REVISED JOINT DEVELOPMENT
AGREEMENT
THIS REVISED JOINT DEVELOPMENT AGREEMENT ("Agreement") is made and entered
into effective as of August 8, 2000, by and between AVALON EXPLORATION, INC.,
Fifteen East Fifth, Suite 2100, Tulsa, Oklahoma, 74103 ("Avalon"), and RED RIVER
ENERGY, L.L.C., 6120 South Yale, Suite 813, Tulsa, Oklahoma, 74136 ("RRE")
(Avalon and RRE are collectively hereinafter referred to as "the Parties").
W I T N E S S E T H:
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WHEREAS, RRE and its Affiliates (as hereafter defined) are the owners of
certain oil and gas interests in the West Edmond Hunton Lime Unit as hereafter
described, and desire to contract with Avalon for the development of the oil and
gas reserve potential of the WEHLU by the drilling of a Pilot Project within the
unit to be performed by Avalon, upon the terms and conditions of this Agreement;
and
WHEREAS, Avalon desires to engage in the exploitation and if necessary
de-watering of a Pilot Project within the unit, to obtain the earning interests
provided for herein in the pilot project production and subsequent joint
development production, and to operate the wells within the Pilot Project and
subsequent joint development areas, all in accordance with the terms and
conditions of this Agreement.
WHEREAS, Avalon and RRE entered into that certain agreement Joint
Development Agreement dated May 25, 2000 and this agreement shall supercede and
replace that certain agreement,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Parties hereto agree as follows:
A G R E E M E N T:
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1. DEFINITIONS.
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For the purposes of this Agreement, the following definitions and/or
interpretations shall apply:
(a) "Affiliates" shall mean all persons, corporations, companies, partnerships
and other entities that own or control a majority of the voting authority
of either of the parties, or are related to, affiliated with or under
common ownership or control with such owners or either of the parties,
including all parent and subsidiary entities.
(b) "AMI" shall mean the Area of Mutual Interest consisting of all of WEHLU and
any area outside of WEHLU as mutually agreed by Avalon and RRE to be
incorporated into the AMI.
(c) "Completion" of any well as provided for herein has occurred when a well
has been fully equipped for the taking of production, through and including
the tanks for an oil well and through and including the connection of said
well to the existing gathering systems, for a gas well, or plugged and
abandoned, after being drilled to Contract Depth, if a dry hole.
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(d) "Completion Date" for purposes of this Agreement shall be the date of the
official completion report filed by Avalon on behalf of RRE with the
appropriate state, federal or Indian agency having jurisdiction thereof for
such well.
(e) "Contract Depth" is a depth sufficient to fully penetrate the stratigraphic
equivalent of the Hunton formation.
(f) "Expenditures" shall refer to the total of (a) all severance, ad valorem,
windfall profit, and other taxes applicable to the Pilot Wells, the JVDA
Wells or the Unit Wells, as applicable, and, (b) all billings or invoices
for operating expenses, equipment, supplies, or services, including
gathering, transportation, and compression charges, used or intended to be
used in connection with the exploration, development, or operation of or
applicable to the Pilot Wells, the JVDA Wells or the Unit Wells, as
applicable.
(g) "Field Study" shall refer to the Work, analysis and all other information
prepared or obtained by Avalon in connection with the determination of the
optimal locations, economic viability and project engineering prognosis for
the development of the Pilot Project.
(h) "Interest Rate" shall be the prime rate published in the Wall Street
Journal (Southwestern Edition) on the date any reimbursement hereunder is
demanded (with the last such published rate to govern on any day when a
rate is not so published).
(i) "Joint Operating Agreement" shall be the Joint Operating Agreement between
Avalon, RRE and other parties evidencing Avalon's contract operational
rights and responsibilities for the Pilot Project and the JVDA, the form of
which is attached hereto as Exhibit "C".
(j) "JVDA" shall mean the Joint Venture Development Area consisting of all of
WEHLU exclusive of the Pilot Project.
(k) "JVDA Production" shall mean and include all oil, gas, casinghead gas,
distillate and/or condensate and other minerals which are produced and
saved from a JVDA Well.
(l) "JVDA Well" or "JVDA Wells" whether individually or collectively, means any
and all wells within WEHLU or the AMI that are drilled and produced as a
part of the JVDA on a Spacing Unit, and all increased density wells on such
Spacing Unit or any lesser Spacing Units, which are covered by this
Agreement.
(m) "Non-commercial Wells" means any wells that is not capable of producing oil
and gas and other minerals in Paying Quantities.
(n) "Paying Quantities" means a quantity of oil (including any gaseous
hydrocarbons produced with oil) and/or gas (including any liquid
hydrocarbons produced with gas) sufficient (not considering the cost of
drilling) to repay the cost of operations.
(o) "Pilot Well Production" shall mean and include all oil, gas, casinghead
gas, distillate and/or condensate and other minerals which are produced and
saved from a Pilot Well.
(p) "Pilot Well" or "Pilot Wells" whether individually or collectively, means a
minimum of four (4) and a maximum of eight (8) production wells and
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injection well(s) , if necessary drilled pursuant to Section 3 of this
agreement together with their associated Spacing Unit, and all increased
density wells on a Spacing Unit or any lesser Spacing Units, which are
covered by this Agreement and located within WEHLU.
(q) "Pilot Project" shall be a group of up to eight (8) wells, but in no event
less than four (4) Pilot Wells capable of producing in Paying Quantities
and if necessary, injection well(s) drilled pursuant to this Agreement
within their associated Spacing Unit in WEHLU as subsequently agreed to
between the Parties.
