EXHIBIT 10.6
OIL, GAS AND COALBED METHANE GAS LEASE
This agreement (this "Lease") is made as of the 3rd day of April, 2001
(the "Lease Date") by and among AFC Coal Properties, Inc., an Ohio corporation,
whose address is 580 Walnut Street, 9th Floor, Cincinnati, Ohio 45202, and
American Premier Underwriters, Inc., a Pennsylvania corporation, whose address
is 580 Walnut Street, 9th Floor, Cincinnati, Ohio 45202 (collectively,
"Lessor"), and Methane Management, Inc., an Ohio corporation, whose address is
33255 Bainbridge Road, Solon, Ohio 44139, and BPI Industries (USA), Inc., a
Nevada corporation whose address is 470 Granville Street, Suite 630, Vancouver,
British Columbia, V6C 1V5 CANADA (collectively, "Lessee").
WITNESSETH:
1. GRANTING CLAUSE AND RESERVATION.
(a) Lessor, in consideration of the royalties described below of which,
Two Hundred Seventy-Five Thousand Dollars ($275,000), shall be paid
by Lessee to Lessor concurrent with the signing of this Lease and
the covenants and agreements of Lessee hereinafter contained, does
hereby grant, lease and let exclusively unto Lessee any and all
rights Lessor owns in Williamson, Saline and Franklin Counties, in
the State of Illinois, either now known and described in Exhibit A
or determined in the future, related to oil, gas, coalbed methane
gas, methane gas and other hydrocarbons other than coal ("Covered
Hydrocarbons") below the surface to the base of the Pre-Mt. Simon
sandstone or their stratigraphic equivalents (the "Depth")
underlying the tracts of land described in Exhibit A attached
hereto, and subject to the terms contained herein the surface of any
tracts of land described in Exhibit A hereto which are owned by
Lessor solely for the purpose and with the exclusive right of
exploring, drilling, and operating for producing and owning Covered
Hydrocarbons together with the right to conduct exploration,
geologic and geophysical surveys by seismograph, core test, gravity
and magnetic methods, laying pipelines, building roads, tanks, power
stations, telephone lines, treat, transport and own said products,
and housing its other appurtenant easements and right-of-way Lessor
may hold to the surface. The use of the surface shall be subject to
rules prescribed by Lessor. The land described in Exhibit A attached
hereto, all of which is located in Williamson, Saline and Franklin
Counties in the State of Illinois, is hereinafter referred to as the
"Land".
(b) Lessor excepts from the terms of this Lease and expressly reserves
unto itself, its successors and assigns the following:
(i) Any right to explore for, mine, operate, produce, remove or
market any hard mineral or hard mineral substance including
but not limited to coal, uranium, and oil shale or their
constituent products, or any of them from the Land;
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(ii) Any right to use the Land for the underground storage of oil,
gases, liquid hydrocarbons or associated products; and
(iii) All other rights not specifically granted by the provisions of
this Lease.
(c) Notwithstanding anything to the contrary contained herein, this
Lease shall not be effective until Lessee has delivered to Lessor a
duly executed general release in form and substance satisfactory to
Lessor from Robert S. Wheat, Sr., Clyde House, Mid-Continent
Methane, Inc., Harrison & Moberly, and any of their affiliates
(collectively, the "Mid-Continent Parties").
2. TERM. This Lease shall remain in force as to the Land for a term of
five (5) years from the Lease Date (the "Primary Term" of this Lease) and as to
a particular tract (as described in Section 6 below) so long thereafter as
Covered Hydrocarbons are being produced from such tract providing a royalty
payment of not less than One Dollar ($1.00) per acre in such tract per calendar
month; provided, however, after the Primary Term, in the event the aggregate
royalties do not exceed Forty-Two Thousand Dollars ($42,000.00) in any month,
this Lease shall terminate.
3. SHUT-IN ROYALTY. During any period (whether before or after the
expiration of the Primary Term hereof) after Covered Hydrocarbons have been
produced, when Covered Hydrocarbons are not being sold or used, and the well or
wells are shut-in and there is no current production of Covered Hydrocarbons to
keep this Lease in force as to such tract, Lessee shall pay or tender a royalty
of One Thousand Dollars ($1,000) per well payable within one hundred and eighty
(180) days of the date such wells are shut-in, and by the payment, Lessee may
extend the term of this Lease as to such tract for a period of one (1) year
commencing from the date the well is shut in. When such payment is made it will
be considered that oil, gas or coalbed methane gas is being produced within the
meaning of this Lease. For the purpose of this Section, no well shall be
considered shut-in unless (a) it is completed and tested and thereby shown to be
capable of producing Covered Hydrocarbons and (b) the results of such tests have
been delivered to Lessor.
4. LESSOR'S ROYALTY.
(a) As consideration of the premises, Lessor hereby reserves, and Lessee
hereby covenants and agrees to pay Lessor, a royalty of fifteen
percent (15%) on, and payable solely out of, gross proceeds from the
sale of Covered Hydrocarbons as measured at the sales meter from all
wells and shall be free and clear of all operating costs and
expenses, provided no royalty shall be due during the first eighteen
(18) months from the Lease Date unless and until the royalty which
otherwise would have been due during such period would have been Two
Hundred Seventy-five Thousand Dollars ($275,000.00). With respect to
Covered Hydrocarbons used as allowed under this Lease under Section
22 or by Lessee in its operations, the royalty shall be based on the
wellhead price at the time of production for the Covered
Hydrocarbons so used.
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(b) Production royalties shall be paid monthly to Lessor's address set
forth in Section 19 within forty-five (45) days after oil, gas or
coalbed methane is measured for sale or delivery to a third party.
