FUNDING AGREEMENT FOR TIER I DEVELOPMENT PROJECT
AMONG
HONDO MAGDALENA OIL & GAS LIMITED
OPON DEVELOPMENT COMPANY
AND
AMOCO COLOMBIA PETROLEUM COMPANY
May 5, 1995
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FUNDING AGREEMENT FOR TIER I DEVELOPMENT PROJECT
This Agreement made as of the 5th day of May, 1995 among Amoco Colombia
Petroleum Company (hereinafter referred to as "AMOCO"), a company
incorporated in Delaware, U.S.A., having offices at 200 Randolph Drive,
Chicago, Illinois 60601; Hondo Magdalena Oil & Gas Limited, (hereinafter
called "HONDO"), a company duly organized and existing under the laws of
the Island of Jersey, Channel Islands, having its principal office at
410 East College Boulevard, Roswell, New Mexico 88201, U.S.A.; and Opon
Development Company, (hereinafter called "ODC"), a partnership duly
formed and existing under the laws of the State of Colorado, U.S.A.,
having its principal offices at 1675 Broadway, Suite 1050, Denver,
Colorado 80202, hereinafter called a Party or the Parties.
WITNESSETH
A. WHEREAS, as of this date, AMOCO holds a sixty percent (60%)
undivided participating interest, ODC holds a ten percent (10%)
undivided participating interest, and HONDO holds a thirty percent
(30%) undivided participating interest in the Opon Association
Contract with Empresa Colombiana de Petroleos ("Ecopetrol"), in the
Republic of Colombia ("the Opon Association Contract").
B. WHEREAS, AMOCO, HONDO and ODC have entered into appropriate Farmout
and Operating Agreements dated August 9, 1993 providing for their
respective right and obligations to conduct operations under the
Opon Association Contract.
C. WHEREAS, HONDO, ODC and AMOCO have discussed the possibility of
Amoco providing assistance with funding HONDO's and ODC's
proportionate share of the proposed Budget for the expenditures
necessary to complete the Tier I Development Project as defined
herein and AMOCO is prepared to extend financing to ODC and HONDO
subject to the terms and conditions established in this Agreement.
NOW THEREFORE, in consideration of the mutual promises contained herein
the Parties agree as follows:
1. AMOCO will pay HONDO's and ODC's proportionate share of
expenditures incurred for the proposed seismic programs, pipeline,
treating facilities, buildings and other construction expenditures
associated with the Tier I Development Project and operating
expenses including overhead, during the period of October 1, 1994
to the date one year after the date of first production and sales
through the pipeline ("First Production") from the Opon Field as
provided herein. The Tier I Development Project are those works and
related expenditures defined in Exhibit A attached hereto.
2. During the period up to the date of First Production, HONDO and ODC
will have the option to reimburse AMOCO for all spending described
in Paragraph 1 above, made on their behalf for the Tier I
Development Project (including their share of any expenditures made
by AMOCO on behalf of Ecopetrol's interest in the Tier I
Development Project) plus an equity premium equivalent to one and
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sixty-seven one-hundredths percent (1.67%) interest compounded
monthly (twenty-two percent (22%) annualized interest) before tax
on all such expenditures incurred through the date of reimbursement
to AMOCO from the time funds are disbursed on HONDO and ODC's
behalf. If HONDO and ODC reimburse AMOCO during the period up to
the date of First Production, HONDO and ODC shall pay AMOCO any
equity premiums to which AMOCO is entitled and any sums advanced by
AMOCO pursuant to this Agreement in cash. After Amoco has been
reimbursed according to the terms of this paragraph, Hondo and ODC
will assume full responsibility for funding their shares of all
future Tier I Development Project expenses under the terms of the
Joint Operating Agreement among AMOCO, HONDO and ODC dated August
9, 1993.