(r) "Spacing Unit" shall mean a 160 acre drilling and spacing unit, or any such
smaller drilling and spacing unit subsequently established within or
including a portion of said 160 acre unit to accommodate increased density
drilling.
(s) "Third Party Charges" shall be any and all charges incurred by Avalon for
the retention of contractors or subcontractors that Avalon deems necessary
to perform or assist in the performance of the Work hereunder.
(t) "Unit Production" shall mean and include all oil, gas, casinghead gas,
distillate and/or condensate and other minerals which are produced and
saved from a Unit Well.
(u) "Unit Well" or "Unit Wells" whether individually or collectively, means any
and all wells within WEHLU that are not Pilot Wells or JVDA Wells,
including without limitation those wells located on the properties listed
in Exhibit "A" attached hereto and made a part hereof.
(v) "WEHLU" shall refer to the West Edmond Hunton Lime Unit as established
pursuant to a Plan of Unitization.
(w) "Work" shall mean all of the equipment, services, materials, products,
supplies, labor and management personnel required to drill and complete the
Pilot Wells hereunder, together with the Field Study.
2. FIELD STUDY.
Avalon agrees to complete the Field Study by August 15, 2000 and will provide a
complete copy of the same to RRE upon completion. RRE agrees to provide Avalon
with complete access to its well, production, accounting, land, engineering
files and field operational facilities in connection with the preparation of the
Field Study. Avalon shall provide all of the geologic and engineering staff
necessary to perform the Field Study. The Field Study shall be performed by
Avalon at its sole cost, risk and expense.
Upon timely delivery of the Field Study, Avalon shall have the right to elect to
proceed or discontinue the Pilot Project, which election shall be made in
writing to RRE on or before August 31, 2000. Should Avalon elect not to continue
with the Pilot Project based on the results of the Field Study, RRE will receive
a complete copy of the Field Study and release Avalon from all other claims,
responsibilities and obligations with respect to the Pilot Project and this
Agreement shall be deemed terminated without any other act by either of the
parties. However, should Avalon determine that the results of the Field Study
are favorable, Avalon may provide its written election to proceed with the Pilot
Project on or before August 31, 2000.
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3. PILOT WELLS.
If Avalon elects to proceed with the development of the Pilot Project, Avalon
shall perform a Pilot Project consisting of a minimum of four (4) and a maximum
of eight (8) Hunton production wells and if necessary the required
injection/disposal well(s). Avalon and RRE shall determine the total number of
wells within the Pilot Project based upon their evaluation of the results of the
Field Study and information gained from the drilling and test results of the
Pilot Project wells. The Pilot Project area will consist of a total of up to
eight (8) Spacing Units encompassing 1280 total acres in the combined Pilot
Project area, unless Avalon determines a lesser number of Pilots Wells are
warranted within the Pilot Project. RRE has presently producing and or shut-in
Unit Wells in the respective quarter sections defined on the Exhibit "A"
attached hereto and made a part hereof. Avalon agrees to obtain RRE's prior
written consent for inclusion of any 160 acre quarter section unit containing a
presently producing or shut-in Unit Well unit described on the attached Exhibit
"A" in the Pilot Project or the JVDA.
In the event a Pilot Well is lost for any reason prior to being drilled to
Contract Depth or Avalon has encountered during the drilling of such Pilot Well
mechanical difficulty or formation or condition which would render further
drilling impractical or impossible, Avalon may plug and abandon such Pilot Well
and thereafter may continue its rights hereunder by commencing a substitute
Pilot Well ("Substitute Location") for such well within thirty (30) days from
the date the drilling rig for such well was released. Any Substitute Location
drilled hereunder shall be drilled subject to the same terms and conditions and
to the same depth as provided for the said well. Any reference herein or
hereinafter made to the said well shall be deemed to be a reference to any
Substitute Locations which may be drilled therefor.
4. EARNING INTERESTS.
RRE hereby grants to Avalon a continuous drilling option on the Pilot Project
area. Avalon may exercise its option to receive rights and interests in the
Pilot Project upon commencement of operations to drill the first Pilot Well in
the Pilot Project. Avalon shall have such an option for the Pilot Project if
such operations to drill commence on or before September 30, 2000. If Avalon
timely commences such first Pilot Well, Avalon shall earn 100% of RRE's right,
title and interest in the Pilot Well Production from each respective Pilot Well
and Spacing Unit containing such Pilot Well within an applicable Pilot Project.
After commencement of the first Pilot Well, the Pilot Project Wells may be
conducted in any order determined by Avalon and its obligation to commence a
Pilot Well shall be satisfied if a Pilot Well in the Pilot Project is timely
commenced as hereafter provided. To earn such interest in each subsequent Pilot
Well Production and corresponding Spacing Units, Avalon must commence operations
for the drilling of each subsequent Pilot Well within thirty (30) days from the
Completion Date of the previous Pilot Well or such continuous drilling option
shall expire, subject to the notice requirements provided in Section 12 hereon.
RRE will allow Avalon a 90 day testing and evaluation period after the
Completion Date of the fourth (4th) well and the commencement of operations of
the fifth (5th) well of the Pilot Project. Should Avalon timely commence each
consecutive Pilot Well, Avalon will maintain and continue its right to drill and
complete consecutive Pilot Wells within the Pilot Project until Completion of
the Pilot Project.
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5. ASSIGNMENT OF INTERESTS.