Pursuant to pre-arranged division orders, royalties may be paid by
the pipeline company or end users; provided, however, Lessee shall
remain principally responsible for the timely payment of all
royalties. If Lessee shall not timely pay Lessor any sum of money
payable under the provisions of this Lease and such non-payment
shall continue for a period of thirty (30) days, Lessee shall, in
addition to such payment, pay Lessor interest on the delinquent
amount, at the prime rate floating as disclosed from time to time in
The Wall Street Journal plus five percent (5%), calculated from the
time of such default. This provision shall in no way constitute a
waiver of the requirement to pay on time and shall be cumulative and
in addition to Lessor's rights either in law or in equity.
5. DRILLING, DEVELOPMENT AND OPERATIONS.
(a) Prior to drilling any well, Lessee shall provide Lessor with written
notice of the location and such other information requested by
Lessor. Lessee shall promptly commence and continuously prosecute
production testing, drilling or reworking operations as a reasonable
and prudent operator would and in a good and workmanlike manner. If
a well is drilled which is capable of producing Covered Hydrocarbons
in quantities that are economically feasible, Lessee shall
diligently develop the well and market production therefrom as soon
as possible.
(b) All operations conducted by Lessee under this Lease shall be
conducted at Lessee's sole cost and risk, and subject to the
indemnity provisions of Section 16 below. Lessor shall have no
responsibility for and no right to control or direct Lessee's
performance under this Lease, except to advise Lessee of its failure
to comply with the terms of this Lease. Subject to Section 18 below
and without limiting of the generality of the immediately preceding
sentence, Lessor and Lessee acknowledge that Lessor has no right or
power to participate in the selection of a drilling contractor, to
propose the drilling of a well, to determine the timing or sequence
of drilling operations, to commence or shut down production, to take
over operations, or to share in any operating decision whatsoever.
Lessor and Lessee hereby expressly negate any intent to create (and
this Lease shall never be construed as creating) a mining or other
partnership or joint venture. No party shall have the authority to
bind the other party for any obligation or otherwise act as an
employee or agent of the other party for any purpose whatsoever.
(c) Lessee shall use its best efforts, in accordance with all Laws and
good industry practice, to complete the wells as producers of
coalbed methane in paying quantities. Lessee shall conduct such
coring, logging, testing, fracing and acidizing operations as a
prudent operator would conduct under the same or similar
circumstances. If a well cannot reasonably be completed as a
producer of Covered Hydrocarbons within the Depth, Lessee shall
promptly plug the well and perform all necessary surface restoration
work. Lessee shall not engage in the so-
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called underground gassification method of producing gas or coalbed
methane; provided, however, Lessee may use nitrogen for fracing
purposes and may use other stimulation processes subject to Lessor's
prior written approval. Lessee shall have the right to flare coalbed
methane during testing and prior to installation in accordance with
all Laws (as defined below). Lessee shall utilize only those methods
or practices which avoid creating a roof or coal structure that
would adversely affect existing or potential mining operations in
the Springfield No. 5 or Herrin No. 6 coal seams.
6. TERMINATION AS TO NON-PRODUCING ACREAGE AND UNDRILLED FORMATIONS (PUGH
CLAUSE). At the expiration of the Primary Term, this Lease shall terminate as to
each tract (except as to tracts with shut-in wells as provided in Section 3)
which is not producing royalties as required in Section 2(a), and shall
terminate as to all the Land as to all depths below one hundred (100) feet below
the stratigraphic equivalent of the deepest depth drilled by Lessee on the Land.
For the purpose of this Section, a well primarily productive of oil shall hold
this Lease only as to the eighty (80) acres upon which it is located with the
well located in the center thereof, and a well which is primarily productive or
capable of producing gas, coalbed methane gas or methane gas shall hold this
Lease only as to the three hundred twenty (320) acres on which it is located
with the applicable well located in the center thereof; and further provided
that a well drilled into abandoned mineworks shall hold all areas in such
mineworks that are drained by such well; provided further, however, if Lessee
has exercised its rights under Section 7, the area held by a well shall be
increased to the portion of the Land covered in the corresponding unit. At the
expiration of the Primary Term, Lessee will deliver to Lessor, in recordable
form, such releases as are necessary to evidence the expiration of this Lease as
to the tracts which this Lease no longer covers.
7. POOLING; UNITIZATION. Lessor grants Lessee the right to form a drilling
unit or units to conform to regular or special spacing rules issued by any
governmental authority having control of such matters, to conform to conditions
imposed upon the issuance of drilling permits, or to promote the conservation of
oil or gas or for the storage of gas or for the injection of air, gas, water,
brine and other fluids. Lessee shall have the right, at its option to pool, or
combine the leased premises or any portion thereof, with other land, lease or
leases in the immediate vicinity thereof, at a time before or after drilling
whether such land, lease or leases are hold by Lessee or by others. Lessee shall
have the right to, re-pool, reform, enlarge and/or reduce or in any other manner
modify or change the pooled unit in order to protect the correlative rights of
the parties or to promote conservation of oil and gas. Such units shall not
substantially exceed one hundred sixty (160) acres with respect to any zone or
stratum predominantly oil-bearing, and not substantially exceed six hundred
forty (640) acres with the respect to any zone or stratum predominately
gas-bearing, or condensate bearing. The entire acreage pooled or unitized shall
be treated for the purpose, except for the payment of royalties on production,
as if it were included in this Lease. In lieu of the royalties elsewhere herein
specified, Lessor shall receive, on the production from any unit so pooled, only
such proportion of the royalties stipulated herein as the amount of its acreage
placed in the unit bears to the total acreage so pooled in the particular unit
involved. Notwithstanding anything to the contrary in this Lease, the
commencement of operations for the drilling of a well on any such drilling unit,
whether such drilling or other operations are on the Land and regardless of
whether such operations were commenced before or after the execution of this
Lease or any pooling or
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unitization, shall have the same force and effect in all respects as the
commencement of operations for the drilling of a well on the Land hereby; and
drilling, reworking or other operations conducted on any such drilling unit or
production of oil or gas anywhere from such drilling unit, whether such
drilling, reworking or other operations are on, or such production is from the
Land and regardless of whether such operations were commenced before or after
the execution of this Lease of any pooling or unitization, shall have the same
force and effect as drilling, reworking or other operations conducted on or
production obtained from the Land as to the continuance and/or extension of the
term of this Lease. Lessor agrees to execute any and all documents Lessee
reasonably deems necessary, desirable or convenient for any pooling or
unitization under the terms of this Lease.
