EXPLORATION AGREEMENT
POTATO HILLS DEEP PROSPECT
THIS EXPLORATION AGREEMENT (the "Agreement") is made and entered into effective
the 27th day of February, 2003, by and between The GHK Company, L.L.C. and
GHK/Potato Hills Limited Partnership (hereinafter collectively referred to as
"GHK"), and BWP Gas, L.L.C. (hereinafter referred to as "Participant").
WHEREAS, GHK represents that it is the present owner of oil and gas leases (the
"Leases") more particularly described on Exhibit "A" attached hereto.
WHEREAS, Participant desires to acquire a certain undivided portion of GHK's
rights, titles and interests in and to the wellbores of certain wells that may
be drilled subject to the tenns, conditions, reservations and limitations
hereinafter provided, and to participate in the drilling of an Initial Well for
oil and/or gas as hereinafter provided.
NOW THEREFORE, for and in consideration of the covenants and agreements
hereinafter contained and set forth, to be kept and performed by the parties
hereto, such parties agree as follows:
I CONTRACT AREA
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1.1 The area (CONTRACT AREA) covered by this Agreement is described as:
TOWNSHIP 3 NORTH, RANGE 19 EAST, LATIMER CO., OKLAHOMA
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SECTIONS 25, 26, 35 AND 36
TOWNSHIP 3 NORTH, RANGE 20 EAST. LATIMER CO., OKLAHOMA
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SECTIONS 25 THROUGH 36
TOWNSHIP 3 NORTH, RANGE 21 EAST, LATIMER CO., OKLAHOMA
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SECTIONS 29, 30, 31, AND 32
TOWNSHIP 2 NORTH, RANGE 19 EAST, PUSHMATAHA CO., OKLAHOMA
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SECTIONS 1 THROUGH 4, 9 THROUGH 15
TOWNSHIP 2 NORTH, RANGE 20 EAST, PUSHMATAHA CO., OKLAHOMA
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SECTIONS 1 THROUGH 9
TOWNSHIP 2 NORTH, RANGE 21 EAST, PUSHMATAHA CO., OKLAHOMA
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SECTION 6
II. EXHIBITS
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2.1 Attached to and made a part hereof for all intents and purposes are
the following Exhibits:
Exhibit "A" - Schedule of leases (the "Leases") owned by GHK prior
to February 13, 2003;
Exhibit "B" - Copy of A.A.P.L. Form 610-1989 Operating Agreement
(sometimes referred to herein as "JOA"), including modification,
deletions and additions, to be utilized in accordance with the terms
and provisions of this Agreement;
Exhibit "C" - Two (2) copies of Authority for Expenditure ("AFE")
for the drilling and completion of the Mary #2-34 well in Section
34-3N-20E, Latimer County, Oklahoma.
Exploration Agreement.doc 1
EXHIBIT "A"
ATTACHED HERETO AND MADE A PART OF THAT CERTAIN
ASSIGNMENT AGREEMENT DATED MARCH 12, 2003
BY AND BETWEEN FAR GROUP, INC.
AND OKLAHOMA HILLS GAS, L.P.
III INTEREST OF PARTIES
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3.1 The ownership percentage ("Ownership Percentage") of the Parties is
as follows:
Mary #2-34 Wellbore
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* Participant 5%- 10% of 8/8ths
*Mary #2-34 wellbore interest of Participant shall be a minimum of
5% of 8/8ths and a maximum of 10% of 8/8ths and will be determined
at option of Participant pursuant to Paragraph 4.1 below.
Subsequent Wells Drilled in the Contract Area Pursuant to Article VIII
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Below
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GHK 90%
Participant 10%
3.2 It is understood and agreed that Participant shall not pay any
geological, geophysical, or lease acquisition costs in connection with
this Agreement insofar as it covers the Contract Area and shall only be
responsible for its promoted share of drilling and completion costs in
accordance with Articles VI and VIII below.