Upon the Completion Date of each Pilot Well or JVDA Well drilled within a Pilot
Project or the JVDA, RRE agrees to assign all its right, title and interest in
the Pilot Well Production from the completed Pilot Well and 60% of RRE's right
title and interest in the JVDA Well Production from the completed JVDA Well,
subject to RRE's election to participate with its 40% interest as provided
herein, in the corresponding Spacing Unit. Title to the leasehold for the Hunton
rights is derived from RRE's respective ownership in the entire WEHLU; however,
Avalon's earning interest will be limited to Pilot Well Production or JVDA
Production received by virtue of the Pilot Wells or JVDA Wells drilled in each
respective Spacing Unit. Depth of rights earned will be from the surface to the
base of the stratigraphic equivalent of total depth drilled in each Pilot Well
or JVDA Well and further limited to those leasehold rights RRE actually owns.
Assignment of rights lying outside the Hunton formation will be done for each
Spacing Unit as rights are earned limited to those leasehold rights RRE actually
owns. RRE will retain all right, title and interest in and to all production
from the Unit Wells, if any, within the Pilot Project or the JVDA. RRE grants
Avalon the right to operate, drill, inject, dispose fluids into any and all
formations which RRE presently owns the leasehold and operating rights to inject
said fluids in the WEHLU. All Pilot Wells shall be drilled to the Contract
Depth.
The interests earned as specified above shall be conveyed and assigned to Avalon
with covenants of special warranty for each Pilot Well, JVDA Well and applicable
Spacing Unit pursuant to the applicable form of Assignment attached hereto as
Exhibit "B". The assignments for each such well and Spacing Unit and any future
assignments for future wells and Spacing Units shall be in a recordable form for
the applicable recording offices, shall be otherwise acceptable to Avalon and
shall be delivered to Avalon within thirty (30) days after the Completion Date
of each Pilot Well or JVDA Well. The assignment shall be made subject to the
terms of the WEHLU and to all royalties, overrides and other lease burdens
currently existing, but shall otherwise be free and clear of all liens,
encumbrances and claims of any kind.
Additionally, the parties may hereafter designate an AMI. If either Avalon or
RRE shall own or hereafter acquire any additional leases or rights within the
AMI, said party, as soon as possible, shall provide the other party the details
of such interest, including purchase price, acreage amounts, description and
acquisition costs. Such party shall then have twenty (20) days from receipt of
such information to elect whether it wishes to pay its proportionate share
(based on each parties respective participating working interest) of the costs
and acquire its proportionate share of the leases or rights. In the event such
party does not make an election within the twenty (20) day period, or elects not
to participate in the acquisition, the leases and rights offered shall not be
considered subject to this Agreement and the AMI, and such party shall be deemed
to have waived any present or future claim to said leases or rights. Any such
leases or rights owned or acquired by the consenting party shall be operated,
developed and produced outside the terms and conditions of this Agreement and
shall be subject to other joint operating agreements and documentation. By
written agreement between Avalon and RRE, the AMI may be expanded or contracted
as may be mutually agreed. Any renewal or extension of any leases or rights
previously offered and not accepted, shall not be required to be reoffered.
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6. OWNERSHIP OF INTERESTS.
RRE represents that it owns an approximate 97% Unit leasehold interest in Hunton
rights only within the WEHLU and controls field operations with respect to the
WEHLU. WEHLU is currently a valid existing unit, which has been duly and
properly established and maintained in accordance with applicable Oklahoma law.
RRE will deliver to Avalon an average 80.0% net revenue interest on all
interests delivered under this Agreement.
7. RIGHT TO REPURCHASE.
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Avalon hereby grants to RRE an option to repurchase from Avalon 40% of RRE's
original interest in the Pilot Project, proportionately reduced. Such option
shall be exercised in writing and delivered to Avalon within one hundred twenty
(120) days of the Completion Date of the last Pilot Well in the Pilot Project.
The repurchase price shall be an amount equal to 40% of the actual costs
incurred by Avalon in drilling and completing the Pilot Wells for the Pilot
Project. Avalon agrees to reassign such interest free and clear of all liens,
overriding royalty interests, or encumbrances not of record prior to Avalon's
acquisition of such interest from RRE. Should RRE elect not to exercise its
option to repurchase or shall fail to timely elect to repurchase, this option
shall terminate and all right, title, and interest of RRE to such 40% option
interest shall be null and void.
8. JVDA WELLS.
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Upon completion and development of the Pilot Project, Avalon shall have the
continuing right to develop the remaining portion of the WEHLU constituting the
JVDA on a joint venture basis with RRE. The terms of such venture shall be as
follows:
(a) Avalon will have the right to earn 64.0% of the JVDA Production
attributable to RRE's ownership position in the JVDA on a continuous
drilling to earn basis.
(b)All JVDA Production attributable to RRE's acreage acquired by Avalon pursuant
to Section 8(a) above in the JVDA will be subject to Avalon paying all
drilling, testing, completing, and equipping costs equal to a 6.25% carried
working interest to the tanks (i.e. ready for production) for the benefit
of RRE, proportionately reduced to Avalon's actual interest acquired in
each respective Spacing Unit for each JVDA Well.
(c) RRE will deliver to Avalon an average 80.0% net revenue interest equal to
the same terms as specified in Section 6 above.