8. AUDITS; INSPECTION; INFORMATION.
(a) Lessee shall keep full and accurate records relating to the
production of oil, gas and coalbed methane, and shall quarterly
deliver to Lessor a written report describing and identifying, in
such detail as Lessor may reasonably request the quantities and
qualities of Covered Hydrocarbons produced and/or sold during the
previous calendar quarter. Lessee and Lessee's buyers or
transporters shall measure all production accurately using standards
established by the American Gas Association (AGA) and/or the
American Petroleum Institute (API) and all measuring devices shall
be tamper proof as nearly as practicable. Lessee, shall provide
promptly to Lessor upon request, copies of written results of all
measurements, tests and sampling (including those performed by
Lessee's buyers or transporters, but only if available to Lessee).
Lessee shall maintain and keep available for Lessor's inspection
upon required notice, copies of all contracts or documents, as well
as all subsequent amendments and other addendums thereto, under
which oil, gas and coalbed methane are marketed, processed,
transported or otherwise disposed of. Lessee shall furnish Lessor
quarterly copies of all purchase or run tickets and other reports
and statements of purchases, gatherers, transporters, or processors
respecting the marketing, gathering, transportation, processing or
other disposition of Covered Hydrocarbons.
(b) Upon three (3) days' written notice to Lessee, Lessor may audit
Lessee's books and records but only as they relate to production,
Covered Hydrocarbons marketed and sold or transferred to surface
owners, or royalty payments. Such audit rights maybe exercised
anytime while royalties are payable and for a period of twenty-four
(24) months thereafter. In the event access to Lessee's books and
records is not provided within three (3) days of the written notice
required in the first sentence, Lessee shall pay Lessor Ten Thousand
Dollars ($10,000,00) for each additional day or portion thereof
access is denied or not provided. In the event an audit determines
an underpayment by Lessee, Lessee shall pay on demand to Lessor all
amounts (plus interest) due and the cost of such audit.
(c) At reasonable times on reasonable notice to Lessee, Lessor shall
have the right, at Lessor's expense, to:
(i) Inspect by all appropriate means Lessee's facilities on the
Land;
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(ii) Test Lessee's meters and other measuring and testing devices;
(iii) Sample, test, measure and gauge production of the wells,
including the right, but not the obligation, to install meters
on lines;
(iv) Observe Lessee in the performance of Lessee's obligations
under this Lease; and
(v) Examine or audit, during the term of this Lease and three (3)
years thereafter, the books, records, supporting documents,
files, and correspondence of Lessee and Lessee's buyers in
connection with the Lease and the production and/or sale of
Covered Hydrocarbons from the Land.
(d) In the event access is not provided, Lessee shall pay Lessor Ten
Thousand Dollars ($10,000.00) for each additional twenty-four (24)
hour period or portion thereof access is denied.
(e) Upon Lessor's written request, to the extent in Lessee's possession,
Lessee shall provide Lessor with a written inventory of all wells
(collectively, the "Prior Wells") drilled on the Land since May 25,
1994, and such other information regarding the Prior Wells as Lessor
may request.
9. TITLE. Lessor makes no covenant to Lessee for quiet enjoyment of the
Land. Furthermore, Lessor does not warrant title, either express or implied, to
the Land. Lessor shall not have any liability to Lessee with respect to any
defect in title. Lessor has made or will make available to Lessee for inspection
or copying at Lessee's expense any title information (such as coal leases or
agreements, contracts, deeds, easements or rights-of-way) in its possession, if
any, with respect to the Land. In receiving any information from Lessor, Lessee
will keep such information confidential and will not use such information, or
copy, distribute or disclose such information to anyone, for any purpose other
than directly relating to this Lease.
10. COAL MINING OPERATIONS. Lessee acknowledges that the coal and other
hard minerals located in and under the Land, and the rights to mine and remove
the same, are of great value and importance to Lessor and its lessees ("Mineral
Tenants"). The right to mine and remove said coal and other hard minerals,
whether by underground methods, surface-mining methods or any other method,
shall be paramount to all rights granted to Lessee hereunder. There are excepted
from the Land and the Depth and from the mining and appurtenant rights, waivers
and immunities granted to Lessee hereunder, and hereby reserved to Lessor, the
right to drill and maintain openings through the Land and the Depth for purposes
of exploring for, developing, working, mining, removing, shipping and
transporting any and all coal, clay and other hard minerals under and within the
Land. Lessee will not violate any provisions of any coal leases that Lessor may
execute in the future concerning the Land, copies of which will be furnished to
Lessee. Lessee shall: (a) not commence any operation or install any facility
which would constitute a present interference with any mining operations in or
under the Land; (b) not commence any operation or install any facility without
giving the Mineral Tenant under such leases at least forty-five (45) days prior
written notice thereof and at least ten (10) days prior
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written notice of any application or filing with any state, Federal or local
government authority for any permit or other authorization required for such
operation or facility; and (c) within sixty (60) days after receiving notice
from a Mineral Tenant under such leases that any operation being conducted or
facility being maintained by Lessee has or within ninety (90) days will become
an interference with the coal mining operations of a Mineral Tenant under such
leases, Lessee shall, at Lessee's expense, take such steps as may be required to
eliminate or prevent such interference, including, without limitation, ceasing
such operation or removing or modifying such facility (and structures, equipment
or personalty used therein) for the period of time necessary to permit a Mineral
Tenant under such leases or other person or entity to complete the mining
operations subject to such interference. Upon transfer by Lessor of any such
reserved rights, Lessee shall expressly assume the obligations of Lessor
contemplated in this Section. Because full extraction mining (e.g. longwall) may
be used and subsidence may result, Lessee agrees that all surface facilities
(including pipelines) will either be designed to withstand the effects of
subsidence or will be removed prior to mining. In any event, neither Lessor nor
Mineral Tenant will be liable for damage.
