EXHIBIT 10.6
THIRD AMENDMENT TO PARTICIPATION AGREEMENT DATED
OCTOBER 4, 2005
THIRD AMENDMENT TO PARTICIPATION AGREEMENT
THIS THIRD AMENDMENT TO PARTICIPATION AGREEMENT ("Third Amendment") is
entered into this 4th day of October, 2005, by and between Dolphin Energy
Corporation, a Nevada corporation, with offices at 1331 17th Street, Suite 730,
Denver, Colorado 80202 ("Dolphin"), and Exxel Energy Corp., with offices at 609
West Hastings Street, 11th Floor, Vancouver, British Columbia, V6B 4W4
("Exxel"). Dolphin and Exxel may be referred to herein individually as a "Party"
and collectively as the "Parties."
RECITALS
A. Dolphin entered into that certain Lease Acquisition and Development
Agreement, dated February 22, 2005 with Apollo Energy, LLC ("Apollo") and ATEC
Energy Ventures, LLC ("ATEC").
B. Exxel is a party to that certain Lease Acquisition and Development
Agreement, dated February 23, 2005 with Apollo and ATEC (the "Exxel/Apollo
Agreement"). The Dolphin/Apollo Agreement and the Exxel/Apollo Agreement are
referred to herein collectively as the "Apollo Agreements."
C. Exxel (as successor in interest to Marc A. Bruner) and Dolphin, are
parties to that certain Participation Agreement, dated February 23, 2005, as
amended by the Amended Participation Agreement, dated March 16, 2005, and the
Second Amendment to Participation Agreement, dated May 24, 2005, each of which
are related to the Apollo Agreements. The Participation Agreement, the Amended
Participation Agreement, and the Second Amendment to Participation Agreement are
collectively referred to herein as the "Original Participation Agreement."
D. The Parties desire to amend the Original Participation Agreement as
set forth herein.
NOW, THEREFORE, the Parties agree as follows:
1. SECTION 3. Section 3 of the Original Participation Agreement is
hereby amended and restated in its entirety as follows:
3. EXXEL ADDITIONAL CAPITAL CONTRIBUTION. In addition to the
$5 million initial capital contributed pursuant to Section 2(b), Exxel
deposited into the Escrow Account Two Million Dollars ($2,000,000).
Further, notwithstanding anything to the contrary in the Operating
Agreement, and subject to Section 5, below, Exxel shall pay all of the
costs and expenses under the Apollo Agreements until Exxel has expended
Fourteen Million Dollars ($14,000,000) of acquisition and operating
costs in connection with the Apollo Agreements, in addition to the
above-described $7 million previously contributed by Exxel. No later
than five (5) business days after Dolphin provides Exxel with the
proposed drilling contract for the initial test wells to be drilled on
the Leases, Exxel shall make an initial payment to the Escrow Account
in the amount of One Million Dollars ($1,000,000) (to secure a drilling
rig for the first test wells under the Apollo Agreements, and to meet
any other immediate commitments necessary to move forward promptly on
development activities under the Apollo Agreements). Within thirty (30)
days thereafter, Exxel shall deposit an additional One Million Dollars
($1,000,000) to the Escrow Account (with all amounts to be credited to
said $14 million).
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2. SECTION 4. Section 4 of the Original Participation Agreement is
hereby deleted in its entirety and not replaced.
3. SECTION 5. Section 5 of the Original Participation Agreement is
hereby amended and restated in its entirety as follows:
5. OWNERSHIP INTERESTS. Dolphin shall own a twenty-five percent
(25%) undivided working interest in all of the Leases acquired pursuant
to the Apollo Agreements. Exxel shall own a seventy-five percent (75%)
undivided working interest in all of the Leases acquired pursuant to
the Apollo Agreements. Commencing September 1, 2005, and continuing
thereafter, the Parties shall execute all assignments and other
documents and take any other action necessary to result in said 75%/25%
ownership interest being reflected in the public records and applicable
government files with respect to all Leases acquired under the Apollo
Agreements and within the AMI. Provided, however, in the event the
Parties enter into an amendment or termination of the Participation
Agreement, as amended, and/or the Parties and Apollo enter into an
amendment or termination of the Apollo Agreements, thereby resulting in
a total expenditure by Exxel (for acquisitions and operations) that is
less than said additional $14 million (referenced in Section 3, above),
the Parties shall execute all assignments and other documents and take
any other action necessary to adjust the percentage working interest to
reflect the actual respective investment made by each Party, including
within such calculation of "the actual respective investment" and such
adjustment the net revenues, if any, received by each Party up to the
effective date of such assignments.
4. SECTION 6(A). Section 6(a) of the Original Participation Agreement
is hereby amended and restated in its entirety as follows:
6(a) SHARE OF COSTS. Subject to Section 3, above, and
notwithstanding the actual dates of signing and/or recording the
assignments or cross assignments pursuant to Section 5, above, each
Party shall be responsible for its respective share of all Project
Costs (as defined in the Apollo Agreements), that is, all Lease
acquisition and operating costs.
5. SECTION 7(A). Section 7(a) of the Original Participation Agreement
is hereby amended and restated in its entirety as follows:
7(a) OPERATOR DESIGNATION. Exxel shall be designated as Operator
under the Operating Agreement. Provided, however, subject to Section
7(c) below, Exxel and Dolphin shall enter into a sub-operating
agreement pursuant to which Dolphin shall be sub-operator for three
years from the date of the first amendment to the Original
Participation Agreement (March 16, 2005). The sub-operating agreement
shall provide for Dolphin, as sub-operator, to have the same
obligations as the Operator has pursuant to the Operating Agreement. As
sub-operator, Dolphin shall use its best efforts to cause commencement
of the first test well (as required pursuant to Section 5.1 of the
Apollo Agreements no later than December 31, 2005, and the commencement
of drilling of the nine additional test wells required under the Apollo
Agreements no later than August 22, 2006.