IV. ASSIGNMENT
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4.1 Participant shall have sixty (60) days from the execution date of
this Agreement to tender payment to 011K in the amount of five million
dollars ($5,000,000 U.S.). Upon receipt of payment in the amount of
$5,000,000, GHK agrees to assign to Participant an undivided five percent
of 8/8ths (5% of 8/8ths) interest in the Mary #2-34 wellbore in Section
34-3N-20E, Latimer County, Oklahoma. In addition to the aforementioned 5%
of 8/8ths working interest, Participant shall have the option to purchase
an additional 1% to 5% of 8/8ths working interest in the Mary #2-34
wellbore (for a maximum ten percent [10%] working interest) by paying one
million dollars ($1,000,000) for each additional one percent (1%) taken.
Said option must be exercised and payment tendered to GHK within ninety
(90) days from the execution date of this Agreement. Any interest assigned
and delivered to Participant shall be subject to the overriding royalty
burdens set forth below and without warranty of any kind, express or
implied, except that GHK shall warrant title to the Leases by, through and
under itself, but not otherwise, and Participant shall have the right to
enforce, to the extent such rights are assignable, any warranties
contained in the Leases. Said wellbore Assignment shall be effective as of
the same date hereof and shall be subject to the terms, conditions,
reservations and limitations of the following:
a. The Leases; and all Assignments as to any portion thereof;
b. This Agreement;
c. That certain unrecorded Operating Agreement dated effective
June 1, 2002, by and between the Parties hereto, a full and complete
copy of which is attached hereto as Exhibit "B";
d. An overriding royalty interest in favor of GHK on all acreage
assigned by GHK to Participant in an amount equal to the difference
between existing burdens and twenty-five percent (25%), it being the
intent of GHK to deliver a seventy five percent (75%) net revenue
interest in the Leases to Participant.
e. As to the following units that are held by production as of
the effective date hereof, a depth limitation whereby GHK reserves
and excepts unto itself in any assignment made pursuant to this
agreement all rights as to those depths and formations from the
surface of the earth to the stratigraphic equivalent of the base of
the Upper Jackfork (Ratcliff)
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formation as defined at 5,410' in the Ratcliff #1-33 wellbore in
Section 33-3N-20E, Latimer County, Oklahoma.
Township 2 North - Range 20 East
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Sections 3, 4, 5, 6, 8 and 9
Township 3 North - Range 20 East
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Sections 25, 31, 34, 35 and 36
Township 2 North - Range 19 East
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Sections 3, 10 and 12
f. As to the following units that are held by production as of
the effective date hereof, a depth limitation whereby GHK reserves
and excepts unto itself in any assignment made pursuant to this
agreement all rights as to those depths and formations listed below:
Township 2 North - Range 20 East
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Section 7: From the surface of the earth to the stratigraphic
equivalent of the base of the basal Jackfork
sandstone as defined at 7,815' in the Four Star
#1-7 wellbore.
Township 3 North - Range 20 East
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Section 32: From the surface of the earth to the stratigraphic
equivalent of the base of the Cedar Creek
sandstone as defined at 5,600' in the Allen #2-32
wellbore.
Township 3 North - Range 20 East
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Section 33: From the surface of the earth to the stratigraphic
equivalent of the base of the Cedar Creek
sandstone as defined at 5,330' in the Cedar Creek
#3-33 wellbore.
Township 2 North - Range 19 East
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Section 1: From the surface of the earth to the stratigraphic
equivalent of the base of the basal Jackfork
sandstone as defined at 4,836' in the Wigington
#1-1 wellbore.
Township 2 North - Range 19 East
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Section 2: From the surface of the earth to the stratigraphic
equivalent of the base of the basal Jackfork
sandstone as defined at 6,150' in the Koopman #1-2
wellbore.
Township 2 North - Range 19 East
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Section 9: From the surface of the earth to the stratigraphic
equivalent of the base of the Arkansas Novaculite
formation as defined at 5,546' in the Gee #1-9
wellbore.