Lessee further agrees that:
(i) Lessor shall be notified of any proposed well location, and if
Lessor is the surface owner, Lessor shall have the right to
approve any roads, equipment and facility locations, pipelines
and all other improvement required by Lessee hereunder;
(ii) Lessee shall use its best efforts to drill holes and maintain
wells as close to the vertical as possible and shall furnish
Lessor with information (including, without limitation,
downhole surveys) concerning the locations of all holes in the
Herrin No. 6 coal seam and the unmined portions of the
Springfield No. 5 coal seam and all holes on the adjacent Land
and adjacent properties if Pooling and Unitization is used;
(iii) Lessee shall prevent infiltration of oil and gas, brine,
water, and other fluids into any workable coal seam except by
way of an initial hydraulic "frac treatment" and any breach in
the integrity of the well shall be rectified by the Lessee as
soon as possible;
(iv) After bonding or providing other security in accordance with
all Laws (or if there is no requirement under any Laws, as
Lessor may reasonably require), Lessee shall plug all
abandoned wells in strict accordance with all Laws and as
Lessor may otherwise reasonably require; and
(v) Lessee shall protect the Land from drainage as a reasonable
and prudent operator and drill such offsetting wells as a
reasonable and prudent operator would in the same or similar
circumstances.
11. PROTECTION OF THE SPRINGFIELD NO. 5 AND HERRIN NO. 6 COAL SEAMS.
Specifically Lessee acknowledges that Lessor may in the future sign leases for
mining of the Springfield No. 5 and Herrin No. 6 coal in Williamson and Franklin
Counties,
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Illinois. In the event coal mining is initiated in or above the above described
areas of the Land, wells may have been drilled by Lessee that potentially could
interfere with proposed coal mining operations. Upon notice to Lessee of the
submission of an application for a coal mining permit and within sixty (60) days
of notice that Lessee's well(s) may interfere with a Mineral Tenant's
activities, Lessee agrees that Lessor or a Mineral Tenant may require that
Lessee remove pipe casing in these coal seams to allow access for mining
operations using any mining methods as if Lessee had not conducted any
activities in or through such coal seams. Such plugging and removal shall be
done in a manner acceptable to Lessor and its consultant, and all federal, state
and local regulatory authorities and in compliance with applicable laws and
regulations. For any non-producing well, Lessee shall also remove the casing
before plugging the well. Lessee shall promptly commence and diligently pursue
completion of the plugging and casing removal. To insure that funds are
available for this plugging and removal process, Lessee agrees that:
(a) Prior to drilling any well through the Springfield No. 5 and Herrin
No. 6 coal seams, Lessee shall deposit an amount for each well
drilled in an escrow account with an independent third party
designated by Lessor as a casing removal fund. The amount deposited
from time to time will be determined by Lessor in writing based on
anticipated casing removal costs. The terms of the escrow account
shall be acceptable to Lessor in its reasonable discretion. In
Lessor's reasonable discretion, the amount of such deposits
(including the deposits for the Prior Wells) shall be increased upon
written notice to Lessee due to increased costs in casing removal,
changes in any Laws or desired changes in methods of casing removal.
It is understood that such removal costs shall include all
foreseeable expenses needed to restore the wellhole to a condition
as if Lessee had not conducted any activities through the coal seams
and to insure that coal mining operations through these seams are
unimpaired as contemplated above.
(b) Within one hundred twenty (120) days of the Lease Date, Lessee shall
have (i) plugged and removed the casing of at least one (1) of the
Prior Wells (the "First Plugged Prior Well," which shall be a
typical well -- not shallow compared to remaining wells) in
accordance with the requirements of this Lease and all Laws, (ii)
provided Lessor with a written certification and supporting
documentation of such plugging and removal, the actual costs
thereof, and the full payment of the costs, and (iii) made the
deposits described above with respect to the other Prior Wells,
provided the amount of such deposits may be based on the actual
costs for removing the casing of the First Plugged Prior Well
subject to increase as provided in the last sentence of (a) above.
(c) Any expenses incurred by Lessee related to removal of casing in
Williamson, Saline and Franklin Counties that is required for access
for mining operations will be paid from this escrow account, and
Lessee shall be responsible for a funding deficiency. Lessee will
provide Lessor with copies of any bills, identifying the well and
work performed, and lien waivers and other documents reasonably
required by Lessor for payments to be made from this account.
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(d) Lessee will be the beneficial owner of this escrow account;
provided, however, the escrow instructions will transfer all right,
title and interest in the escrow account to Lessor if any of the
following events occur:
(i) Lessee fails to eliminate or prevent interference in the coal
mining operations caused by existing wells when requested by
any coal mining lessee of Lessor.
(ii) Lessee becomes insolvent, ceases doing business or files for
protection under bankruptcy laws.
(e) Three (3) years following the later of (i) the expiration of the
Primary Term and (ii) the end of production of Covered Hydrocarbons
and the plugging and full reclamation of all wells on the Land in
accordance with applicable law and Lessor's direction, any remaining
funds in this escrow account will be released to Lessee.