(d) RRE will retain the right to participate in all JVDA Wells in the JVDA with
36.0% of its original leasehold interest in each Spacing Unit. Should RRE
elect to participate with its 36.0% interest, said interest shall be in
addition to the carried working interest set out in Section 8(b) above. For
illustrative purposes only, each parties' JVDA unit working interest,
should all parties elect to participate with their full interest, would be
as follows, proportionately reduced: Working Interest Before Production in
the Tanks: Avalon- 64.0%, RRE- 36.0%; Working Interest After Production in
the Tanks: Avalon- 64.0% less (64.0% x 6.25%) = 60.0%, RRE- 36.0% plus
(64.0% x 6.25%) = 40.0%.
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(e) Avalon shall provide written notice of any proposed JVDA Well to RRE and
RRE shall then have twenty (20) days from receipt of such notice to elect
whether it wishes to participate in such JVDA Well. In the event RRE does
not make an election within the twenty (20) day period, or elects not to
participate in the JVDA Well, Avalon will have the right of first refusal
to acquire and participate with such interest. Such right of first refusal
shall be exercised by written notification from Avalon to RRE within thirty
(30) days after the expiration of RRE's twenty (20) day election period.
RRE shall retain its right to the 6.25% carried working interest in wells
in which it does not elect to participate.
(f) Within one hundred eighty (180) days from the Completion Date of the final
Pilot Well in the Pilot Project, Avalon must notify RRE in writing of its
desire to develop the JVDA and commence operations on the initial JVDA Well
in the JVDA. The parties agree that such one hundred eighty (180) day
period is intended to be sufficient time to evaluate the production success
from the Pilot Project; however, should additional time be needed to
evaluate the success of the Pilot Project, Avalon will request such
extension from RRE in writing, and RRE shall not unreasonably withhold its
consent thereto.
(g) Avalon will continue to develop the JVDA on a well by well basis within
applicable Spacing Units with no more than thirty (30) days elapsing
between the Completion Date of one JVDA Well and the commencement of
operations on the subsequent JVDA Well.
(h) For any JVDA Well, the drilling and spacing earning units in the JVDA shall
be Spacing Units of 160 acre units, unless hereafter modified by the
written agreement of the parties.
9 OPERATIONS.
(a) RRE or one of its Affiliates is presently the legal unit operator of the
WEHLU as recognized by the Oklahoma Corporation Commission. RRE hereby
grants Avalon the right to be contractual operator of all Pilot Wells in
the Pilot Project and all JVDA Wells in the JVDA, notwithstanding that RRE
shall continue to be the unit operator of WEHLU and continue to be
responsible and obligated for all unit operating requirements established
by the WEHLU unitization agreement. RRE will retain the right and
obligation to operate the WEHLU for all Unit Wells presently in existence
and be the legal operator of all Pilot Wells and JVDA Wells drilled by
Avalon. RRE agrees to support Avalon in any Oklahoma Corporation Commission
or other governmental filings necessary to conduct operations under this
Agreement within the boundaries of the WEHLU.
(b) Avalon shall have the responsibility for all operations involved with the
drilling and completion of the Pilot Wells and JVDA Wells hereunder and for
causing each such well that is capable of producing in Paying Quantities to
be hooked-up to the appropriate separation facilities and gathering system.
Avalon shall perform all the activities and functions normally performed by
an operator as a contract service to the working interest owners in the
Pilot Project and JVDA Wells. Avalon's contract operational rights and
responsibilities shall be evidenced by the Joint Operating Agreement. In
the event any provision of the Joint Operating Agreement conflicts with or
is contrary to the terms and conditions of this Agreement, the terms and
conditions of this Agreement shall govern and control. Any reference in the
Joint Operating Agreement to Avalon being the operator shall be deemed to
be Avalon as a contract operator under this Agreement. The services,
materials, and equipment for such wells shall be procured and used by
Avalon in accordance with this Agreement and shall be subject to the
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interests of Avalon and RRE as provided herein. Upon the Completion Date of
each well completed as a well capable of producing oil/and or gas in Paying
Quantities, Avalon shall continue to be contract operator and RRE shall
continue to be operator of record and Avalon agrees to conduct operations
in accordance with the Operations Contract, the form of which is attached
hereto as Exhibit "D".
(c) Prior to the commencement of drilling operations on each Pilot Well or JVDA
Well, Avalon shall prepare a well program for the drilling and completion
of the well. Avalon will conduct its operations of such well in accordance
with the terms and conditions of the Joint Operating Agreement.
(d) In performing the drilling program contemplated hereunder, the parties
acknowledge that Avalon shall not be obligated to provide services or Third
Party Charges for drilling any well beyond the depth specified on the
appropriate well program. Should Avalon determine that continued drilling
operations on any well have become uneconomical due to unforeseen
conditions or circumstances, then Avalon may discontinue further drilling
and may commence such further services Avalon deems necessary to determine
whether completion operations should be undertaken. Avalon shall provide
RRE twenty-four (24) hours notice of Avalon's intent to log a well so that
RRE may have a representative present. Upon completion of such log, Avalon
shall have the right to make an election to proceed with completion or
plugging and abandonment of the well.