Township 2 North - Range 19 East
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Section 11: From the surface of the earth to the stratigraphic
equivalent of the base of the Cedar Creek
sandstone as defined at 5,052' in the Hester-Clell
#1-1 1 wellbore.
g. Subject to that certain Letter Agreement dated July 23, 1998,
by and between GHK and W. O. Pettit, W. P. Lerbiance, Jr., Tripco,
Inc. and/or Prism Energy, Inc., and Don W. Roberts ("Pettit Group")
whereby the Pettit Group has the right to acquire from GHK an
undivided five percent (5.0%) interest in each section of the
Contract Area where GHK owns at least fifty percent (50.0%) in the
Contract Area and five percent (5.0%) of GHK's leasehold interest in
each section of the Contract Area where GHK owns less than fifty
percent (50.0%).
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h. Subject to existing agreements with Chesapeake Exploration
Limited Partnership, Palace Exploration Company, Castlerock
Resources, Inc., and Tularosa, Inc. dated effective March 28, 2002
whereby GHK's interest is reduced by a proportionate 15%, 14%, 0.5%
and 0.5% respectively.
i. GHK reserves and excepts unto itself all rights in existing
wellbores, equipment, facilities and pipelines within the AMI.
Should any existing wellbore be reentered, recompleted or deepened
("subsequent operation") to a formation that is to be assigned to
Participant, then Participant shall have the option to participate
in the subsequent operation by paying its ownership share of GHK' s
actual cost to drill the well to the point before the subsequent
operation along with its ownership share of the cost to complete the
subsequent operation.
4.2 The interest assigned shall be subject to its proportionate share of
all royalties, overriding royalties, production payments and other
leasehold burdens created, reserved, excepted or assigned in any of the
instruments referred to in Article 4.1 above.
V. AREA OF MUTUAL INTEREST
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5.1 An Area of Mutual Interest ("AMI") identical in area to the
aforementioned Contract Area is hereby established.
5.2 The AMI created pursuant to this paragraph shall be effective as of
the same date this Agreement is effective and shall continue for a period
of five (5) years thereafter. The duration of the AMI can be extended or
reduced only by written agreement of the parties hereto.
5.3 Should Participant or anyone ion their behalf, or for their benefit,
directly or indirectly after the effective date of this Agreement acquire
any Additionally Acquired Interests within the AMI, then Participant shall
offer GHK the right to acquire its Ownership Share of the same by paying
its proportionate share of the costs incurred in connection therewith.
Participant shall give prompt written notice of all the particulars with
respect to price, terms and conditions relative to such leases and/or
rights with the AMI. GHK shall have ten (10) days (forty-eight [48] hours
if a well is drilling or completing within one [1] mile of the AMI
outline) to acquire its proportionate share of such offering by paying a
like share of the actual land costs attributable to such acquisition.
Failure or refusal to notify or pay Participant in the manner set forth
above shall constitute an election by GHK not to acquire its proportionate
share of said interest.
5.4 Participant shall offer GHK its Ownership Share of any leasehold
interest, unleased mineral interest, force pooled interest, or any other
interests or rights whatsoever ("Participant's Interests"), which
Participant currently owns within the AMI. Participant's Interests shall
be offered in writing to GHK within ten (10) days from execution and
delivery of this Agreement and GHK will have ten (10) days to elect to
acquire its Ownership Share of Participant's Interests at actual cost and
existing net revenue interest. Participant's Interests shall be assigned
by Participant to GHK within thirty (30) days of GHK's payment of its
proportionate share of land costs, subject to an overriding royalty
interest equal to the difference between existing burdens and twenty two
percent (22.00%), it being the intent of Participant to deliver a seventy
eight percent (78.00%) net revenue interest in the Participant's Interests
to GHK. In the event Participant's Interest has existing burdens in excess
of twenty two percent (22.00%), then such interest shall be delivered to
GHK at existing net revenue interest and Participant shall reserve no
overriding royalty interest as to such interest.