3. During the period from the date of First Production through the
365th day after the date of First Production, HONDO and ODC will
have the option to reimburse AMOCO for all spending, described in
Paragraph 1 above, made on their behalf for the Tier I Development
Project (including their share of any expenditures made by AMOCO on
behalf of Ecopetrol's interest in the Tier I Development Project)
plus an equity premium equivalent to one and sixty-seven
one-hundredths percent (1.67%) interest compounded monthly
(twenty-two percent (22%) annualized interest) before tax on all
such expenditures incurred through the date of reimbursement to
AMOCO from the time funds are disbursed on HONDO's and ODC's
behalf. If HONDO and ODC reimburse AMOCO during the period after
the date of First Production through the 365th day after the date
of First Production, HONDO and ODC shall pay AMOCO any equity
premiums to which AMOCO is entitled and/or any sums advanced by
AMOCO pursuant to this Agreement in cash. Any outstanding balance
of sums advanced by AMOCO and premium due to AMOCO shall be reduced
by, and until any outstanding balance has been reimbursed AMOCO
shall be entitled to, (i) HONDO's and ODC's share of production
revenues from sales of the first 80 mmcfd natural gas and
corresponding condensate and natural gas liquids from the Opon
Structure as defined in Exhibit D, (ii) HONDO's and ODC's share of
all tariff revenues pertaining to that first 80 mmcfgd received by
AMOCO as Operator of the Opon Association Contract Area from
transporters of gas through the Tier I Development Project
pipeline, and (iii) HONDO's and ODC's share of Ecopetrol's
reimbursement pertaining to the Tier I Development Project, as
revenues are received. After Amoco has been reimbursed according to
the terms of this paragraph, Hondo and ODC will assume full
responsibility for funding their shares of all future Tier I
Development Project expenses under the terms of the Joint Operating
Agreement among AMOCO, HONDO and ODC dated August 9, 1993 and
revisions to that Operating Agreement.
4. From the date of First Production through the 90th day of
production, HONDO and ODC will have the option to reimburse AMOCO
for all spending, described in Paragraph 1 above, made on their
behalf for the Tier I Development Project (excluding their share of
any expenditures made by AMOCO on behalf of Ecopetrol's interest in
the Tier I Development Project) plus an equity premium equivalent
to twenty-five percent (25%) of all such expenditures incurred
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through the date of reimbursement to AMOCO. If HONDO and ODC
reimburse AMOCO during the period from the date of First Production
through the 90th day of production, HONDO and ODC shall pay AMOCO
any equity premiums to which AMOCO is entitled and any sums
advanced by AMOCO pursuant to this Agreement in cash. The sum of
all expenditures made by AMOCO on behalf of HONDO and ODC and
premium due to AMOCO shall be reduced by, and until any outstanding
balance has been reimbursed AMOCO shall be entitled to, (i) HONDO's
and ODC's share of production revenues from sales of the first 80
mmcfd natural gas and corresponding condensate and natural gas
liquids from the Opon Structure as defined in Exhibit D, (ii)
HONDO's and ODC's share of all tariff revenues pertaining to the
first 80 mmcfgd received by AMOCO as Operator of the Opon
Association Contract Area from transporters of gas through the Tier
I Development Project pipeline as of the date of reimbursement, and
(iii) HONDO's and ODC's share of Ecopetrol's reimbursement
pertaining to the Tier I Development Project. After Amoco has been
reimbursed according to the terms of this paragraph, Hondo and ODC
will assume full responsibility for funding their shares of all
future Tier I Development Project expenses under the terms of the
Joint Operating Agreement among AMOCO, HONDO and ODC dated August
9, 1993.