(e) RRE shall perform the duties of the operator in accordance with all
operating agreements applicable to the Unit Wells and the WEHLU unitization
agreement. Avalon agrees to perform or cause to be performed all of its
duties and obligations under this Agreement, including, without limitation,
with respect to the Pilot Wells and JVDA Wells, the operation of such wells
in good faith, in a workmanlike and prudent manner, in conformity with
accepted and prudent oil and gas industry standards of operations, in full
compliance in all material respects with all applicable federal, state, and
local laws, rules, and regulations and in material compliance with all
expressed or implied obligations of the lessee under all leases subject
hereto and assigned hereunder and in material compliance with the WEHLU
unitization agreement. Notwithstanding the above, RRE shall be responsible
for collection and distribution of all revenues attributable to the Pilot
Wells, the JVDA Wells and the Unit Wells, provided, however, that Avalon
shall have the right (i) to assume the administrative functions for revenue
distribution under the Pilot Wells and/or the JVDA Wells, and/or (ii) to
assume the responsibilities for marketing oil and gas from the Pilot Wells
and/or the JVDA Wells, upon twenty (20) days prior written notice to RRE
and the written agreement/consent of RRE. The assumption of these functions
shall not relieve RRE of its obligations and responsibilities as operator
of WEHLU. Avalon shall be responsible for the payment of all Expenditures
on any Pilot Well or JVDA Well. RRE shall be responsible for the payment of
all Expenditures on all Unit Wells.
(f) Avalon covenants and agrees to use prudent, good faith, and reasonable
efforts (and to devote sufficient numbers of its employees and adequate
amounts of equipment and machinery) to maintain production from each Pilot
Well and JVDA Well operated by it pursuant to this Agreement, all in
accordance with industry standards, to the extent that a market exists for
such production.
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(g) RRE will promptly make all filings, elections, and applications and will
promptly take such other action (including, without limitation, price
re-determination) as may be necessary to establish and obtain the highest
maximum pricing category and highest price reasonably available for the oil
or gas production from the wells, subject to existing oil or gas purchase
contracts. In the negotiation of future contracts for the sale of
production from the wells, RRE will use its best efforts to obtain the
highest price and best terms reasonably available.
(h) Gas produced and sold from the Pilot Wells and JVDA Wells completed
hereunder will be measured at the wellhead prior to commingling with any
other gas stream. Copies of measurement tests and monthly volume statements
provided by gas purchasers for the subject wells will be available to
Avalon from RRE. RRE covenants to maintain sufficient facilities to be able
to conduct, and to conduct no less than semi-annually, sufficient tests for
each well, so as to be able to allocate the quantities of gas produced back
to the well producing such gas within a degree of accuracy normally
acceptable within the industry for gas and wells of this nature. RRE shall
provide the results of tests to Avalon within ten (10) days after
completion of the tests. Avalon shall have the right to inspect the
production facilities, surface equipment and meters, to be able to verify
the tests and allocations of production for the gas. Oil and condensate
produced from the subject wells will be stored and measured separately,
before commingling with other well streams. Avalon shall have the right, at
its own expense, to determine production and measurement accuracy. Upon
request, Avalon shall be provided with advance notice of any meter tests or
calibrations so that it may have a representative present to witness such
tests.
(i) Each party shall notify the other party of every material adverse claim or
demand made or threatened to be made by any person (including any
government or governmental agency) affecting the Pilot Wells or the JVDA
Wells or the proceeds of production therefrom in any manner whatsoever, and
of any proceeding instituted with respect thereto.
(j)RRE, on behalf of itself and any present or future Affiliates, covenants that
it will not contract with any third party pursuant to a sublease, farmout
or other arrangement for any Unit Well completed as a producer of oil or
gas in Paying Quantities, without Avalon's prior written consent during the
productive life of any Pilot Well or JVDA Well hereunder, unless required
by applicable statutes, rules, regulations or lease obligations, nor will
it drill, propose, or consent to drill additional wells located in a
Spacing Unit where a Pilot Well or JVDA Well is drilled or Avalon owns the
right to propose and drill a JVDA well pursuant to this agreement.
Notwithstanding the foregoing, nothing contained in this subsection shall
prohibit RRE from drilling replacement Unit Wells should RRE lose such a
well during recompletion operations.
10. ENVIRONMENTAL LIABILITY.
RRE, as operator of the WEHLU, shall have all responsibility and liability for
any past, present or future generation, handling, storage, transportation,
treatment and disposal of all hazardous or toxic substances, pollutants or
contaminants ("contamination") at or relating to any Unit Well site in the
WEHLU. Avalon, as operator of the Pilot Wells and JVDA Wells, shall have all
responsibility and liability for any future generation, handling, storage,
transportation, treatment and disposal of all contamination at or relating to
any Pilot Well site or JVDA Well site. Each party shall defend and indemnity the
other party against all liabilities, obligations, costs and expenses which may
arise from a violation of such party's responsibilities described above.
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11. HEALTH AND SAFETY COMPLIANCE.
Avalon and RRE shall each comply with, and require and insure that all
contractors or subcontractors, vendors and materialmen which it supervises or
controls, comply with all federal, state and local laws and ordinances, or
orders, regulations and directives issued by any governmental agency, or any
health and safety plan pertaining to the health and safety of persons working or
otherwise on any well site. All materials furnished and/or work performed under
this Agreement, or any subcontract, by Avalon or RRE or any of their respective
contractors or subcontractors under their supervision or control, shall fully
comply with all governmental safety and health requirements, including the rules
and standards contained in the Occupational Safety and Health Act of 1970, as
amended, Federal Mine Safety and Health Act of 1977, as amended, and any other
applicable or similar federal, state and local safety or health laws, rules or
regulations. Avalon and RRE shall, to the extent either of them prepares,
supervises or controls the conditions at any well site, provide all safety
equipment, materials, tools and personal protection equipment necessary to
insure that work is performed in a safe, healthful and workmanlike manner.
