EXHIBIT 10.1
JOINT VALUE ENHANCEMENT AGREEMENT
by and among
PANNONIAN ENERGY INC.
and
M-I, LLC
NABORS DRILLING USA, LP,
POOL WELL SERVICES CO.,
RED OAK CAPITAL MANAGEMENT LLC
and
Schlumberger Technology Corporation
dated
January 16, 2004
CARBON, DUCHESNE AND
UINTAH COUNTIES, UTAH
TABLE OF CONTENTS
1. DEFINITIONS...........................................................1
2. THE PROJECT WELLS.....................................................5
3. PROJECT GOVERNANCE....................................................5
4. THE SERVICES..........................................................8
5. SERVICE PARTY COMPENSATION...........................................11
6. OPERATION OF THE PROJECT WELLS.......................................13
7. EARLY BUYOUT.........................................................15
8. TERM.................................................................15
9. GENERAL TERMS AND CONDITIONS.........................................16
10. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY...................17
11. NOTICES..............................................................19
12. MISCELLANEOUS PROVISIONS.............................................20
13. SEVERABILITY; SAVINGS CLAUSE.........................................22
14. WARRANTIES/DISCLAIMERS...............................................22
15. FORCE MAJEURE........................................................22
16. RELATIONSHIP OF THE PARTIES..........................................23
17. REASONABLENESS.......................................................23
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18. CONFLICTS OF INTEREST................................................23
19. CORPORATE POWER AND AUTHORITY........................................24
20. PUBLIC ANNOUNCEMENTS.................................................24
21. MODIFICATION OF EXHIBITS.............................................24
22. NO LIABILITY; INDEMNITY..............................................25
23. COUNTERPARTS.........................................................26
EXHIBITS
Exhibit A.........Contract Area
Exhibit B.........Project Governance
Exhibit C.........Master Service Agreements
Exhibit D.........Engagement Letter
Exhibit E.........Computations
Exhibit F.........Financial Accounting Procedures
Exhibit G.........Form of Pannonian Collateral Documents
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JOINT VALUE ENHANCEMENT AGREEMENT
This JOINT VALUE ENHANCEMENT AGREEMENT (the "Agreement") is entered into this
16th day of January, 2004 by, between and among Pannonian Energy Inc.
("Pannonian"), a Delaware corporation; M-I, LLC ("M-I"), a Delaware limited
liability company; Nabors Drilling USA, LP ("Nabors"), a Delaware limited
partnership; Pool Well Services Co. ("Pool"), a Delaware corporation; Red Oak
Capital Management LLC ("red Oak"), a Delaware corporation; and Schlumberger
Technology Corporation ("Schlumberger"), a Texas corporation. In this Agreement,
M-I, Nabors, Pool, Red Oak and Schlumberger are referred to individually as a
"Service Party" and collectively as the "Service Parties."
WHEREAS, Pannonian owns numerous oil and gas leasehold interests covering lands
within portions of Carbon, Duchesne and Uintah Counties, Utah, as depicted on
the attached Exhibit A ("Contract Area");
WHEREAS, Pannonian wishes to develop the Contract Area by drilling fifty (50)
new wells;
WHEREAS, the Service Parties wish to become the exclusive suppliers of certain
goods and services for Pannonian's development of the Contract Area, and
WHEREAS, as an inducement for Pannonian to grant such exclusivity, the Service
Parties are willing to accept Deferred Payments for a portion of those goods and
services; and
WHEREAS, Pannonian and the Service Parties wish to accomplish the foregoing in
accordance with the terms of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises, conditions and
agreements herein contained, the sufficiency of which is hereby acknowledged,
the Parties agree as follows:
1. DEFINITIONS
For purposes of this Agreement, including the Exhibits, except as
otherwise expressly provided or unless the context otherwise requires,
the terms defined in this Article have the meanings assigned to them
herein and the capitalized terms defined elsewhere in this Agreement by
inclusion in quotation marks have the meanings so ascribed to them.
1.1 "Accrual Method of Accounting" means a method of accounting in
which (i) the Gross Proceeds for a Month shall be the net amount
recognized and recorded during such Month in Pannonian's ledgers
for sales of Hydrocarbon Production from a Project Well and (ii)
the Production Costs for a Month shall be the amount incurred in
connection with that Project Well and recorded during such Month
in Pannonian's ledgers as production costs, with all such
proceeds and costs being determined in accordance with Generally
Accepted Accounting Principles ("GAAP") and Council of Petroleum
Accountants Societies ("COPAS") guidelines and procedures.
1.2 "AFE" means an Authority for Expenditure prepared for the purpose
of estimating the costs to be incurred in connection with a
proposal to drill, deepen, plug back, complete, recomplete,
sidetrack or rework a Project Well.
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1.3 "Affiliate" means, with respect to any Person, any other Person
controlling or controlled by or under common control with such
Person, with the concept of control in such context meaning the
possession, directly or indirectly, of the power to direct the
management and policies of another, whether by ownership of
voting securities, contract or otherwise. With respect to a
corporation, partnership or limited liability company, control is
conclusively deemed to exist where a Person owns fifty percent
(50%) or more of the voting stock in such corporation or of the
voting interest as a partner in such partnership or as a member
of such limited liability company.
1.4 "Agreement" means this Joint Value Enhancement Agreement between
and among the Parties, including the Exhibits attached hereto or
referred to herein.
