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EXHIBIT 10.5
TERM SHEET
ERBU PROPERTY DISPOSITION AND SUPPLY COMMITMENT
1. All Oil and Gas Properties currently owned by Pennzoil Products
Company ("Products") in Michigan, New York, Ohio, Pennsylvania and West
Virginia (the "Eastern Properties") shall be transferred to Pennzoil
Exploration and Production Company ("E&P") effective April 13, 1998.
The term "Oil and Gas Properties" shall include all (a) oil, gas and
mineral fee and leasehold interests (including royalty and overiding
royalty interests); (b) related or adjoining surface fee, leasehold and
associated surface interests; (c) related personal property and
fixtures thereon or associated therewith; and (d) all rights and
obligations under all contracts associated therewith.
2. All Oil and Gas Property currently owned by Pennzoil Company
("Pennzoil") in the Bluebell - Altamont Field, Utah (the "Western
Properties") shall continue to be owned by Pennzoil Company.
3. E&P (which shall be defined, for purposes hereafter, to include
Pennzoil unless otherwise stated) will enter into a contractual
arrangement with Products granting Products the preferential right (but
not the obligation) to purchase on a month-to-month basis, at market
prices, up to one hundred percent (100%) of the crude oil produced and
saved attributable to E&P's interests in the Eastern and Western
Properties (the "Committed Crude"). Product's preferential right to
purchase shall extend until October 1, 2017 in the case of the Eastern
Properties, and until March 1, 2010 in the case of the Western
Properties. Throughout the term of Product's preferential right to
purchase, E&P shall have the right to solicit and/or entertain written
offers from purchasers other than Products ("third parties") for the
purchase of all or any portion of the Committed Crude. If E&P receives
a third party offer to purchase or exchange Committed Crude that it
wishes to accept, it shall notify Products in writing of such offer at
least fifteen (15) working days prior to the beginning of the calendar
month in which such third party purchase is to commence. Products shall
advise E&P within five (5) working days of its receipt of such
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notification whether or not it elects to match all substantive terms and
conditions of the third party offer. If Products does not elect to match
all substantive terms and conditions of the third party offer, E&P may
accept the third party offer for the full term contemplated and the crude
subject to the third party offer shall no longer be considered Committed
Crude.
4. Throughout the term of Products' preferential right to purchase, in the
event E&P elects to sell, exchange or otherwise assign to a third party all
or any portion of E&P's interest in any of the wells producing Committed
Crude, E&P shall, within ten (10) working days after reaching agreement
with the third party purchaser on the terms of such sale, exchange or
assignment, notify Products in writing of such election, with full
information concerning the proposed sale, exchange or assignment, which
shall include the name and address of the third party (who must be ready,
willing and able to purchase, exchange or take assignment), the purchase,
exchange or assignment price, and all other terms of the offer. Products
shall advise E&P within twenty (20) working days of Products' receipt of
such notification whether or not it elects to match all substantive terms
and conditions of such sale, exchange or assignment. If Products does not
elect to match all substantive terms and conditions of such sale, exchange
or assignment, E&P may accept such sale, exchange or assignment. Such sale,
exchange or assignment shall be free and clear of pre-existing contractual
commitments between Products and E&P.
5. Ninety (90) days prior to the end of each calendar year, E&P shall provide
Products with a development plan for the Eastern Properties and the Western
Properties showing planned recompletions and well abandonments for the
upcoming calendar year. For a period of thirty (30) days following the
receipt of the development plan, Products may elect to cause E&P to refrain
from implementing any or all of the planned recompletions and well
abandonments identified in the development plan. If Products so elects,
then E&P shall have the right:
(a) to continue to operate any such well at Products' expense. If
E&P exercises this option, Products shall, beginning on the first day
of the calendar
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year covered by the development plan, reimburse E&P for (a) the direct
expense (as described in Section II of the "Accounting Procedures Joint
Operations" 1984 COPAS-ONSHORE) of operating the well, and (b) fixed
overhead charges $300.00 (normal operations) and $3,000.00 (rig
operations) for Eastern Property wells and $1,500.00 per month (normal
operations) and $15,000.00 per month (rig operations) for Western
Property wells. Fixed overhead charges shall be adjusted annually to
reflect changes in the Producer Price Index. Products shall be entitled
to all revenues (net of royalty and severance taxes) attributable to
wells for which Products has assumed cost responsibility pursuant to this
paragraph. Once Products agrees to abandon the zones producing in a well
at the time operations were commenced on Products' behalf, such well
shall be returned to E&P; or
(b) to assign any such well to Products for operation by Products or
by a third party on Products' behalf; or
(c) withdraw its proposal to abandon or recomplete.