12. FAILURE TO CONDUCT DRILLING OPERATIONS OR DEFAULT.
(a) Any failure of Avalon to (i) timely comply with the continuous drilling
obligations provided for herein, under circumstances not constituting a
force majeure, or (ii) perform or comply with any other provision of this
Agreement applicable to Avalon, and with respect to either (i) or (ii)
above, after thirty (30) days notice of such event by RRE to Avalon, shall
be deemed a default hereunder by Avalon.
(b) Any failure of RRE to perform or comply with any provision of this
Agreement applicable to RRE after thirty (30) days notice of such event by
Avalon to RRE, shall be deemed a default hereunder by RRE.
(c) Upon a default by Avalon, RRE shall have the right to (i) terminate this
Agreement, and (ii) receive reassignments of its interests except as
hereafter provided, and (iii) recover such damages and other relief to
which it may be entitled at law or in equity. Notwithstanding the
foregoing, if such default occurs prior to the Completion Date of the last
Pilot Well in the second Pilot Project, RRE shall be entitled to
reassignment of its interests in the Pilot Wells and applicable Spacing
Units, but in no event shall Avalon be obligated to reassign or release its
interest in those Pilot Wells and applicable Spacing Units unless and until
Payout has occurred (whether by prepayment or otherwise). Further, if such
default occurs after the Completion Date of the last Pilot Well in the
Pilot Project or after any JVDA Well has been completed, RRE shall not be
entitled to reassignment of its interests in the Pilot Wells, the JVDA
Wells and the applicable Spacing Units, and in no event shall Avalon be
obligated to reassign or release its interest in those Pilot Wells, JVDA
Wells and applicable Spacing Units.
(d) Upon a default by RRE, Avalon shall have the right to any or all of the
following: (i) terminate its obligations to drill additional Pilot Wells
under this Agreement; (ii) if such default occurs prior to the Completion
Date of the last Pilot Well in the Pilot Project, Avalon may, but shall
have no obligation to, perform such covenant, agreement or obligation of
RRE and any payment made or expense incurred in such performance shall be
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reimbursed to Avalon by RRE on demand, and, until and unless so reimbursed
(other than with revenues from the proceeds of production of the wells),
such expenses shall bear interest calculated at the Interest Rate; and
(iii) recover its damages and exercise all other remedies available, at law
or in equity. In addition to the remedies provided in this subparagraph,
Avalon shall be subrogated to the extent permitted by law to all rights,
liens, and security interests securing the payment of any debt, claims,
tax, or assessment for the payment of which Avalon may make an advance. No
such payment or performance by Avalon shall constitute a waiver of any such
default by RRE. If Avalon shall provide notice to RRE of Avalon's election
to terminate this Agreement, Avalon shall thereafter have no further
obligations or duties hereunder to drill such additional wells. Such
termination shall not have any effect upon Avalon's right to receive
payments as described herein, nor shall it affect the validity of any
Assignments provided herein as to Pilot Wells or JVDA Wells already
completed or in the process of being completed. Such termination shall not
have any effect upon RRE's reversionary rights, rights to repurchase and
carried interest hereunder.
(e) Any termination of this Agreement shall not affect the obligations
specified hereunder that survive termination, including without limitation
Section 10& Section 13.
(f) Upon RRE's receipt of written notice from Avalon, Avalon may, in its sole
discretion, elect to amend completion of a Pilot Project containing fewer
than five (5) wells as sufficient performance to continue Avalon's rights
under this Agreement.
13. PROTECTION FROM LIENS AND ENCUMBRANCES.
The parties shall keep the interests in the WEHLU free and clear from all liens
and encumbrances created by the actions or improper inactions of themselves,
their agents and their contractors, except (i) those for which a party has
disputed in good faith and diligently acts to resolve, and (ii) any mortgage
lien encumbering RRE's rights and interests. The parties acknowledge and agree
that RRE's rights and interests in WEHLU are currently subject to mortgage liens
and security interests in favor of Bank of Oklahoma, N.A. ("BOK") and that as a
condition to this Agreement, RRE shall provide Avalon with BOK's written consent
to this Agreement in the form as attached Exhibit "E" and commitment to execute
and deliver such partial releases of its mortgage lien in the form as attached
Exhibit "F" as Avalon may reasonably require to allow the rights and interests
of RRE to be conveyed to Avalon as described in this Agreement free and clear of
BOK's liens and security interests. Each party shall defend and indemnify the
other party for all damages (including attorneys' fees) for such party's failure
to comply with the terms of this paragraph.
14. INSURANCE.
During the term of this Agreement during which Avalon is conducting drilling and
completion operations on the Pilot Project and the JVDA, Avalon shall maintain
insurance which a prudent operator would maintain on similar projects. During
the term of this Agreement, RRE shall maintain insurance with respect to WEHLU
and its operations which a prudent operator would maintain on similar projects.
Each party shall, upon request of the other party, provide copies or allow
inspection of all insurance policies required above and shall provide each other
with certificates of insurance evidencing such coverage within ten (10) days
after execution of this Agreement.
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15. GAS MARKETING AND CONTRACTS.