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VI. INITIAL WELL COMMITMENT
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6.1 The Parties hereto agree to join in the drilling of the Mary #2-34
well ("Initial Well") at a location in the Southwest ("SW/4") of Section
34, Township 3 North, Range 20 East, Latimer County, Oklahoma. GHK has
commenced drilling and is currently drilling the Initial Well at a depth
of approximately 17,500'. GHK shall diligently pursue the drilling of said
Initial Well to a total depth of 24,500' below the surface of the ground
or a depth sufficient to adequately test the Arbuckle formation, whichever
is the lesser depth. For the purpose of drilling said Initial Well, all of
Section 34-3N-20E, Latimer County, Oklahoma shall be considered the
appropriate drilling and spacing unit unless changed by 011K pursuant to
State and/or Federal rules and regulations or by mutual agreement.
6.2 Should the total costs as reflected on the AFE attached hereto as
Exhibit "C" exceed one hundred and ten percent (110%), Participant agrees
to pay its proportionate Ownership Share, as determined pursuant to
Articles 3.1 and 4.1 hereinabove, of all costs incurred in the drilling,
testing, equipping, producing and operating the Initial Well that exceed
110% of the AFE. GHK will invoice Participant for such costs incurred on a
monthly basis.
6.3 If, prior to reaching the authorized depth during the drilling of
the Initial Well, or prior to completing said well, conditions are
encountered, which would render further operations by a reasonably prudent
Operator impractical or unreasonably dangerous and Operator is forced to
abandon the well, then, within sixty (60) days after cessation of
operations GHK shall have the right to commence or cause to be commenced
the actual drilling of a "Substitute Well" for said Initial Well at a
mutually acceptable (among the parties of the Operating Agreement)
location on the Contract Area described in the JOA, and then continue the
drilling thereof in the same manner and to at least the same authorized
depth as provided for the Initial Well, and such Substitute Well when so
drilled shall qualify as the Initial Well. Assignor may drill as many
Substitute Wells as may be necessary to reach the authorized depth
provided operations for each Substitute Well shall be commenced within
sixty (60) days of cessation of operations of the previous Substitute Well
unless a shorter term is required by any of the Leases or Agreements. Each
such Substitute Well shall be considered under this Agreement to be the
Initial Well.
6.4 By execution of this Agreement, the parties hereto agree that all
operations conducted within the AMI shall be conducted in accordance with
the terms and provisions of the form Operating Agreement, attached hereto
as Exhibit "B". At such time as the first well is proposed in each
drilling and spacing unit within the AMI, there shall be prepared and
submitted by the Operator for approval by Participant, an operating
agreement similar in form as Exhibit "B" attached hereto.
VII. OPERATOR OF CONTRACT AREA
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7.1 GHK shall be designated Operator of all operations in the AMI. and
shall conduct, direct and have full control of all operations, including
determination of appropriate drilling and spacing unit size, in the AMI as
permitted and required within the limits of this agreement, Participant
agrees to support GHK as Operator at any hearing before any State and/or
Federal regulatory body in which GHK is seeking operations.
VIII. SUBSEQUENT WELLS
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8.1 Should GHK desire to drill a well or wells ("Subsequent Well") in
addition to the Initial Well on lands in the AMI, then with respect to
each additional well GHK shall give Participant written notice of the
proposed operation specifying the work to be performed, the approximate
location, proposed depth, objective formation, and the estimated cost of
the operation in the form of an AFE. Participant shall have thirty (30)
days after receipt of the
Exploration Agreement.doc 5
notice within which to notify, in writing, GHK whether Participant elects
to participate in the cost of the proposed operation. Failure of
Participant to reply within the 30-day period shall constitute an election
by that party NOT to
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participate in the cost of the proposed operation. Should Participant
elect to participate, they shall pay and bear an undivided ten percent
(10%) interest in the wellbore of the Subsequent Well by paying 1.33 times
of the actual costs associated with the drilling and completion of such
well. The 10% interest shall be proportionately reduced to the total GHK
interest in the well. By way of clarification and example, if GHK owns a
50% interest in a Subsequent Well, Participant's participation interest
will be 50% times 10% (or 5%) and when multiplied by 1.33, will result in
Participant paying 6.65% of the actual costs of drilling and completing
said well. Participant's interest in any well shall be limited to the
wellbore only of such well.