12. WATER DISPOSAL. Lessor grants to Lessee the rights to dispose of water
produced in association with production of Covered Hydrocarbons from wells
drilled pursuant to this Agreement. These rights are limited to water thus
produced and Lessee shall not be permitted to dispose of water on the Land from
other sources outside the Land. Lessee shall be responsible for all expenses of
disposal, including, without limitation, drilling and casing. All water disposal
operations (including, without limitation, drilling and depth and location of
water disposal wells) permitted hereunder will be conducted in accordance with
all applicable Laws. Lessee shall provide Lessor with copies of (a) all
applications relating to water disposal wells filed with applicable regulatory
authorities for such wells within three (3) days of such filing, and (b) all
approvals of applicable regulatory authorities within three (3) days of Lessee's
receipt. Lessee's right to dispose of produced water in disposal wells will be
limited to those zones in the interval described below, provided Lessee shall
have first provided Lessor with written evidence, reports or logs establishing
the such zones are appropriate for water disposal:
The water disposal rights granted are defined as all appropriate intervals
as determined by Lessor between the Degonia Sand to the base of Pre-Mt.
Simon sandstone.
13. GENERAL OPERATING CONDITIONS.
Lessee shall:
(a) Comply with all federal, state, and local laws, statutes,
ordinances, regulations and orders applicable to Lessee's
operations, regulations and orders applicable to Lessee's operations
and conditions created thereby, including environmental, land use,
restoration, pollution, water quality and other laws relating to
public health, safety and welfare, and all plugging requirements,
including, without limitation, Illinois requirements and the Mine
Safety and Health Administration standards (collectively, "Laws");
(b) Fully indemnify, defend and hold harmless Lessor from and against
any and all loss, liability, damage, cost and expense imposed as a
result of any such laws,
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including laws imposing strict liability or liability without fault,
or the violation of any or Lessee's covenants hereunder;
(c) Abstain from committing any waste or unnecessary damage, and from
depositing any materials, supplies or litter on the Land; and
(d) Obtain permission to enter the Land from both the surface owner and
tenant or comply with 765 ILCS 530/1 et seq. Lessee shall be solely
responsible for surface damages caused by Lessee and to clean up and
restore the Land as nearly as possible to the condition existing on
the date of this Lease to the reasonable satisfaction of the surface
owner.
14. SPECIAL OPERATING METHODS. As soon as possible after completion of any
operation on any part of the Land or after Lessee shall no longer require a
particular part of the Land for current operations, and in any event as to any
of the lands covered hereby as to which this Lease shall terminate, Lessee shall
return the premises to the condition that they existed at the commencement of
this Lease upon completion from time to time of any particular operation and
upon final cessation of operations upon the land covered hereby.
Further, Lessee shall:
(a) Provide to Lessor upon request all survey information which Lessee
may now have or hereafter obtain to inform Lessor fully as to the
exact location of any well drilled and copies of all logs, drill
stem test records, core analyses, pressure tests, or any other
information obtained by Lessee in the course of drilling any well;
(b) Promptly pay Lessor, if Lessor owns the surface, or to the owner of
the surface if Lessor does not own the surface, for anticipated
damage to timber, growing crops, fences, livestock, and other
property upon commencing any exploration, drilling or production
activities on the Land; and upon completion of each such separate
activity, promptly pay Lessor or the owner for any and all damages
suffered from Lessee's activities not theretofore paid;
(c) Bury all pipelines and conduits to a depth greater than one (1) foot
below plow depth on tillable land and two (2) feet below surface on
non-tillable land;
(d) Upon written request by Lessor, enclose with an adequate fence all
equipment and excavations, and either immediately repair any fence
cut by Lessee or immediately install cattle guards or steel gates
upon cutting a fence;
(e) Abstain from drilling, without prior written consent of Lessor, any
well within two hundred (200) feet of any pond or other source of
water, or any building or improvements which is now or may hereafter
be constructed or located on the Land;
(f) Not use, without the prior written consent of Lessor, any fresh
water from the Land;
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(g) Separate and stockpile all topsoil from the excavation work, and
upon abandonment of such work or termination of this Lease, fill and
level all excavations, replace the top soil, and seed and sod
excavations, replace the top soil, and seed and sod excavated areas
to Lessor's satisfaction;
(h) Maintain in good condition all wells, drilling facilities, roads,
pipelines, equipment, storage areas, and other improvements owned,
used or constructed by Lessee, and upon termination of this Lease in
whole or as to any part of the Land, or in the event of a dry hole,
remove all such materials and equipment and plug any abandoned well,
in accordance with all applicable statutes, rules and regulations;
and
(i) Notify Lessor or other representatives designated by Lessor from
time to time, at least twenty-four (24) hours prior to the
commencement of any plugging or cementing operations and again
promptly after plugging has been completed. Lessee shall furnish
Lessor with copies of each plugging affidavit. Prior notice of
plugging or cemented operations may be given by telephone or other
oral communication provided that written confirmation is delivered
within two (2) days of such oral notice. To the extent that the
terms and conditions of this paragraph apply to the surface, the
same shall be operative notwithstanding the fact that Lessor does
not own the surface.
Anything contained herein to the contrary notwithstanding, the location of
any and all wells, pipelines, storage facilities and other structures upon the
Land shall be subject to the prior written approval of Lessor so that Lessor can
determine whether the same complies with this Lease or same interferes with
current or future mining operations, provided Lessor's approval of any such
location shall not constitute a waiver of any of its rights under this Lease.
Lessor shall have twenty (20) days after Lessee notifies Lessor of any proposed
well, pipeline, storage facility or other structure to deliver its written
approval or disapproval. Approval will not be unreasonably withheld. If no such
approval or disapproval is received during the twenty (20) day period, Lessor
shall be deemed to have approved the location of the proposed well, pipeline
storage facility or other structure, and Lessee may proceed accordingly;
provided, however, any such approval shall not be deemed to be Lessor's
assurance that Lessee's activities are permitted under any coal leases or will
not interfere with mining operations.
