III.
56
57		Functions included in the overhead rates regardless of whether performed by the Operator, Operator's Affiliates or third parties and regardless
58		of location, shall include, but not be limited to, costs and expenses of:
59
60		▪  warehousing, other than for warehouses that are jointly owned under this Agreement
61		▪  design and drafting (except when allowed as a direct charge under Sections II.13, III..I.A.(ii), and III.2, Option B)
62		▪  inventory costs not chargeable under Section V (Inventories of Controllable Material)
63		▪  procurement
64		▪  administration
65		▪  accounting and auditing
66		▪  gas dispatching and gas chart integration

9

COPAS 2005 Accounting Procedure Recommended by COPAS

1		▪  human resources
2		▪  management
3		▪  supervision not directly charged under Section II.2 (Labor)
4		▪  legal services not directly chargeable under Section II.9 (Legal Expense)
5		▪  taxation, other than those costs identified as directly chargeable under Section II.10 (Taxes and Permits)
6		▪  preparation and monitoring of permits and certifications; preparing regulatory reports; appearances before or meetings with
7		governmental agencies or other authorities having jurisdiction over the Joint Property, other than On-site inspections; reviewing,
8		interpreting, or submitting contents on or lobbying with respect to Laws or proposed Laws.
9
10		Overhead charges shall include the salaries or wages plus applicable payroll burdens, benefits, and Personal Expenses of personnel performing
11		overhead functions, as well as office and other related expenses of overhead functions.
12
13	1.	OVERHEAD-DRILLING AND PRODUCING OPERATIONS
14
15		As compensation for costs incurred but not chargeable under Section II (Direct Charges) and not covered by other provisions of this
16		Section III, the Operator shall charge on either:
17
18		þ   (Alternative 1) Fixed Rate Basis, Section III.1.B.
19		o   (Alternative 2) Percentage Basis, Section III.1.C.
20
21	A.	TECHNICAL SERVICES
22
23		(i)     Except as otherwise provided in Section II.13 (Ecological Environmental and Safety) and Section III.2 (Overhead - Major
24		Construction and Catastrophe), or by approval of the Parties pursuant to Section I.6.A (General Matters), the salaries, wages,
25		related payroll burdens and benefits, and Personal Expenses for On-site Technical Services, including third party Technical
26		Services:
27
28		þ   (Alternative 1- Direct) shall be charged direct to the Joint Account.
29
30		o  (Alternative 2 - Overhead) shall be covered by the overhead rates.
31
32		(ii)    Except as otherwise provided in Section II.13 (Ecological, Environmental, and Safety) and Section III.2 (Overhead - Major
33		Construction and Catastrophe), or by approval of the Parties pursuant to Section I.6.A (General Matters), the salaries, wages,
34		related payroll burdens and benefits, and Personal Expenses for Off-site Technical Services, including third party Technical
35		Services:
36
37		o   (Alternative 1 - All Overhead) shall be covered by the overhead rates.
38
39		o   (Alternative 2 - All Direct) shall be charged direct to the Joint Account.
40
41		þ   (Alternative 3 - Drilling Direct) shall be charged direct to the Joint Account, only to the extent such Technical Services
42		are directly attributable to drilling, redrilling, deepening, or sidetracking operations, through completion, temporary
43		abandonment, or abandonment if a dry hole. Off-site Technical Services for all other operations, including workover,
44		recompletion, abandonment of producing wells, and the construction or expansion of fixed assets not covered by Section
45		III.2 (Overhead · Major Construction and Catastrophe) shall be covered by the overhead rates.
46
47		Notwithstanding anything to the contrary in this Section III, Technical Services provided by Operator's Affiliates are subject to limitations
48		set forth in Section II.7 (Affiliates). Charges for Technical personnel performing non-technical work shall not be governed by this Section
49		III.1 .A. but instead governed by other provisions of this Accounting Procedure relating to the type of work being performed.
50
51	B.	OVERHEAD-FIXED RATE BASIS
52
53		(1)   The Operator shall charge the Joint Account at the following rates per well per month:
54
55		Drilling Well Rate per month $7,500.00 8,200.00  (prorated for less than a full month) / for wells drilled to a TVD of 4,200 feet or more.  5,000.00 for well drilled to a TVD of less than 4,200 feet
56
57		Producing Well Rate per month $750.00 $820.00 (prorated for less than a full month) /  for wells drilled to a TVD of 4,200 feet or more.  500.00 for wells drilled to a TVD of less than 4,200 feet.
58
59		(2)  Application of Overhead-Drilling Well Rate shall be as follows:
60
61		(a)    Charges for onshore drilling wells shall begin on the spudlocation work begins date / and terminate on the date the drilling and/or completion
62		equipment used on the well is released, whichever occurs later. Charges for offshore and inland waters drilling wells shall
63		begin on the date the drilling or completion equipment arrives on location and terminate on the date the drilling or completion
64		equipment moves off location, or is released, whichever occurs first. No charge shall be made during suspension of drilling
65		and/or completion operations for fifteen (15) or more consecutive calendar days.
66