8.2 Notwithstanding anything to the contrary contained in Exhibit "B"
attached hereto, in the event GHK proposes that Subsequent Well(s) be
drilled in the AMI, Participant will have thirty (30) days to make an
election to participate in such well or forever forfeit its rights to
participate in that well or any other well drilled in that particular
spacing unit.
IX. DELAY RENTALS, MINIMUM ROYALTIES, SHUT-IN ROYALTIES
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9.1 If any delay rental, minimum royalty or shut-in royalty shall become
due on any oil and gas lease subject to this agreement while the same
remains in force and effect and such oil and gas lease is not then subject
to an effective JOA entered into pursuant to the terms and provisions of
this Agreement, then the party hereto who originally acquired such lease
shall pay such delay rental, minimum royalty or shut-in royalty and the
other owner of such lease, determined in accordance with the terms and
provisions of this Agreement, shall reimburse the paying party for its
respective proportionate part calculated pursuant to the terms and
provisions of this Agreement upon receipt of an invoice evidencing such
payment.
X. RELATIONSHIP OF PARTIES
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10.1 Nothing contained in this Agreement is intended to create, nor shall
this Agreement be construed as creating, a partnership, joint venture,
mining partnership, association or other relationship whereby any party
hereto shall ever be held liable for the acts, debts, or obligations of
the other. The duties, obligations and liabilities of the parties to this
Agreement shall be several and not joint, it being understood and agreed
that each party shall be responsible only for its duties, obligations and
liabilities as set out herein. For federal income tax purposes, the
provision contained in the attached JOA in respect to federal income tax
is herewith adopted for all purposes hereunder as though said provision
appeared herein.
XL. RISK OF LOSS
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11.1 GHK and Participant understand and agree that the drilling and
exploration for hydrocarbons is a highly speculative venture and
Participant agrees that GHK has made no warranties or representations as
to the success or financial gain relative to the above captioned prospect.
Participant, by acceptance of this Agreement, signifies that it has
sufficient knowledge and experience to utilize the information contained
herein and to evaluate the risks involved in any investment in oil and gas
activities and that it is capable of bearing any and all economic risks
involved in this investment with full knowledge that its investment could
result in a loss.
XII. MISCELLANEOUS
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12.1 The terms, covenants and conditions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors, heirs, representatives and assigns.
Exploration Agreement.doc 6
12.2 Should Participant desire to sell all or any part of its interest
under this Agreement, or its rights and interests in the Contract Area, it
shall promptly give written notice to GHK, with full information
concerning its proposed disposition, which shall include the name and
address of the prospective transferee (who must be ready, willing and able
to purchase), the purchase price, a legal description, sufficient to
identify the property, and all other terms of the offer. GHK shall then
have an optional prior right, for a period of ten (10) days after the
notice is delivered, to purchase for the stated consideration on the same
terms and conditions the interest which Participant proposes to sell.
However, there shall be no preferential right to purchase or a requirement
to notify GHK, in the following events: (i) Participant desires to
mortgage its interest, (ii) Participant desires to transfer title to its
interests to its mortgagee in lieu of or pursuant to foreclosure of a
mortgage of its interests, (iii) Participant disposes of its interests by
merger, reorganization, consolidation, or (iv) Participant sells or
transfers all or any part of its interests to an affiliate entity, trust,
subsidiary or parent company or to a subsidiary of a parent company, or to
any entity which Participant owns an interest.
12.3 The articles, sections and other headings contained in this
Agreement are inserted and included solely for convenience and shall not
be considered, or given any effect, in construing this Agreement, or any
part thereof, or in connection with the duties, obligations, benefits or
liabilities of the respective parties hereto, or in ascertaining the
intent of the parties hereto if any questions of intent should arise; it
being otherwise the intention of the parties hereto that this Agreement be
construed as whole.
12.4 The Agreement represents the entire agreement between the parties
hereto with respect to the AMI, and shall only be amended by a written
instrument executed by all the parties hereto.
12.5 Each of the parties to this Agreement represents it is not a party
to any agreement or arrangement which conflicts with the terms and
provisions of this Agreement.