15. FORCE MAJEURE. Lessee's obligations to drill, develop and conduct
operations and to market Covered Hydrocarbons shall be excused (but in no event
for more than one (1) year) if any such drilling, development, operating
marketing is interrupted, delayed or prevented by a force majeure event. The
term "force majeure" as used herein shall mean any of the following causes: an
act of God, fire, strike, civil disorder and inability to obtain equipment or
supplies due to governmental order or action or by regulation of local, state or
federal authority; provided that any such force majeure shall have been beyond
the control of Lessee, shall have operated without the fault or negligence of
Lessee and could not have been foreseen or avoided through ordinary diligence.
Within twenty-four (24) hours of the occurrence of a force majeure event, Lessee
shall provide Lessor with written notice and a specific description of such
event. The effects of such force majeure shall be limited by Lessee insofar as
possible and with all reasonable dispatch but shall not extend the Primary Term
for more than one (1) year.
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16. INDEMNIFICATION. Lessee shall and hereby does agree to indemnify, hold
harmless and defend Lessor and its officers, directors, shareholders, employees,
attorneys, agents, successors and assigns from and against any and all lawsuits,
actions, proceedings, disputes, penalties, fines, impositions, and claims
(hereinafter referred to collectively as "claims") based on (a) death of or
injury to persons or destruction of or damage to property arising out of
Lessee's acts or omissions, (b) violation by Lessee of any civil, criminal or
other statute, law, rule, regulation or ordinance, or failure by Lessee to
comply with any federal, state or local law, (c) any public or private nuisance
arising out of Lessee's acts or omissions, (d) any requirement for restoration,
removal, remediation, repair or reclamation with respect to any area of the Land
or lands outside the Land arising out of this Lease or any act or omission of
Lessee, (e) any use or occupancy of the Land by Lessee during the term of this
Lease, or any condition of the Land for which Lessee is responsible arising
during or after the term of this Lease, (f) any other act or omission of Lessee,
(g) Lessee's (i) representations or statements to third parties, (ii) omissions
to make representations or statements to third parties when such representations
or statements are necessary in order to avoid misrepresentation or inaccuracy,
or (iii) relationships with third parties, including, but not limited to,
persons or entities who or which provide debt or equity financing, services or
equipment to Lessee with respect to this Lease, or activities conducted or to be
conducted by Lessee hereunder, (h) any failure by Lessee to comply with any
other term of this Lease with respect to Lessee's operations, acts, use or
occupancy of the Land, and (i) any claim or demand made by, on behalf of or in
connection with any of the Mid-Continent Parties. Without limiting the
generality of the foregoing, Lessee's obligations hereunder shall include but
are not limited to claims brought under United States, State of Illinois or
local environmental statutes, laws, rules, regulations or ordinances. Lessee's
obligations hereunder include the obligation to reimburse Lessor for all fees,
costs and expenses incurred in connection with any claim which is subject to
this Section 16.
Lessee shall defend, at its cost, any claim or action brought to recover
or assert any such claim and shall pay any judgment rendered pursuant to such
claim or action together with all costs and expenses (including, without
limitation, attorneys' fees) incidental thereto.
Lessor shall not be liable for special, indirect or consequential damages
incurred or experienced by Lessee resulting from or arising out of this Lease or
the operations contemplated hereby, including without limitation loss of profit,
loss of Covered Hydrocarbon resources, loss of business opportunities or
business interruptions, howsoever caused.
17. INSURANCE.
(a) Lessee shall maintain in full force and effect during the term of
this Lease:
(i) Workers Compensation Insurance in accordance with applicable
state laws and when applicable extended to include coverage
for maritime obligations, United States Longshoremen's and
Harbor Worker's Compensation Act, Outer Continental Shelf
Lands Act, Jones Act and Death on the High Seas Act;
(ii) Employer's Liability Insurance with limits of at least Five
Million Dollars ($5,000,000);
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(iii) Comprehensive General Public Liability insurance, including
contractual liability coverage, with limits of at least Five
Million Dollars ($5,000,000); and
(iv) Automotive Liability Insurance covering all owned, non-owned
and hired vehicles with limits of at least Five Million
Dollars ($5,000,000).
(b) Commencing with the drilling of the first well and thereafter,
Lessee shall maintain in full force and effect Environmental
Impairment Insurance with limits of at least Five Million Dollars
($5,000,000).
(c) All insurance policies shall be occurrence basis policies on terms
reasonably acceptable to Lessor from an insurance carrier authorized
to do business in the State of Illinois and having a policyholder's
rating of "A" or better in the most current edition of Best's
Insurance Reports. Lessee further agrees to name Lessor as
additional insured under the insurance coverages set forth above.
(d) On the date of this Agreement with respect to the coverages set
forth in Section 17(a), Lessee will furnish Lessor with valid
certificates of insurance signed by the insurance carrier(s)
certifying the above coverages to Lessor's reasonable satisfaction,
and stating that such coverage will not be terminated, modified or
cancelled without at least thirty (30) days prior written notice to
Lessor. In the event a policy in accordance with Section 17(c) is
not available for the coverage set forth in Section 17(b), Lessee
shall provide Lessor with replacement security and protection,
including, without limitation, for the duty to defend, which is
approximately the equivalent of the required coverage as determined
by Lessor in its reasonable judgment.
18. TERMINATION AND RELEASE OF LEASE. This Lease shall terminate, without
further action of the parties, if Lessee fails to correct any breach of any
provision of this Lease within thirty (30) days of the date of which Lessor
shall have notified Lessee of such a breach; provided, however, in the event
Lessee fails to pay royalties by the due date more than four (4) times in any
twelve (12) consecutive month period or six (6) times in any thirty-six (36)
consecutive month period, this Lease shall terminate automatically without any
further notice of a payment breach. Lessee may re-enter the Land for a period of
ninety (90) days after termination of this Lease to remove Lessee's equipment
and related property from the Land, and may re-enter the Land thereafter, as and
when required by Law, to perform reclamation and environmental remediation work
on the respecting the Land. Notwithstanding such termination, Lessee's
obligations hereunder which by these terms survive termination and any accrued
and unsatisfied obligations hereunder (including, without limitation, indemnity,
audit and payment obligations) shall survive the termination of this Lease. If
Lessor remedies any breach of Lessee, Lessee shall pay Lessor on demand for
expenses incurred by Lessor in curing such breach plus interest on such amount
at the rate specified in Section 4(b).