10

COPAS 2005 Accounting Procedure Recommended by COPAS

1		(b)   Charges for any well undergoing any type of workover, recompletion, and/or abandonment for a period of five (5) or more
2		consecutive work-days shall be made at the Drilling Well Rate. Such charges shall be applied for the period from date
3		operations, with rig or other units used in operations, commence through date of rig or other unit release, except that no charges
4		shall be made during suspension of operations for fifteen (15) or more consecutive calendar days.
5
6		(3)  Application of Overhead-Producing Well Rate shall be as follows:
7
8		(a)   An active well that is produced, injected into for recovery or disposal, or used to obtain water supply to support operations for
9		any portion of the month shall be considered as a one-well charge for the entire month.
10
11		(b)   Each active completion in a multi-completed well shall be considered as a one-well charge provided each completion is
12		considered a separate well by the governing regulatory authority.
13
14		(c)   A one-well charge shall be made for the month in which plugging and abandonment operations are completed on any well,
15		unless the Drilling Well Rate applies, as provided in Sections III.1.B.(2)(a) or (b). This one-well charge shall be made whether
16		or not the well has produced.
17
18		(d)  An active gas well shut in because of overproduction or failure of a purchaser, processor, or transporter to take production shall
19		be considered as a one-well charge provided the gas well is directly connected to a permanent sales outlet.
20
21		(e)   Any well not meeting the criteria set forth in Sections III.1.B.(3) (a), (b), (c), or (d) shall not qualify for a producing overhead
22		charge.
23
24		(4)  The well rates shall be adjusted on the first day of April each year following the effective date of the Agreement; provided,
25		however, if this Accounting Procedure is attached to or otherwise governing the payout accounting under a farmout agreement, the
26		rates shall be adjusted on the first day of April each year following the effective date of such farmout agreement. The adjustment
27		shall be computed by applying the adjustment factor most recently published by COPAS. The adjusted rates shall be the initial or
28		amended rates agreed to by the Parties increased or decreased by the adjustment factor described herein, for each year from the
29		effective date of such rates, in accordance with COPAS MFI-47 ("Adjustment of Overhead Rates").
30
31	C.	OVERHEAD-PERCENTAGE BASIS
32
33		(1)  Operator shall charge the Joint Account at the following rates:
34
35		(a)   Development Rate ______ percent (_____ ) % of the cost of development of the Joint Property, exclusive of costs
36		provided under Section II.9 (Legal Expense) and all Material salvage credits.
37
38		(b)   Operating Rate _________percent (_____%) of the cost of operating the Joint Property, exclusive of costs
39		provided under Sections II.1 (Rentals and Royalties) and II.9 (Legal Expense); all Material salvage credits; the value
40		of substances purchased for enhanced recovery; all property and ad valorem taxes, and any other taxes and assessments that
41		are levied, assessed, and paid upon the mineral interest in and to the Joint Property.
42
43		(2)  Application of Overhead-Percentage Basis shall be as follows:
44
45		(a)   The Development Rate shall be applied to all costs in connection with:
46
47		[i]     drilling, redrilling, sidetracking, or deepening of a well
48		[ii]    a well undergoing plugback or workover operations for a period of five (5) or more consecutive work-days
49		[iii]   preliminary expenditures necessary in preparation for drilling
50		[iv]   expenditures incurred in abandoning when the well is not completed as a producer
51		[v]    construction or installation of fixed assets, the expansion of fixed assets and any other project clearly discernible as a
52		fixed asset, other than Major Construction or Catastrophe as defined in Section lli.2 (Overhead-Major Construction
53		and Catastrophe).
54
55		(b)   The Operating Rate shall be applied to all other costs in connection with Joint Operations, except those subject to Section III.2
56		(Overhead-Major Construction and Catastrophe).
57
58	2.	OVERHEAD-MAJOR CONSTRUCTION AND CATASTROPHE
59
60		To compensate the Operator for overhead costs incurred in connection with a Major Construction project or Catastrophe, the Operator
61		shall either negotiate a rate prior to the beginning of the project, or shall charge the Joint Account for overhead based on the following
62		rates for any Major Construction project in excess of the Operator's expenditure limit under the Agreement, or for any Catastrophe
63		regardless of the amount. If the Agreement to which this Accounting Procedure is attached does not contain an expenditure limit, Major
64		Construction Overhead shall be assessed for any single Major Construction project costing in excess of $100,000 gross.
65
66