12.6 Any party's obligations under this Agreement shall be suspended
during the time and to the extent that it is prevented from complying
therewith, in whole or in part, by weather conditions, labor disturbances,
civil disorder, Acts of God, unavoidable accidents, laws, rules or
regulations of governmental bodies or agencies, delays in transportation,
inability to obtain necessary materials or equipment including drilling
rigs, in the open market, or any other cause, except financial, whether
similar or dissimilar to those specifically enumerated, beyond the party's
reasonable control.
12.7 In the event of a conflict between this Agreement and JOA attached
hereto as Exhibit "B" or any operating agreement prepared pursuant to the
terms hereof, this Agreement shall control.
12.8 In the event that Participant pays all sums set forth in Article 4.1
hereinabove, GHK does hereby grant Participant the right, but not the
obligation, to participate with an undivided ten percent (10%) of GHK's
interest in all other prospects generated or acquired by GHK (hereinafter
referred to singularly as "Prospect" and plurally as "Prospects").
Participant's terms for such participation shall be identical to those
terms and conditions offered to Petroleum Properties Management Company,
L.L.C., Brian F. Egolf and Robert D. Hissom (hereinafter collectively
referred to as the "Private Investor Group"). In the event that any of the
participants in the Private Investor Group makes an election to not
participate, for its proportionate share of any Prospect, Participant,
shall have the option, but not the obligation, to acquire Participant's
proportionate share of the non-participating Private Investor Group's
interest in said Prospect. Additionally, in the event that GHK makes the
determination to seek the participation of additional industry partners or
investors (other than the Private Investor Group) in any Prospect,
Participant shall have the right of first refusal to acquire all or any
Exploration Agreement.doc 7
portion of the participation interest offered by GHK in said Prospect,
under the same terms as offered to said industry partner(s) or
investor(s). Participant will have thirty (30) days after receipt of
notice within which to notify, in writing, GHK whether Participant elects
to participate in the Prospect. Failure to timely reply shall constitute
an election by Participant not to participate in said Prospect. For the
purposes of this paragraph, the notice to be provided to the Participant
shall contain all the terms of the Prospect and all information necessary
for Participant to make an informed decision regarding its election to
participate in the proposed Prospect. The Prospects currently being
evaluated and assembled by 011K include, but are not limited to, the
Indian Prospect in Roger Mills County, Oklahoma, the Goostree Prospect in
Beckham County, Oklahoma, and the Big "0" Prospect in the Texas Panhandle.
The terms of participation have not been determined by GHK for any of the
Prospects identified in this Article 12.8, as of the effective date of
this Agreement.
12.9 All notices required hereunder shall be delivered by certified mail,
return receipt requested, and shall be made to the following:
The GHK Company
6305 Waterford Blvd., Suite 300
Oklahoma City, OK 73118
Attention: Robert S. May
BWP Gas, L.L.C.
5858 Westheimer, Suite 708
Houston, Texas 77057
Attention: Managing Member
***prior to the payment of the sums set forth in Article 4.1
hereinabove, GHK shall provide to Participant all necessary
consents, approvals and authorizations of assignments, and waivers
of preferential rights to purchase as to the Ownership Interests to
be conveyed to Participant.
12.10 All jointly acquired well information and proprietary data, whether
of technical or land-related nature, shall be held strictly confidential
by Participant. Requests from a third party to examine or contract to
lease or purchase any of such data must be approved in writing by GHK.
If the terms and conditions contained in this Agreement correctly set forth your
understanding of our agreement, please signify your acceptance by executing the
Agreement in the space provided below and returning one (1) executed original to
GHK at the above address on or before ten (10) days from the date of execution
below, or, at GHK's option, this Agreement shall expire and have no further
force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement this 4TH
---
day of MARCH 2003, but is effective as of the 27th day of February, 2003.
------
THE GHK COMPANY, L.L.C.
GHK/POTATO HILLS LIMITED PARTNERSHIP BWP GAS, L.L.C.
By: "ROBERT S. MAY" By: "ERNEST BARTLETT"
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Robert S. May, Attorney-in-Fact Title: HBA GAS, INC.
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MANAGING MEMBER
BY: ERNEST BARTLETT
PRESIDENT
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