6. SECTION 7(B). The portion of the first sentence in Section 7(b)
immediately prior to Section 7(b)(i) is hereby amended and restated in its
entirety as follows: "Notwithstanding
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anything in the Operating Agreement to the contrary, Dolphin shall be entitled
to a management fee of ten percent (10%) of its costs as sub-operator, which
shall be applied to:"
7. SECTION 7(C). Section 7(c) of the Original Participation Agreement is
hereby amended and restated in its entirety as follows:
7(c) CHANGE OF OPERATOR. Between September 1 and September 30 of
each year during the term of the Operating Agreement commencing in
September 2006, if all 10 of the test wells required under the Apollo
Agreements have been drilled by August 31, 2006, Exxel shall have the
right, but not the obligation, on a one-time basis each year, to provide
written notice to Dolphin stating that Exxel elects to replace Dolphin as
sub-operator on the basis that Dolphin has not conducted operations on the
Leases in a reasonable and prudent manner and in accordance with accepted
industry standards. Said notice shall include the specific basis, including
relevant documentation, supporting said determination. In addition to the
foregoing, Dolphin acknowledges and agrees that it may be removed as
sub-operator: (i) for any reason that the Operator may be removed or deemed
to have resigned under the Operating Agreement, or (ii) if Galaxy Energy
Corporation, Dolphin's parent entity, becomes insolvent, bankrupt or is
placed in receivership. If Dolphin does not agree with such determination,
the Parties shall submit the issue to binding arbitration before a three
arbitrator panel (each Party selecting one arbitrator and the two
arbitrators then selecting the third arbitrator). Such proceedings shall
commence in Denver, Colorado, within sixty (60) days after Exxel's receipt
of Dolphin's written objection to said determination, and shall be governed
by the rules of the Judicial Arbiter Group, Inc. located in Denver,
Colorado ("JAG").
8. SECTIONS 7(D) AND 7(E). New Sections 7(d) and 7(e) of the Original
Participation Agreement are hereby added as follows:
7(d) BUDGET. The Parties shall use their best efforts to meet and
agree upon a quarterly budget (the "Budget"), with the fourth quarter of
2005, as the first quarterly Budget, and continuing quarterly thereafter.
Each such quarterly Budget shall reflect, at a minimum, the cost of
operations that are required under the Apollo Agreements, and may also
include Dolphins and/or Exxel's recommendations, if any, for additional
operations and expenditures. Each AFE shall be consistent with said
requirements under the Apollo Agreements. Acquisition costs shall be
governed solely by the Apollo Agreements and the Participation Agreement,
as amended, and shall not be included in any AFE.
7(e) PAYMENT PROCESS. Until Exxel has expended the next $14 million
as set forth in Section 3, above, the Parties shall process all
expenditures in accordance with the following procedure:
(i) Dolphin shall prepare and provide to Exxel an AFE for the
proposed operation;
(ii) Exxel shall review the AFE and either approve it or
disapprove it on the basis that such AFE violates an agreed-upon Budget in
writing within thirty (30) days from receipt (with Exxel's failure to
respond within said thirty days being deemed a disapproval);
(iii) If Exxel approves the AFE, Dolphin shall have the right
and option
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to request that Exxel advance up to 100% of Exxel's share of such costs in
order to make payment to third parties. Early payment discounts shall be
credited to the joint account.
(iv) If Exxel disapproves the AFE, the non-consent
provisions of the Operating Agreement shall control (provided, however,
that Dolphin shall have the right and option to initiate binding
arbitration procedures which shall be governed by the rules of the JAG as
to the validity of the basis for such disapproval);
(v) Upon receipt of funds advanced by Exxel pursuant to Section
7(e)(iii), above, Dolphin shall segregate such funds in a separate bank
account identified as the "Exxel Account," and maintain such funds separate
from Dolphin's operating capital and from any accounts unrelated to the
AFE. When the funds are needed for expenditures in accordance with the
Budget, Dolphin shall transfer the funds out of the Exxel Account to
Dolphin's operating account.
(vi) Dolphin shall provide monthly statements to Exxel,
reflecting the use and application of funds, advanced to the Exxel Account;
(vii) Upon completion of each operation, Exxel shall have
the option of either obtaining a refund of any excess balance from the
advanced funds, or applying such balance to amounts owed by Exxel for any
other outstanding invoice related to the joint operations.
Notwithstanding the foregoing, Exxel shall not have the right to disapprove
an AFE and go non-consent under the Operating Agreement with respect to any of
the ten (10) test wells required to be drilled by August 22, 2006, under the
Apollo Agreements.
9. DEFINED TERMS. Except as expressly set forth herein, the terms defined
in the Apollo Agreements and the Original Participation Agreement shall have the
same meaning when used herein.
10. EFFECT OF AMENDMENT. Except as expressly set forth in this Third
Amendment, the Original Participation Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the Parties have executed this Third Amendment as of
the date first above written.
DOLPHIN ENERGY CORPORATION EXXEL ENERGY CORP.
By: /s/ MARC E. BRUNER By: /s/ JOHN R. HISLOP
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Marc E. Bruner, President John R. Hislop, President
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