11

COPAS 2005 Accounting Procedure Recommended by COPAS

1		Major Construction shall mean the construction and installation of fixed assets, the expansion of fixed assets, and any other project clearly
2		discernible as a fixed asset required for the development and operation of the Joint Property, or in the dismantlement, abandonment,
3		removal, and restoration of platforms, production equipment, and other operating facilities.
4
5		Catastrophe is defined as a sudden calamitous event bringing damage, loss, or destruction to property or the environment, such as an oil
6		spill, blowout, explosion, fire, storm, hurricane, or other disaster. The overhead rate shall be applied to those costs necessary to restore the
7		Joint Property to the equivalent condition that existed prior to the event.
8
9		A.  If the Operator absorbs the engineering, design and drafting costs related to the project:
10
11		(1)  5.0 % of total costs if such costs are less than $!00,000; plus
12
13		(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus
14
15		(3)   2.0 % of total costs in excess of $1,000,000.
16
17		B.   If the Operator charges engineering, design and drafting costs related to the project directly to the Joint Account:
18
19		(1)   5.0 % of total costs if such costs are less than $!00,000; plus
20
21		(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus
22
23		(3)   2.0 % of total costs in excess of $1,000,000.
24
25		Total cost shall mean the gross cost of any one project. For the purpose of this paragraph, the component parts of a single Major
26		Construction project shall not be treated separately, and the cost of drilling and workover wells and purchasing and installing pumping
27		units and downhole artificial lift equipment shall be excluded. For Catastrophes, the rates shall be applied to all costs associated with each
28		single occurrence or event.
29
30		On each project, the Operator shall advise the Non-Operator(s) in advance which of the above options shall apply.
31
32		For the purposes of calculating Catastrophe Overhead, the cost of drilling relief wells, substitute wells, or conducting other well operations
33		directly resulting from the catastrophic event shall be included. Expenditures to which these rates apply shall not be reduced by salvage or
34		insurance recoveries. Expenditures that qualify for Major Construction or Catastrophe Overhead shall not qualify for overhead under any
35		other overhead provisions.
36
37		In the event of any conflict between the provisions of this Section III.2 and the provisions of Sections II.2 (Labor), II.5 (Services), or II.7
38		(Affiliates), the provisions of this Section III.2 shall govern.
39
40	3.	AMENDMENT OF OVERHEAD RATES
41
42		The overhead rates provided for in this Section III may be amended from time to time if, in practice, the rates are found to be insufficient
43		Or excessive, in accordance with the provisions of Section I.6.B (Amendments).
44
45
46		IV. MATERIAL PURCHASES, TRANSFERS, AND DISPOSITIONS
47
48		The Operator is responsible for Joint Account Material and shall make proper and timely charges and credits for direct purchases, transfers, and
49		dispositions. The Operator shall provide all Material for use in the conduct of Joint Operations; however, Material may be supplied by the Non-
50		Operators, at the Operator's option. Material furnished by any Party shall be furnished without any express or implied warranties as to quality,
51		fitness for use, or any other matter.
52
53	1.	DIRECT PURCHASES
54
55		Direct purchases shall be charged to the Joint Account at the price paid by the Operator after deduction of all discounts received. The
56		Operator shall make good faith efforts to take discounts offered by suppliers, but shall not be liable for failure to take discounts except to
57		the extent such failure was the result of the Operator's gross negligence or willful misconduct A direct purchase shall be deemed to occur
58		when an agreement is made between an Operator and a third party for the acquisition of Material for a specific well site or location.
59		Material provided by the Operator under "vendor stocking programs," where the initial use is for a Joint Property and title of the Material
60		does not pass from the manufacturer, distributor, or agent until usage, is considered a direct purchase. If Material is found to be defective
61		or is returned to the manufacturer, distributor, or agent for any other reason, credit shall be passed to the Joint Account within sixty (60)
62		days after the Operator has received adjustment from the manufacturer, distributor, or agent.
63
64
65
66