RRE shall make available to Avalon for inspection, copying and receipt prior to
Avalon's commencement hereunder any and all information it possesses (or
otherwise has access to), subject to any confidentiality agreements pertaining
thereto, regarding existing gas contracts potentially applicable to production
from a Pilot Well or a JVDA Well. If gas from the Pilot Wells or JVDA Wells is
sold on the spot market, RRE shall consult with and keep Avalon advised on an
on-going basis as to the marketing strategy employed with respect to such gas
and shall furnish a detailed monthly report to Avalon commencing with the first
business day following the first month of gas sales. Such report shall identify
the volumes of gas sold, the price obtained therefor, and the purchaser to whom
sales were made, with similar reports to be furnished to Avalon on a monthly
basis thereafter. WEHLU is currently subject to a gas purchase dedication
contract with GPM Gas Company by contract dated February 18, 1998, as amended,
and expires on March 31, 2001. Upon expiration or termination of such
dedication, Avalon shall retain its right to take its share of production in
kind, to separately market its production, or to approve any and all marketing
arrangements with respect to its Pilot and JVDA Production .
16. NOTICES.
Any notice required to be given by this Agreement shall be deemed given when
placed in the regular course of either first class or U.S certified mail,
postage prepaid, or overnight delivery service, and addressed to the respective
parties. Any notice required or permitted under this Agreement shall be
addressed as follows:
RRE: Red River Energy, L.L.C
---
6120 South Yale, Suite 813
Tulsa, Oklahoma 74136
Attn: Bob Davis
AVALON: Avalon Exploration, Inc.
------
Fifteen East Fifth, Suite 2100
Tulsa, Oklahoma 74103
Attn: Randy Sullivan
17. AUDIT RIGHTS.
Costs incurred and revenue used as the basis to determine Payout shall be
subject to the right of protest or question as to correctness thereof; provided,
however, all such costs and revenue shall be deemed to be true and correct after
twenty-four (24) months following the end of the calendar year in which such
cost or revenue is billed or received, unless within the said period a party
takes written exception thereto and makes claim on the other party for
adjustment. Adjustments shall be made within a reasonable time from receipt and
resolution of any such written exception.
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18. FORCE MAJEURE.
Neither party shall be liable to the other party, its subsidiaries, affiliates,
or any person, firm or corporation in privity with such other party, its
subsidiaries or affiliates for any delays or any failure to act hereunder (other
than to pay money) which may be due, occasioned or caused, directly or
indirectly, by reason of any event of force majeure, which shall include without
limitation, the application or entry of any laws, rules, regulations, or orders
promulgated by any federal, state or local government body or agency or any
court of law or by the rules, regulations or orders of any public body or
official purporting to exercise authority or control respecting the activities
and operations contemplated hereunder; strikes; lockouts; acts of God, including
but not limited to actions of the elements, weather or water conditions;
inability to obtain fuel or other critical materials or supplies, including a
drilling rig; or any other cause beyond the control of the non-performing party.
In the event of the occurrence of any of the foregoing affecting one or more
non-performing parties, such party shall give the other party prompt written
notice of the force majeure with reasonably full particulars concerning the
same, and thereupon the obligations of the party giving such notice, so far as
they are affected by the force majeure, shall be suspended during the
continuation of any such event or condition and the terms of this Agreement
shall be extended for a period of time equal to the period of suspension. The
Parties shall make reasonable efforts to avoid the adverse impact of an event of
force majeure and to resolve such event or occurrence once it has occurred in
order to resume performance.
19. ALTERNATIVE DISPUTE RESOLUTION.
-------------------------------
Except for the right of either party to apply to a court of competent
jurisdiction for a temporary restraining order, a preliminary injunction, or
other equitable relief to preserve the status quo or prevent irreparable harm,
if any controversy, claim or dispute ("Dispute") between the parties arises out
of the interpretation or performance of this Agreement, the parties hereto agree
to make good faith efforts to resolve the dispute amicably as follows:
(a) Either party has the right to request the other to meet to discuss a
Dispute. The party requesting the meeting will give at least ten (10)
business days notice in writing of the subject it wishes to discuss,
provide a written statement of the Dispute, and designate an officer of the
company with complete power to resolve the Dispute to attend the meeting.
Within three (3) business days, the party receiving the request will
provide a responsive written statement and will designate an officer of the
company who will attend the meeting with complete power to resolve the
Dispute.
(b) If the meeting fails to resolve the Dispute as reflected in an agreement
signed by their respective officers, the Dispute shall be submitted for
non-appealable, binding determination through arbitration. The parties
agree that an officer with complete authority to resolve the Dispute for
each entity shall attend the arbitration. An arbitrator, with oil and gas
experience, chosen from the judges available through Judicial Arbitration &
Mediation Services, Inc. ("JAMS") shall be the arbitrator unless the
parties agree on a substitute arbitrator because a JAMS arbitrator is not
reasonably available. Unless the parties agree otherwise, the arbitration
shall be conducted in accordance with the rules of JAMS on effect of the
date of this Agreement.
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(c) The arbitrator may consider any matter relevant to the subject of this
dispute and shall follow the statutes and substantive decision of Oklahoma
law relevant to the subject. The arbitrator shall not have the authority or
power to alter, amend or modify any of the terms and conditions of the
agreement of the parties. The arbitrator will convene a hearing and issue a
final ruling within ninety (90) days of the date of first notice, unless
otherwise agreed by the parties.
(d) Any agreement by the parties with respect to arbitration procedures or
settlement of the dispute shall be in writing and signed and shall be
binding and final upon the parties hereto. The fees and expenses of
counsel, witnesses and employees of the parties hereto and all other costs
and expenses incurred exclusively for the benefit of the party incurring
the same shall be borne by the party incurring such fees and expenses. All
other fees and expenses, including without limitation, compensation for the
arbitrator, shall be divided equally between the parties.