6. Products may elect to cause E&P to drill additional wells for the
production of Committed Crude by agreeing to fund all development costs
associated with such wells. On or before January 1 of each calendar year,
Products shall notify E&P of its desire to fund the drilling of new wells
(including associated pipelines, processing and support facilities) for
the production of Committed Crude. Within sixty (60) days following the
receipt of such an election, E&P shall furnish Products with a
recommended drilling plan consisting of a list of recommended drilling
locations, relevant technical information supporting such recommendations
and AFE's providing estimates for the proposed work. Within thirty (30)
days of its receipt of the recommended drilling plan, Products shall make
a final selection of the wells it desires to have drilled during the
remainder of the calendar year. E&P may elect to drill any of the
proposed wells for its own account. Products shall fund all capital
expenditures on the proposed wells (including associated pipelines,
processing and support activities) which E&P elects not to drill for its
own account (the "Joint
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Wells") and will receive one hundred percent (100%) of all revenues (net of
royalty and severance taxes) attributable to each of the Joint Wells until
"payout," which will occur when Products has recovered all of its capital
expenditures attributable to such well plus a return on its investment
calculated at the six-month LIBOR rate plus one percent (1%). Until payout,
Products shall bear all of the direct operating expenses attributable to
the Joint Wells (calculated as described in paragraph 6 above) plus monthly
fixed overhead charges of $300.00 (normal operations) and $3,000.00 (rig
operations) for Eastern Property Joint Wells and $1,500.00 (normal
operations) and $15,000.00 (rig operations) for Western Property Joint
Wells. Fixed overhead charges shall be adjusted annually to reflect changes
in the Producer Price Index. Products also shall bear all costs incurred
prior to payout for the plugging and abandonment of any wells drilled
pursuant to this paragraph. Products' obligation to bear costs and expenses
hereunder shall apply to all costs and expenses incurred, notwithstanding
the fact that such costs and expenses may exceed the estimates provided for
in any AFE. Following "payout," E&P shall bear all costs, and shall receive
all revenues, associated with the Joint Wells.
7. At any time after the second anniversary of a spin-off of Products from
Pennzoil Company, and until October 1, 2017 in the case of the Eastern
Properties, and until March 1, 2010 in the case of the Western Properties,
Products shall have the right to purchase the entirety of E&P's interest
in either the Eastern Properties or the Western Properties, or in both the
Eastern and Western Properties, including: (a) oil, gas and mineral fee
and leasehold interests (including royalty and overriding royalty
interests); (b) related or adjoining surface fee, leasehold and associated
surface interests; (c) related personal property and fixtures thereon or
associated therewith; and (d) all rights and obligations under all
contracts associated therewith. Within five (5) working days of the giving
of notice to make such a purchase by Products, the parties shall each name
a qualified independent appraiser, and such two named appraisers shall
choose a third independent appraiser, who shall each submit an appraisal of
the fair market value of the properties to be purchased. After receiving
such appraisals, in the event Products wishes to proceed with such
purchase, Products shall pay to E&P the higher of (i) the average of the
three independent appraisals of
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the properties, or (ii) the net book value (book value adjusted for DD&A plus
capital and other investments) of the properties at the purchase date, plus
the amount of any book value write-down(s) required by generally accepted
accounting practices taken subsequent to the date of this Agreement and prior
to the receipt by E&P of Products' notice to make such purchase.
8. The transfer described in paragraph 1 above shall be executed on or before
April 13, 1998. All other provisions of this term sheet shall, in substance,
be embodied in a separate definitive agreement between the parties which,
when executed, shall be made effective as of the date of the transfer
described in paragraph 1 above.
9. Nothing in this Term Sheet shall prevent E&P from complying fully with all
applicable rules, regulations and other legal requirements relating to the
production of oil, gas and minerals from the Easter and Western Properties
and to the payment of royalties thereon.