12

COPAS 2005 Accounting Procedure Recommended by COPAS

1	2.	TRANSFERS
2
3		A transfer is determined to occur when the Operator (i) furnishes Material from a storage facility or from another operated property, (ii) has
4		assumed liability for the storage costs and changes in value, and (iii) has previously secured and held title to the transferred Material.
5		Similarly, the removal of Material from the Joint Property to a storage facility or to another operated property is also considered a transfer;
6		provided, however, Material that is moved from the Joint Property to a storage location for safe-keeping pending disposition may remain
7		charged to the Joint Account and is not considered a transfer. Material shall be disposed of in accordance with Section IV.3 (Disposition of
8		Surplus) and the Agreement to which this Accounting Procedure is attached.
9
10		A.   PRICING
11
12		The value of Material transferred to/from the Joint Property should generally reflect the market value on the date of physical transfer.
13		Regardless of the pricing method used, the Operator shall make available to the Non-Operators sufficient documentation to verify the
14		Material valuation. When higher than specification grade or size tubulars are used in the conduct of Joint Operations, the Operator
15		shall charge the Joint Account at the equivalent price for well design specification tubulars, unless such higher specification grade or
16		sized tubulars are approved by the Parties pursuant to Section l.6.A (General Matters). Transfers of new Material will be priced
17		using one of the following pricing methods; provided, however, the Operator shall use consistent pricing methods, and not alternate
18		between methods for the purpose of choosing the method most favorable to the Operator for a specific transfer:
19
20		(1)   Using published prices in effect on date of movement as adjusted by the appropriate COPAS Historical Price Multiplier (HPM)
21		or prices provided by the COPAS Computerized Equipment Pricing System (CEPS).
22
23		(a)    For oil country tubulars and line pipe, the published price shall be based upon eastern mill carload base prices (Houston,
24		Texas, for special end) adjusted as of date of movement, plus transportation cost as defined in Section IV.2.B (Freight).
25
26		(b)   For other Material, the published price shall be the published list price in effect at date of movement, as listed by a Supply
27		Store nearest the Joint Property where like Material is normally available, or point of manufacture plus transportation
28		costs as defined in Section IV.2.B (Freight).
29
30		(2)   Based on a price quotation from a vendor that reflects a current realistic acquisition cost.
31
32		(3)   Based on the amount paid by the Operator for like Material in the vicinity of the Joint Property within the previous twelve (12)
33		months from the date of physical transfer.
34
35		(4)   As agreed to by the Participating Parties for Material being transferred to the Joint Property, and by the Parties owning the
36		Material for Material being transferred from the Joint Property.
37
38		B.  FREIGHT
39
40		Transportation costs shall be added to the Material transfer price using the method prescribed by the COPAS Computerized
41		Equipment Pricing System (CEPS). If not using CEPS, transportation costs shall be calculated as follows:
42
43		(1)  Transportation costs for oil country tubulars and line pipe shall be calculated using the distance from eastern mill to the
44		Railway Receiving Point based on the carload weight basis as recommended by the COPAS MFI-38 ("Material Pricing
45		Manual") and other COPAS MFIs in effect at the time of the transfer.
46
47		(2)  Transportation costs for special mill items shall be calculated from that mill's shipping point to the Railway Receiving Point.
48		For transportation costs from other than eastern mills, the 30,000-pound interstate truck rate shall be used. Transportation costs
49		for macaroni tubing shall be calculated based on the interstate truck rate per weight of tubing transferred to the Railway
50		Receiving Point.
51
52		(3)  Transportation costs for special end tubular goods shall be calculated using the interstate truck rate from Houston, Texas, to the
53		Railway Receiving Point.
54
55		(4)  Transportation costs for Material other than that described in Sections IV.2.B.(l) through (3), shall be calculated from the
56		Supply Store or point of manufacture, whichever is appropriate, to the Railway Receiving Point
57
58		Regardless of whether using CEPS or manually calculating transportation costs, transportation costs from the Railway Receiving Point
59		to the Joint Property are in addition to the foregoing, and may be charged to the Joint Account based on actual costs incurred. All
60		transportation costs are subject to Equalized Freight as provided in Section II.4 (Transportation) of this Accounting Procedure.
61
62		C.  TAXES
63
64		Sales and use taxes shall be added to the Material transfer price using either the method contained in the COPAS Computerized
65		Equipment Pricing System (CEPS) or the applicable tax rate in effect for the Joint Property at the time and place of transfer. In either
66		case, the Joint Account shall be charged or credited at the rate that would have governed had the Material been a direct purchase.