20. MISCELLANEOUS.
(a) This Agreement is made subject to, and the parties shall comply with all
applicable rules, regulations, laws and orders issued or promulgated by any
court or governmental agency having jurisdiction over operation, production
or marketing on and from the lands covered hereby.
(b) It is not intended nor shall this Agreement ever be construed to create a
partnership, joint venture, mining partnership, or association of any kind
between any of the parties hereto for any purposes.
(c) Avalon shall be an independent contractor with respect to the performance
of all Work hereunder, and unless otherwise specified in writing no person
employed by or contracted by one party shall be deemed for any purpose to
be the employee, agent, servant or representative of the other party, and
neither party shall have direction or right of control over the other
party, its employees, agents or contractors in the results to be obtained
hereunder, unless such employees, agents or contractors become the express
loaned servants of the other party.
(d) The parties expressly agree that this Agreement shall not create any rights
in third parties and is not intended to be relied upon by any person or
entity other than a signatory to this Agreement.
(e) This Agreement constitutes the entire agreement between the parties hereto
relating to the matters covered hereby and no representations,
correspondence, or other statements made by either of the parties hereto
prior to the date hereof shall form a part of this Agreement and any
representations, correspondence, or other statements made by any of the
parties hereto prior to the date hereof relating to the matters covered
hereby shall be superseded and canceled by the terms of this Agreement.
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Without limiting the foregoing, the parties agree that the Letter of Intent
dated February 18, 2000, is hereby superseded and canceled by the terms of
this Agreement. No modification, alteration, or amendment of this Agreement
shall be effective unless in writing and signed by all of the parties
hereto, and no modification or amendment shall be inferred from any act or
failure to act, or any rules of waiver, estoppel, ratification, or other
equitable principle. No division order signed by Avalon shall be construed
to modify or amend the terms of this Agreement.
(f) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAW OF THE STATE OF OKLAHOMA. SUBJECT TO THE BINDING MEDIATION AND
ARBITRATION PROVISIONS OF SECTION 19 HEREOF, EACH PARTY HERETO HEREBY
SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF OKLAHOMA AND
AGREES THAT ANY ACTION RELATING TO THE AGREEMENT BE BROUGHT IN THE CITY OF
TULSA, TULSA COUNTY, OKLAHOMA.
(g) Each party agrees that it will maintain the terms of this Agreement in
confidence and that it will not cause or permit disclosure to any third
party of this Agreement or of the terms hereof or any information received
from the other in connection herewith, without the express written consent
of the other party, except that disclosures may be made (i) to the extent
the disclosing party is required to make the disclosure by statute or by a
court, agency or other governmental body having jurisdiction, and (ii) to
the extent necessary for the disclosing party to enforce its rights under
this Agreement.
(h) This Agreement may be executed in any number of counterparts and each such
counterpart so executed shall have the same force and effect as an original
instrument as if all of the parties hereto the aggregate counterparts had
signed the same document and shall be binding upon the parties hereto,
their representatives, successors and assigns, regardless of whether such
signatures are notarized or attested by a corporate secretary or other
comparable officer.
(i) The paragraph headings used in this Agreement are inserted for convenience
only and shall be disregarded in construing this Agreement.
(j) The terms and conditions of this Agreement shall survive the completion of
operations hereunder and of any Assignment earned pursuant hereto.
(k) Avalon shall be responsible for payment of all sales and/or use taxes
applicable to materials and services furnished in connection with the Pilot
Project or the JVDA. (l) At the end of each calendar year, or sooner if
Avalon shall request, RRE shall furnish to Avalon such data and information
as it may reasonably request to enable Avalon and its engineers to prepare
reserve reports for wells drilled in the Pilot Project or the JVDA.
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IN WITNESS WHEROF, the parties hereto have executed this Agreement as of
the day and year first above written.
"RRE" RED RIVER ENERGY, L.L.C. (RRE)
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
"AVALON" AVALON EXPLORATION, INC. (AVALON)
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
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RRE/Avalon Joint Development Agreement Exhibit A
Section TWN RGE QUARTER COUNTY
24 15N 5W NE,NW,SE KINGFISHER
25 15N 5W NE KINGFISHER
36 15N 5W SW KINGFISHER
30 15N 4W NE,SE LOGAN
32 15N 4W SE LOGAN
33 15N 4W SE LOGAN
5 14N 4W SW OKLAHOMA
8 14N 4W SE OKLAHOMA
9 14N 4W NE,NW OKLAHOMA
10 14N 4W NE,SW,SE OKLAHOMA
15 14N 4W NE OKLAHOMA
15 14N 4W SW,SE OKLAHOMA
16 14N 4W NE OKLAHOMA
16 14N 4W SE OKLAHOMA
17 14N 4W NE OKLAHOMA
21 14N 4W SE OKLAHOMA
22 14N 4W NE,SW OKLAHOMA
27 14N 4W NE,NW,SW OKLAHOMA
30 14N 4W SE OKLAHOMA
32 14N 4W NW OKLAHOMA
32 14N 4W SE OKLAHOMA
33 14N 4W SW OKLAHOMA
4 13N 4W NW OKLAHOMA
5 13N 4W NE OKLAHOMA
15 13N 4W NW OKLAHOMA
16 13N 4W NW OKLAHOMA
16 13N 4W NE OKLAHOMA
20 13N 4W NE OKLAHOMA
9 12N 4W SE OKLAHOMA
End of Exhibit A
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