19. NOTICES. All notices, request, demands and other communications under
this lease shall be in writing and shall be deemed to have been duly given (i)
on the date of service if served personally or by telecopier, telex or other
similar communication, (ii) on the first day after
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sending if sent for guaranteed next day delivery by Federal Express or other
next-day courier service or (iii) on the fourth business day after mailing if
mailed by registered or certified mail, return receipt requested, postage
prepaid, and properly addressed as follows:
If to Lessor:
AFC Coal Properties, Inc.
580 Walnut Street, 9th Floor
Cincinnati, Ohio 45202
John A. Anderson, President
If to Lessee:
Methane Management, Inc.
33255 Bainbridge Road
Solon, Ohio 44139
James G. Azlein, President
BPI Industries (USA), Inc.
470 Granville Street, Suite 630
Vancouver, British Columbia
V6C 1V5
CANADA
Curtis R. Huber, President
Any party may change its address for purposes of this Lease by giving the other
parties hereto notice of the new address in the manner set forth above.
20. TAX CREDIT. Lessee shall not intentionally undertake or knowingly
allow any transaction pertaining to the ownership for this Lease which would
create a disallowance in whole or in part of the tax credit which may be
authorized under Section 29 of the Internal Revenue Code for production of
nonconventional fuel.
21. TAXES. Lessee shall pay when due and payable all taxes and
assessments, and all license, permit or other fees, legally assessed, levied,
imposed upon or becoming legally due and payable out of or in respect of (a)
Lessor's or Lessee's interest in the Covered Hydrocarbons on the Land, if
separately assessed, or (b) Lessee's property or equipment on the Land or any
used or occupancy of said Land under this Lease, for which Lessor is legally
liable or for which the Land or Lessor's interest therein may be subject to
lien. Lessor shall pay all other property taxes which but for the execution of
this Lease Lessor would be liable, including, without limitations, real estate
taxes upon the surface of the Land (to the extend Lessor has any interest in the
surface).
22. FARM TAP. Lessee may provide a "farm tap" for use of free or
discounted gas or coalbed methane gas by the surface owner for domestic or farm
use only, in order to obtain easements or rights-of-way if deemed necessary by
Lessee, and/or for the operation of compressors or equipment necessary to
produce Covered Hydrocarbons from the Covered Land. Any agreements between the
Lessee and surface owner are subject to the limitations placed on the Lessee
pursuant to the terms of this Lease, including Lessor's right to mine and
produce coal
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without interference. Neither Lessor nors Minerals Tenant is or will be liable
for any damage to farm tap facilities or for damages resulting from termination
of coalbed gas production.
23. SEVERABILITY. Nothing in this Lease is intended to breach or be in
violation of state or federal statute. Any such provisions that are in
contradiction or violation thereof are duly voided and shall not cause failure
of the remaining provisions of this agreement.
24. RELATIONSHIP OF THE PARTIES.
(a) NOTHING CONTAINED IN THIS AGREEMENT OR ANY CONSENT OR OTHER
AGREEMENT EXECUTED IN CONNECTION HEREWITH SHALL BE DEEMED TO CREATE,
AND THE PARTIES SPECIFICALLY DISCLAIM ANY INTENTION TO CREATE, ANY
JOINT VENTURE, PARTNERSHIP, AGENCY, EMPLOYMENT, OR OTHER
RELATIONSHIP BETWEEN LESSOR AND LESSEE AND FOR ALL PURPOSES LESSOR
AND LESSEE ARE INDEPENDENT CONTRACTORS. LESSEE SHALL INCLUDE IN ANY
INFORMATION PROVIDED TO OR AGREEMENTS WITH ANY CUSTOMER, PURCHASERS,
SUPPLIERS, VENDORS, LENDERS OR INVESTORS A STATEMENT THAT LESSOR AND
LESSEE ARE INDEPENDENT CONTRACTORS FOR ALL PURPOSES, AND NEITHER
LESSOR NOR LESSEE SHALL BE RESPONSIBLE FOR THE ACTS OR OMISSIONS OF
THE OTHER.
(b) LESSOR EXPRESSLY DISCLAIMS ANY RESPONSIBILITY FOR THE ACTIONS AND
REPRESENTATIONS OF LESSEE, INCLUDING BUT NOT LIMITED TO
REPRESENTATIONS CONCERNING THE ECONOMIC FEASIBILITY OR THE FINANCIAL
VIABILITY OF ANY OIL, GAS OR COALBED METHANE OPERATION CONDUCTED ON
THE LAND.
(c) Lessee represents, warrants and covenants that it (i) will not make
any statement, representation, warranty or promise concerning, or
description of or reference to, this Lease, the subject matter
hereof or the relationship of Lessor and Lessee, which is false,
misleading or inaccurate, either by its terms or as a result of
omission of information which is necessary for such statement,
representation, warranty, promise, description, or reference to be
true or accurate, and (ii) will provide a copy of this Lease to any
prospective investor, lender, partner or joint venturer relating to
this Lease or involving the rights and obligations of Lessee under
this Lease. Lessee further represents and warrants that only
accredited investors (as defined under federal securities laws) will
be permitted to invest in Methane Management, Inc. or directly in
the transactions contemplated by this Lease, whether as debt or
equity.