13

COPAS 2005 Accounting Procedure Recommended by COPAS

1	D.	CONDITTON
2
3		(1)   Condition "A" - New and unused Material in sound and serviceable condition shall be charged at one hundred percent (100%)
4		of the price as determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes). Material transferred from the
5		Joint Property that was not placed in service shall be credited as charged without gain or loss; provided, however, any unused
6		Material that was charged to the Joint Account through a direct purchase will be credited to the Joint Account at the original
7		cost paid less restocking fees charged by the vendor. New and unused Material transferred from the Joint Property may be
8		credited at a price other than the price originally charged to the Joint Account provided such price is approved by the Parties
9		owning such Material, pursuant to Section I.6.A (General Matters). All refurbishing costs required or necessary to return the
10		Material to original condition or to correct handling, transportation, or other damages will be borne by the divesting property.
11		The Joint Account is responsible for Material preparation, handling, and transportation costs for new and unused Material
12		charged to the Joint Property either through a direct purchase or transfer. Any preparation costs incurred, including any internal
13		or external coating and wrapping, will be credited on new Material provided these services were not repeated for such Material
14		for the receiving property.
15
16		(2)   Condition "B" - Used Material in sound and serviceable condition and suitable for reuse without reconditioning shall be priced
17		by multiplying the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes) by seventy-five percent
18		(75%).
19
20		Except as provided in Section IV.2.0(3), all reconditioning costs required to return the Material to Condition "B" or to correct
21		handling, transportation or other damages will be borne by the divesting property.
22
23		If the Material was originally charged to the Joint Account as used Material and placed in service for the Joint Property, the
24		Material will be credited at the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes) multiplied
25		by sixty-five percent (65%).
26
27		Unless otherwise agreed to by the Parties that paid for such Material, used Material transferred from the Joint Property that was
28		not placed in service on the property shall be credited as charged without gain or loss.
29
30		(3)   Condition "C" - Material that is not in sound and serviceable condition and not suitable for its original function until after
31		reconditioning shall be priced by multiplying the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C
32		(Taxes) by fifty percent (50%).
33
34		The cost of reconditioning may be charged to the receiving property to the extent Condition "C" value, plus cost of
35		reconditioning, does not exceed Condition "B" value.
36
37		(4)   Condition ''D" - Material that (i) is no longer suitable for its original purpose but useable for some other purpose, (ii) is
38		obsolete, or (iii) does not meet original specifications but still has value and can be used in other applications as a substitute for
39		items with different specifications, is considered Condition "D" Material. Casing, tubing, or drill pipe used as line pipe shall be
40		priced as Grade A and B seamless line pipe of comparable size and weight. Used casing, tubing, or drill pipe utilized as line
41		pipe shall be priced at used line pipe prices. Casing, tubing, or drill pipe used as higher pressure service lines than standard line
42		pipe, e.g., power oil lines, shall be priced under normal pricing procedures for casing, tubing, or drill pipe. Upset tubular goods
43		shall be priced on a non-upset basis. For other items, the price used should result in the Joint Account being charged or credited
44		with the value of the service rendered or use of the Material, or as agreed to by the Parties pursuant to Section 1.6.A (General
45		Matters).
46
47		(5)   Condition "E" -Junk shall be priced at prevailing scrap value prices.
48
49	E.	OTHER PRICING PROVISIONS
50
51		(1)   Preparation Costs
52
53		Subject to Section II (Direct Charges) and Section III (Overhead) of this Accounting Procedure, costs incurred by the Operator
54		in making Material serviceable including inspection, third party surveillance services, and other similar services will be charged
55		to the Joint Account at prices which reflect the Operator's actual costs of the services. Documentation must be provided to the
56		Non-Operators upon request to support the cost of service. New coating and/or wrapping shall be considered a component of
57		the Materials and priced in accordance with Sections IV.l (Direct Purchases) or IV.2.A (Pricing), as applicable. No charges or
58		credits shall be made for used coating or wrapping. Charges and credits for inspections shall be made in accordance with
59		COPAS MFl-38 ("Material Pricing Manual").
60
61		(2)   Loading and Unloading Costs
62
63		Loading and unloading costs related to the movement of the Material to the Joint Property shall be charged in accordance with
64		the methods specified in COPAS MFI-38 ("Material Pricing Manual").
65
66

14

COPAS 2005 Accounting Procedure Recommended by COPAS

1	3.	DISPOSITION OF SURPLUS
2
3		Surplus Material is that Material, whether new or used, that is no longer required for Joint Operations. The Operator may purchase, but
4		shall be under no obligation to purchase, the interest of the Non-Operators in surplus Material.
5
6		Dispositions for the purpose of this procedure are considered to be the relinquishment of title of the Material from the Joint Property to
7		either a third party, a Non-Operator, or to the Operator. To avoid the accumulation of surplus Material, the Operator should make good
8		faith efforts to dispose of surplus within twelve (12) months through buy/sale agreements, trade, sale to a third party, division in kind, or
9		other dispositions as agreed to by the Parties.
10
11		Disposal of surplus Materials shall be made in accordance with the terms of the Agreement to which this Accounting Procedure is
12		attached. If the Agreement contains no provisions governing disposal of surplus Material, the following terms shall apply:
13
14		▪     The Operator may, through a sale to an unrelated third party or entity, dispose of surplus Material having a gross sale value that
15		is less than or equal to the Operator's expenditure limit as set forth in the Agreement to which this Accounting Procedure is
16		attached without the prior approval of the Parties owning such Material.
17
18		▪      If the gross sale value exceeds the Agreement expenditure limit, the disposal must be agreed to by the Parties owning such
19		Material.
20
21		▪      Operator may purchase surplus Condition "A" or "B" Material without approval of the Parties owning such Material, based on
22		the pricing methods set forth in Section IV.2 (Transfers).
23
24		▪      Operator may purchase Condition "C' Material without prior approval of the Parties owning such Material if the value of the
25		Materials, based on the pricing methods set forth in Section IV.2 (Transfers), is less than or equal to the Operator's expenditure
26		limitation set forth in the Agreement. The Operator shall provide documentation supporting the classification of the Material as
27		Condition C.
28
29		▪      Operator may dispose of Condition "D" or "E" Material under procedures normally utilized by Operator without prior approval
30		of the Parties owning such Material.
31
32	4.	SPECIAL PRICING PROVISIONS
33
34		A.    PREMIUM PRICING
35
36		Whenever Material is available only at inflated prices due to national emergencies, strikes, government imposed foreign trade
37		restrictions, or other unusual causes over which the Operator has no control, for direct purchase the Operator may charge the Joint
38		Account for the required Material at the Operator's actual cost incurred in providing such Material, making it suitable for use, and
39		moving it to the Joint Property. Material transferred or disposed of during premium pricing situations shall be valued in accordance
40		with Section IV.2 (Transfers) or Section IV.3 (Disposition of Surplus), as applicable.
41
42		B.     SHOP-MADE ITEMS
43
44		Items fabricated by the Operator's employees, or by contract laborers under the direction of the Operator, shall be priced using the
45		value of the Material used to construct the item plus the cost of labor to fabricate the item. If the Material is from the Operator's
46		scrap or junk account, the Material shall be priced at either twenty-five percent (25%) of the current price as determined in Section
47		IV.2.A  (Pricing)  or  scrap  value,  whichever  is  higher.  In  no  event  shall  the  amount  charged  exceed  the  value  of  the  item
48		commensurate with its use.
49
50		C.     MILL REJECTS
51
52		Mill rejects purchased as "limited service" casing or tubing shall be priced at eighty percent (80%) of K-55/J-55 price as determined in
53		Section IV.2 (Transfers). Line pipe converted to casing or tubing with casing or tubing couplings attached shall be priced as K-55/J-
54		55 casing or tubing at the nearest size and weight.
55
56
57		V. INVENTORIES OF CONTROLLABLE MATERIAL
58
59
60		The Operator shall maintain records of Controllable Material charged to the Joint Account, with sufficient detail to perform physical inventories.
61
62		Adjustments to the Joint Account by the Operator resulting from a physical inventory of Controllable Material shall be made within twelve (12)
63		months following the taking of the inventory or receipt of Non-Operator inventory report. Charges and credits for overages or shortages will be
64		valued for the Joint Account in accordance with Section IV.2 (Transfers) and shall be based on the Condition "B" prices in effect on the date of
65		physical inventory unless the inventorying Parties can provide sufficient evidence another Material condition applies.
66