5. If after 365 days past the date of First Production HONDO and ODC
have not reimbursed AMOCO for all Tier I Development Project
expenditures plus any equity premium as stated above, HONDO and ODC
will reimburse AMOCO as follows. The total expenditures made on
behalf of HONDO and ODC (including their share of any expenditures
made by AMOCO on behalf of Ecopetrol's interest in the Tier I
Development Project) shall be computed on the date of First
Production. The balance referred to in this paragraph shall be
increased after the date of First Production by (a) any additional
expenditures on behalf of HONDO and ODC to the extent such
expenditures exceed revenues during the month of expenditure, and
(b) an equity premium equivalent to one and sixty-seven
one-hundredths percent (1.67%) interest compounded monthly
(twenty-two percent (22%) annualized interest) before tax from the
time funds are disbursed. Such balance shall be similarly decreased
by (a) any revenues (including any tariffs or reimbursements from
Ecopetrol) before tax net of royalties and expenditures
attributable to HONDO's and ODC's interest, in the first 80 mmcfd
natural gas and corresponding condensate and natural gas liquids
produced from the Opon Structure defined in Exhibit D, and (b) any
partial payments made by HONDO and ODC. Such increases and
decreases shall be applied to such balance as they occur. On the
366th day after the date of First Production such balance shall
then be subject to a 100% equity premium. Until such balance plus a
100% equity premium has been reimbursed to AMOCO on an after-tax
basis as defined in Paragraph 6, AMOCO shall be entitled to HONDO's
and ODC's share of production revenues from sales of the first 80
mmcfd natural gas and corresponding condensate and natural gas
liquids from the Opon Structure defined on Exhibit D, HONDO's and
ODC's share of all tariff revenues received by Amoco as operator of
the Opon Association Contract Area from transporters of gas through
the Tier I Development Project pipeline attributable to the above
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mentioned first 80 mmcfgd, and HONDO's and ODC's share of Ecopetrol
reimbursements to the Association.
6. The after-tax payback of expenditures and premium described in the
above Paragraph 5 will be calculated using only production revenue,
transportation tariffs, and expenditures associated with the first
tranche of 80 mmcfd gross gas sales from the Opon Structure as
defined in Exhibit D. Such after-tax payback shall be calculated by
applying Colombian taxes to AMOCO's Colombian taxable income under
Colombian law that would result from a calculation using only
HONDO's and ODC's proportionate share of the revenue from
production and transportation tariffs associated with the first
tranche of 80 mmcfd gross gas sales from the Opon Structure as
defined in Exhibit D and the expenditures made on the behalf of
HONDO and ODC. In the event such revenues are available, HONDO and
ODC have the option to apply revenues associated with production in
excess of the first tranche of 80 mmcfd gross gas sales to the
payback of the Tier I Development Project in the same manner as
above.
7. AMOCO's funding of ODC's and HONDO's proportionate share of
expenditures as provided herein, shall be secured by HONDO's and
ODC's respective share of the first 80 mmcfd natural gas and
corresponding condensate and natural gas liquids production from
the Opon Structure as defined in Exhibit D.
8. HONDO and ODC hereby cast their affirmative vote under the Opon
Association Contract and that certain Operating Agreement among
AMOCO, HONDO and ODC dated August 9, 1993, to declare commerciality
of the field once the Opon #4 Well has been drilled and tested. The
Parties shall meet to mutually agree on an acceptable development
program to be presented to Ecopetrol.
9. The Parties agree and hereby incorporate the following change to
the Joint Operating Agreement among HONDO, ODC and AMOCO:
(a) The provisions contained in Article 14.2 of the Joint
Operating Agreement and Clause 14(m) of the Farmout Agreement
among the Parties are deleted hereby. For United States
Federal Income Tax purposes, this Agreement and the operations
under this Agreement, the Farmout and Joint Operating
Agreements are regarded as a partnership, the parties hereby
elect to be included in the application of all of the
provisions of Sub-Chapter K, Chapter 1, Sub-Title A of the
United States Internal Revenue Code of 1986, as amended.
AMOCO as Operator is authorized and directed to execute for
each Party such evidence of this election as may be required
by the Internal Revenue Service. No party shall give any
notice or take any other action inconsistent with the election
made hereby. The tax partnership created pursuant to this
Agreement shall be regulated pursuant to terms and conditions
established by a Tax Partnership Agreement that the Parties
shall promptly negotiate in good faith, and attach to this
Agreement as Exhibit C.
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(b) Except for the foregoing modification contained herein, the
remaining provision of the Farmout and Joint Operating
Agreements among AMOCO, HONDO and ODC shall remain in full
force and effect.
(c) Also, since the Parties desire to introduce some additional
changes to the Joint Operating Agreement among AMOCO, HONDO
and ODC, the parties shall meet as soon as possible to
negotiate in good faith such changes.
10. The Parties shall immediately negotiate and enter into a mutually
acceptable Lifting Agreement to produce and sell the hydrocarbons
(including natural gas liquids and condensate) produced from the
field under the Opon Association Contract. However, until the time
when the Parties execute such Lifting Agreement, AMOCO shall have
the right to lift and sell, domestically or internationally,
HONDO's and ODC's share of hydrocarbons including natural gas
liquids and condensate produced from the Opon Field, at El Centro
Gas Processing Plant and/or other facilities and account therefor.