(d) Lessee acknowledges that Lessor makes and has made no
representations, warranties or promises to Lessee regarding (i) the
condition under the Land or the Depth or the existence, quantity,
quality or depth of coal, oil, gas or coalbed methane which is the
subject of this Lease and (ii) the profitability, commercial
viability or economic feasibility of oil, gas or coalbed methane
extraction from
15
the Land. In entering into this Lease, Lessee has relied solely and
exclusively on its own independent investigation of the foregoing
matters, the Land, and the Depth and Lessee agrees that the Land and
the Depth are provided "AS IS, WHERE IS" with all faults, defects
and conditions, whether structural, environmental or otherwise.
Lessor shall not be liable for special, indirect or consequential
damages incurred or experienced by Lessee resulting from or arising
out of this Lease or the operations contemplated hereby, including,
without limitation, loss of profit, loss of oil, gas or coalbed
methane resources, loss of business opportunities or business
interruptions, howsoever caused, except if due to Lessor's material
breach of this Lease.
(e) All obligations of Methane Management, Inc. and BPI Industries
(USA), Inc. as Lessee hereunder shall be joint and several.
25. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Lease shall be binding upon and inure to the benefit of the respective
successors and assigns of the parties. This Lease may not be assigned by Lessee
without the prior written consent of Lessor, which consent shall not be
unreasonably withheld; provided, however, in no event whatsoever shall Lessee
make any assignment to any of the Mid-Continent Parties. All assignments shall
be executed and acknowledged in recordable form and shall be recorded in the
real property records of the counties and states in which the Land is situated.
No assignment of Lessor's interest in this Lease shall enlarge the obligations
or diminish the rights of Lessee. Lessor may transfer or assign ownership of the
Land or the Lessor's interest in this Lease, but no such transfer or assignment
shall be binding on the Lessee until the Lessee has been furnished a copy of a
written transfer or assignment.
26. JURISDICTION; JURY WAIVER. Any lawsuit, dispute, action or other
proceeding (collectively, "Action") based on or arising out of or in connection
with this Lease, whether in contract, tort or otherwise, or any order or
judgment entered by any court in respect thereof must be brought, maintained,
and entered exclusively in the courts of Hamilton County, Ohio or in the Western
Division of the United States District Court for the Southern District of Ohio;
provided however, that any suit brought by Lessor seeking enforcement against
any collateral or other property may be brought, at Lessor's option, in the
courts of any jurisdiction where such collateral or other property may be found.
Each party to this Lease (and their respective affiliates, successors and
assigns) expressly and irrevocably submits to the jurisdiction of the courts of
the State of Ohio and of the United States District Court for the Southern
District of Ohio for the purpose of any such Action, order or judgment. Lessee
further irrevocably consents to the service of process by registered mail,
postage prepaid, to the address set forth for such Lessee in this Lease (or such
other address as it shall have specified in writing to Lessor as its address for
notices hereunder) or by such other service as may be authorized by the
applicable court's rules. Service by the aforementioned mailing shall be deemed
good and sufficient service thereof. Each party to this Lease (and their
respective affiliates) hereby expressly and irrevocably waives any defense or
objection which it may now or hereafter have based on a claim of lack of
personal jurisdiction or based on improper venue or based on the doctrine of
forum non conveniens as to any such Action brought in any court referred to
above, Lessee further irrevocably agrees that a final judgment, award or decree
in any such Action shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other
16
manner as provided by law. THE PARTIES TO THIS LEASE FURTHER EXPRESSLY AND
IRREVOCABLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH ACTION AND AGREE THAT
ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED TO A COURT AND NOT BEFORE A JURY.
27. DATA TRANSFER. Upon request by Lessor, Lessee shall make available to
Lessor all geological, geophysical, engineering, or other information that
Lessee acquires with respect to the Land. In addition, Lessee shall provide to
Lessor, materials in possession of Lessee relating to title to the Land
including, without limitation, abstracts, title opinions and reports and title
curative documents. Lessor shall be entitled to make copies of any such
information and materials at its expense.
28. MINISTERIAL DOCUMENTS. Lessor shall not unreasonably refuse to execute
in a timely manner ministerial documents (such as applications or drilling
permits, approvals or consents) as may be reasonably necessary to give effect to
a provision of this Lease.
29. ENTIRE AGREEMENT. This Lease constitutes the entire agreement between
the parties hereto with respect to the subject matter and supersedes all
representations, statement or agreements, written or verbal, between the parties
or by a party with respect to such subject matter. This Agreement shall only be
amended or modified in writing.
30. GOVERNING LAW. This Lease shall be governed by and construed under the
laws of the State of Illinois.
31. RECORDING OF MEMORANDUM OF LEASE. Lessee shall record a memorandum of
this Lease in the real property records of the county(ies) in which the Covered
land is situated.
32. SURRENDER OF LEASE. Lessee may at any time and from time to time
surrender this Lease as to any part or parts of the Land by delivering a release
thereof to Lessor and placing it of record in the land records of the county
where the Land is situated.
33. INTERESTS OF THIRD PARTIES. This lease is subject to all existing
reservations, exceptions, easements, encumbrances, restrictions, covenants,
servitude, grants, deeds, leases, conveyances and other matters affecting the
Land, including without limitation the
17
coal leases which may hereafter be executed by Lessor affecting the Land; upon
the request of Lessor, Lessee agrees to execute and deliver to Lessor or such
party such instruments as are necessary to confirm the subordinated of its
rights hereunder to such lease.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed as of the day and year first written above.
LESSOR LESSEE
AFC Coal Properties, Inc. Methane Management, Inc.
By: /s/ John A. Anderson By: /s/ James G. Azlein
------------------------------------- --------------------------------
John A. Anderson, President James G. Azlein, President
American Premier Underwriters, Inc. BPI Industries (USA), Inc.
By: /s/ John A. Anderson By: /s/ Curtis R. Huber
------------------------------------- --------------------------------
John A. Anderson, Vice President Curtis R. Huber, President
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