15

COPAS 2005 Accounting Procedure Recommended by COPAS

1	1.	DIRECTED INVENTORIES
2
3		Physical inventories shall be performed by the Operator upon written request of a majority in working interests of the Non-Operators
4		(hereinafter, "directed inventory"); provided, however, the Operator shall not be required to perform directed inventories more frequently
5		than once every five (5) years. Directed inventories shall be commenced within one hundred eighty (180) days after the Operator receives
6		written notice that a majority in interest of the Non-Operators has requested the inventory. All Parties shall be governed by the results of
7		any directed inventory.
8
9		Expenses of directed inventories will be borne by the Joint Account; provided, however, costs associated with any post-report follow-up
10		work in settling the inventory will be absorbed by the Party incurring such costs. The Operator is expected to exercise judgment in keeping
11		expenses within reasonable limits. Any anticipated disproportionate or extraordinary costs should be discussed and agreed upon prior to
12		commencement of the inventory. Expenses of directed inventories may include the following:
13
14		A.   A per diem rate for each inventory person, representative of actual salaries, wages, and payroll burdens and benefits of the personnel
15		performing the inventory or a rate agreed to by the Parties pursuant to Section I.6.A (General Matters). The per diem rate shall also
16		be applied to a reasonable number of days for pre-inventory work and report preparation.
17
18		B.   Actual transportation costs and Personal Expenses for the inventory team
19
20		C.   Reasonable charges for report preparation and distribution to the Non-Operators.
21
22	2.	NON-DIRECTED INVENTORIES
23
24		A.   OPERATOR INVENTORIES
25
26		Physical inventories that are not requested by the Non-Operators may be performed by the Operator, at the Operator's discretion. The
27		expenses of conducting such Operator-initiated inventories shall not be charged to the Joint Account.
28
29		B.    NON-OPERATOR INVENTORIES
30
31		Subject to the terms of the Agreement to which this Accounting Procedure is attached, the Non-Operators may conduct a physical
32		inventory at reasonable times at their sole cost and risk after giving the Operator at least ninety (90) days prior written notice. The
33		Non-Operator inventory report shall be furnished to the Operator in writing within ninety (90) days of completing the inventory
34		fieldwork.
35
36		C.   SPECIAL INVENTORIES
37
38		The expense of conducting inventories other than those described in Sections V.1 (Directed Inventories), V.2.A (Operator
39		Inventories), or V.2.B (Non-Operator Inventories), shall be charged to the Party requesting such inventory; provided, however,
40		inventories required due to a change of Operator shall be charged to the Joint Account in the same manner as described in Section
41		V.1 (Directed Inventories).
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66

16

EXHIBIT  "D"

Attached to and made a part of that certain Operating Agreement dated effective September 30, 2013, by and between PetroShare Corp as Operator, and Rancher Energy Corp, US Energy Development Co., and Royale Investments, LLC as Non-Operators.

INSURANCE

As to all operations hereunder, Operator shall carry for the benefit and protection of the parties hereto the following insurance coverage:

    (i)  Worker's Compensation or Employer's Liability Insurance as required by the laws of the states in which the operations are conducted.