Thereafter, the Parties shall comply with the provisions of such
Lifting Agreement.
11. The Parties shall be reimbursed by Ecopetrol pursuant to the terms
of the Association Contract, first for the Parties' costs,
expenditures and overhead for the Tier I Development Project as
established in this Agreement.
12. HONDO and ODC hereby cast their affirmative vote to AMOCO's
proposed Budget for the expenditures necessary to complete the Tier
I Development Project which is attached herein as Exhibit B to this
Agreement.
13. Each of the Parties may separately exercise the alternative options
described in Paragraphs 2, 3 and 4, without reference to the
actions taken by the other Parties. The obligations of the Parties
are several and not joint.
14. The choice of law and dispute resolution provisions of the Farmout
and Joint Operating Agreement among HONDO, ODC and AMOCO shall
apply to this Agreement and as applicable the remaining provisions
of such Agreements.
15. This Agreement is contingent upon the Parties executing a
Memorandum of Understanding with Ecopetrol to proceed with the
construction of the pipeline from the Opon Field to Ecopetrol's
refinery in Barrancabermeja, Colombia and the corresponding gas
processing facilities which are part of the Tier I Development
Project as described herein. Therefore, this Agreement shall
become effective on the date the Parties execute such Memorandum of
Understanding with Ecopetrol.
16. AMOCO, HONDO and ODC each, respectively, as to its own interests
represent and warrant to the others that they have the power and
authority to enter into and perform the obligations undertaken by
them under this Agreement and their doing so will not violate, nor
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constitute a default or breach under, any law, contract, loan
arrangement, corporate authority or restriction applicable to each
of them or to which each of them is a party and the persons
executing this Agreement on their behalf are legally authorized to
do so.
17. Payments in kind and production revenue reimbursements as
contemplated herein shall follow the principals of the Joint
Operating Agreement. Any reimbursement in currency under this
Agreement shall be made in U.S. Dollars.
18. AMOCO will provide to HONDO and ODC monthly statements showing
disbursements made and equity premium accrued for the Tier I
Development Program.
19. Where revenues are used to reduce any outstanding balance pursuant
to this Agreement, it is the intent of the Parties to deduct excise
taxes actually paid before reducing such outstanding balance.
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THIS AGREEMENT may be executed in counterparts each of which when
executed and delivered shall be an original but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the duly
authorized representatives of the Parties as of the day of and year
first above written.
HONDO MAGDALENA OIL & GAS LIMITED
By: /s/ C.B. McDaniel
---------------------------------
C. B. McDanlel
Title: General Counsel and Assistant Secretary
Date: May 5, 1995
---------------------------------
AMOCO COLOMBIA PETROLEUM COMPANY
By: /s/ T.W. Melson
---------------------------------
Title: Attorney In Fact
---------------------------------
Date: May 5, 1995
---------------------------------
OPON DEVELOPMENT COMPANY
BY: /s/ Douglas K. Childs
---------------------------------
Title: President of Childs Petroleum Corporation,
General Partner Chase Petroleum Ltd., General
Partner of Chase Opon Ltd., Managing General
Partner of Opon Development Company.
Date: May 5, 1995
---------------------------------
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EXHIBIT A
TIER I DEVELOPMENT PROJECT
The Tier I Development comprises all expenditures related to the
construction and operation of facilities required to make gas sales into
the local Colombian gas market. These facilities include field flowlines
and production treating facilities, a pipeline to Barrancabermeja,
upgrade of gas processing facilities at Ecopetrol's El Centro plant, and
construction of a permanent warehouse and personnel housing at the field
location. All expenditures for geological and geophysical work,
including 2D and 3D seismic surveys, are also included in the Tier I
Development Project. The Tier I Development Project includes:
Flowlines and pipeline to Barrancabermeja (16" pipeline via El Centro)
El Centro processing equipment and storage upgrades
Opon Field treating facilities
Geological and geophysical work programs
Other construction, including field warehouse and housing
Operating expenses, including overhead
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