    (ii) Comprehensive General Liability Insurance, including contractual liability, with a combined single limit per occurrence of not less than $1,000,000 for bodily injury and property damage and a combined occurrence limit of $2,000,000.

   (iii) Comprehensive Automobile Insurance, including hired and non-owned vehicles, with a combined single limit per occurrence of not less than $1,000,000 for bodily injury and property damage.

   (iv) Liability Umbrella Insurance (excess of underlying insurance coverage mentioned above) with a combined limit per occurrence coverage of not less than $5,000,000.

The cost of the foregoing insurance coverage shall be charged to the parties pursuant to the Accounting Procedure (Exhibit "C") as follows: item (i) will be included in labor rates, items (ii) and (iv) will be charged to the joint account, and item (iii) is included in mileage rates.

If a Non-Operator wishes to obtain its own insurance coverage for any of the above categories, such party shall provide Operator with a certificate evidencing such coverage. In such event, Operator shall not invoice such party for its share of the cost of that particular coverage. Additionally, all such insurance coverages and all of the insurance coverages described above shall contain a waiver of subrogation in favor of all other parties hereto.

Each party may obtain its own well control or OEE insurance for its proportionate share of such obligation and provide Operator with a certificate evidencing such coverage. In the event a Non-Operator wishes to be covered under Operators OEE insurance, it shall give the Operator its written election to be covered under Operators policy and it shall be responsible for its proportionate share of such premiums and associated deductible expense and receive the coverage benefits as provided under such policy.

To the extent not covered by the aforementioned insurance, the liability of the parties hereto for damages or claims arising out of illness or personal injury to or death of any person or damage to or destruction or loss of property of any person or entity resulting from operations conducted hereunder shall be borne by the parties hereto in the proportions in which they bear the costs of such operations. Additionally, Operator shall not be liable to Non-Operator for damage to or for loss or destruction of jointly owned property from operations hereunder, unless such damage, loss, or destruction arises solely out of the gross negligence or willful misconduct of Operator.

EXHIBIT H

MEMORANDUM OF OPERATING AGREEMENT AND FINANCING STATEMENT

Attached to and a made part of that certain Joint Operating Agreement dated September 30, 2013, between PetroShare Corp., Operator, and the signatory parties thereto, Non-Operators.

1.0 This Memorandum of Operating Agreement and Financing Statement (hereinafter called "Memorandum") shall be effective when the Operating Agreement referred to in Paragraph2.0 below becomes effective, that being September 30, 2013.

2.0 The parties hereto have entered into an Operating Agreement, providing for the development and production of crude oil, natural gas and associated substances from Buck Peak, (hereinafter called the "Contract Area"), and designating PetroShare Corp., as Operator to conduct such operations.

3.0 The Operating Agreement provides for certain liens and/or security interests to secure payment by the parties of their respective share of costs under the Operating Agreement. The Operating Agreement contains an Accounting Procedure along with other provisions which supplement the lien and/or security interest provisions, including non-consent clauses which provide that parties who elect not to participate in certain operations shall be deemed to have relinquished their interest until the consenting parties are able to recover their costs of such operations plus a specified amount. Should any person or firm desire additional information regarding the Operating Agreement or wish to inspect a copy of the Operating Agreement, said person or firm should contact the Operator.

4.0 The purpose of this Memorandum is to more fully describe and implement the liens and/or security interests provided for in the Operating Agreement, and to place third parties on notice thereof.

5.0  In consideration of the mutual rights and obligations of the parties hereunder, the parties hereto agree as follows:

5.1     The Operator shall conduct and direct and have full control of all Operations on the Contract Area as permitted and required by, and within the limits of the Operating Agreement.

5.2     The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations and shall be liable only for its proportionate share of costs.

5.3     Each Non-Operator grants to Operator a lien upon its oil and gas rights in the Contract Area, and a security interest in its share of oil and or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate provided in the Accounting Procedure referred to in Paragraph 3.0 above. To the extent that Operator has a security interest under the Uniform Commercial Code of the state, Operator shall be entitled to exercise the rights and remedies of a secured party under the Code. The bringing of a suit and the obtaining of judgment by Operator for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the rights or security interest for the payment thereof.

5.4     The Operator grants to Non-Operator a lien and security interest equivalent to that granted to Operator as described in Paragraph 5.3 above, to secure payment by Operator of its own share of costs when due.

6.0  For purposes of protecting said liens and security interest, the parties hereto agree that this Memorandum shall cover all right, title and interest of the debtor(s) in:

6.1     Property  Subject to Security Interests

(A)     All personal property located upon or used in connection with the Contract Area.

(B)      All fixtures on the Contract Area.

(C)      All oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom.

(D)     All accounts resulting from the sale of the items described in subparagraph(c) at the wellhead of every well located on the Contract Area or on lands pooled therewith.

(E)      All items used, useful, or purchased for the production, treatment, storage, transportation, manufacture, or sale of the items described in subparagraph (c).

(F)     All accounts, contract rights, rights under any gas balancing agreement, general intangibles, equipment, inventory, farmout rights,  option farmout rights, acreage and or cash contributions, and conversion rights, whether now owned or existing or hereafter acquired or arising, including but not limited to all interest in any partnership, limited partnership, association, joint venture, or other entity or enterprise that holds, owns, or controls any interest in the Contract Area or in any property encumbered by this Memorandum.

(G)     All severed and extracted oil, gas, and associated  substances now or hereafter produced from or attributable to the Contract Area, including without limitation oil, gas and associated substances in tanks or pipelines or otherwise held for treatment, transportation, manufacture, processing or sale.

(H)     All the proceeds and products of the items described in the foregoing paragraphs now existing or hereafter arising, and all substitutions therefor, replacements thereof, or accessions thereto.

(I)      All personal property and  fixtures  now  and  hereafter  acquired  in furtherance of the purpose of this Operating Agreement. Certain of the above-described items are or are to become fixtures on the Contract Area.

(J)      The proceeds and products of collateral are also covered.

6.2     Property Subject to Liens

(A)     All real property within the Contract Area, including all oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom.

(B)      All fixtures within the Contract Area.

(C)      All real property and fixtures now and hereafter acquired in furtherance of the purposes of this Operating Agreement.

7.0 The above items will be financed at the wellhead of the well  or wells  located  on the Contract Area, and this Memorandum is to be filed for record in the real estate records of the county or counties in which the Contract Area is located, and in the Uniform Commercial Code records. All parties who have executed the Operating Agreement are also parties hereto.

8.0  On default of any covenant or condition of the Operating Agreement,  in addition to any other remedy afforded by law or the practice of this state, each party to the agreement and any successor to such party by assignment, operation or law, or otherwise, shall have, and is hereby given and vested with, the power and authority to take possession of and sell any interest which the defaulting party has in the subject lands and to foreclose this lien in the manner provided by law.

9.0 Upon expiration of the subject Operating Agreement and the satisfaction of all debts, the Operator shall file of record a release and termination on behalf of all parties concerned. Upon the filing of such release and termination, all benefits and obligations under this Memorandum shall terminate as to all parties who have executed or ratified this Memorandum. In addition, the Operator shall have the right to file a continuation statement on behalf of all parties who have executed or ratified this Memorandum.

10.0 It is understood and agreed by the parties hereto that if any part, term or provision of this Memorandum is by the courts held to be illegal or in conflict with any law of the state where made the validity of the remaining portions or provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Memorandum did not contain the particular part, term or provision held to be invalid.

11.0  This Memorandum shall be binding upon and shall inure to the benefit of the parties hereto and to their respective heirs, devisees, legal representatives, successors and assigns. The failure of one or more persons owning an interest in the Contract Area to execute this Memorandum shall not in any manner affect the validity of the Memorandum as to those persons who have executed this Memorandum.·

12.0  A party having an interest in the Contract Area can ratify this Memorandum by execution and delivery of an instrument of ratification, adopting and entering into this Memorandum, and such ratification shall have the same effect as if the ratifying party had executed this Memorandum or a counterpart thereof. By execution or ratification of this Memorandum, such party hereby consents to its ratification and adoption by any party who may have or may acquire any interest in the Contract Area.

13.0 This Memorandum may be executed or ratified in one or more counterparts and all of the executed or ratified counterparts shall together constitute one instrument.  For the purposes

of recording, only one copy of this Memorandum with individual signature pages attached thereto needs to be filed of record.

ATTEST OR WITNESS:	OPERATOR PetroShare Corporation
	By:
	Type or print name
	Title
	Date:

ATTEST OR WITNESS:	NON-OPERATORS  U.S. Energy Development Corporation
	By:
	Type or print name
	Title:
	Date:

 

ATTEST OR WITNESS:	NON-OPERATORS
	By:
	Type or print name
	Date:

ACKNOWLEDGMENTS

Note:           The following forms of acknowledgment  are short forms approved by the Uniform Law on Notarial Acts.  The validity and effect of these forms in any state will depend upon the statutes of that state.

ACKNOWLEDGMENT  IN REPRESENTATIVE  CAPACITY:

STATE OF	)
	)ss.
COUNTY OF	)

This instrument was acknowledged before me on ______________________________, 2013, by

___________________________________________________________________________,

My commission expires:

Notary Public

STATE OF	)
	)ss.
COUNTY OF	)

This instrument was acknowledged before me on ______________________________, 2013, by

___________________________________________________________________________,

My commission expires:

Notary Public

INDIVIDUAL ACKNOWLEDGMENT:

STATE OF	)
	)ss.
COUNTY OF	)

This instrument was acknowledged before me on ______________________________, 2013, by

___________________________________________________________________________,

My commission expires:

Notary Public