1.5 "Bundle" means a specific group of Project Wells approved by the
Executive Committee and the Oilfield Service Parties pursuant to
Article 3.3.2, consisting of the first twelve (12) Project Wells
(the two [2] Evaluation Wells and the next ten [10] Project Wells
that are completed thereafter, whether as producers or dry holes)
in the first Bundle; the next ten (10) Project Wells that are
completed, whether as producers or dry holes, in the second
Bundle, and successive groups of the following ten (10) Project
Wells that are completed, whether as producers or dry holes, in
each of the following Bundles; provided however, that if for any
reason the full number of Project Wells are not drilled in the
final Bundle, then the final Bundle shall consist only of such
lesser number of Project Wells as were actually commenced.
1.6 "Business Day" means any day other than a Saturday, a Sunday, or
a day on which the United States Postal Service is not scheduled
to deliver ordinary first class mail.
1.7 "Deferred Payment" means the monthly payments calculated on a
Bundle by Bundle basis due each Service Party under the terms of
this Agreement in consideration of its provision of Risked
Services with the amount of each such Deferred Payment due each
Service Party being calculated as the amount equal to the Net
Profits for such Bundle times the applicable Service Party's
Percentage for such Bundle.
1.8 "Deferred Payment Account" is defined in Article 5.4.
1.9 "Effective Date" means the effective date of this Agreement,
being January 16, 2004.
1.10 "Engagement Letter" means that certain letter agreement dated
December 8, 2003, entered into between Red Oak Capital
Management, LLC and Pannonian, pursuant to which Red Oak will, at
Pannonian's request, arrange for financing for a portion of the
services provided on the Project Wells within the Contract Area,
a copy of which is attached hereto as Exhibit D.
1.11 "Evaluation Wells" means the Lytham Federal #22-22-9-19 and the
Federal #32-31-9-19 wells completed by Schlumberger pursuant to
that certain Joint Value Enhancement Agreement by and between
Pannonian Energy Inc. and Schlumberger Technology Corporation
dated November 3, 2003.
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1.12 "Excess Production Costs" for a Month means the amount of
Production Costs, together with any Excess Production Costs
carried forward from a prior Month, that are in excess of the
Gross Proceeds for such Month.
1.13 "Exhibits" means the exhibits to this Agreement, as such exhibits
may be amended from time to time.
1.14 "Gross Proceeds" for a Month means the amount earned by Pannonian
from the sale of Hydrocarbon Production from each Project Well,
computed in accordance with Exhibit E attached hereto and using
the Accrual Method of Accounting.
1.15 "Hydrocarbon Production" means all crude oil, natural gas,
condensate and other liquid and gaseous hydrocarbons produced,
saved and sold from the Contract Area.
1.16 "Investment Election" shall have the same meaning assigned to
that term in the Engagement Letter attached hereto as Exhibit D.
1.17 "Master Service Agreement" means, as to Schlumberger, Nabors,
Pool and M-I, the service agreement entered into between that
Service Party and Pannonian, pursuant to which that Service Party
will provide Services in connection with the Project Wells.
Copies of (i) the executed Schlumberger and M-I Master Service
Agreements and (ii) forms of the Nabors and Pool Master Service
Agreements are attached hereto as Exhibit C.
1.18 "Month" means the period beginning at 7:00 a.m. Mountain time on
the first day of any calendar month and ending at the same time
on the first day of the next succeeding calendar month.
1.19 "Negative Account Balance" means, at any given time, the amount
by which the cumulative value of the Risked Services provided by
a given Service Party exceeds the cumulative amount of the
Deferred Payments received by such Service Party.
1.20 "Net Profits" for the Project Wells for any Month means the
amount by which the Gross Proceeds for the Project Wells exceeds
the sum of (a) Production Costs for the Project Wells for that
Month, plus (b) Recompletion Costs for the Project Wells for that
Month, plus (c) Excess Production Costs for the Project Wells as
of the end of the immediately preceding Month.
1.21 "Pannonian's Working Interest" means that portion of the working
interest ownership in a given Project Well (determined according
to industry custom and practice) attributable to Pannonian's
ownership of the lease on which such well is located (including
farm-in interests and other related interests).
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1.22 "Party" means Pannonian, M-I, Nabors, Pool, Red Oak or
Schlumberger, individually; "Parties" means Pannonian, M-I,
Nabors, Pool, Red Oak and Schlumberger, collectively.
1.23 "Percentage" means, as to each Service Party and as to each
Bundle, the percentage determined by the Executive Committee by
dividing that Service Party's Expenditures on such Bundle by the
Total Well Construction and Completion Costs attributable to that
Bundle; provided, however, that until finally determined by the
Executive Committee pursuant to Article 3.4(g), the Percentage,
as to each Service Party and as to that Bundle, shall be
provisionally determined by the Executive Committee, either by
dividing each of the anticipated Service Party's Expenditures as
shown in all applicable AFEs, by the estimated Total Well
Construction and Completion Costs shown in those AFEs or by such
other method as the Executive Committee may believe appropriate
under the circumstances.
1.24 "Person" means any individual, governmental agency, corporation,
partnership, joint venture, trust, estate, joint venture,
unincorporated organization, or other entity or organization.
1.25 "Production Costs" for a Month means the costs incurred by
Pannonian during such Month that are allocable to Pannonian's
Working Interest in the Project Wells (including without
limitation plugging, abandonment and reclamation costs), computed
in accordance with Exhibits E and F and using the Accrual Method
of Accounting. For purposes of calculating the Deferred Payments,
Production Costs will be determined and allocated on a
Bundle-by-Bundle basis.
1.26 "Project Well" means a well commenced under the terms of this
Agreement in the Wasatch, Mesaverde, Castlegate or Blackhawk
formations, starting at a depth below the Green River Formation
and ending at a depth equivalent to the top of the Mancos
formation.
1.27 "Prudent Standards" means the standards of reasonable and prudent
business judgment and sound oil and gas field practices, in
compliance with applicable federal, state and local laws, rules
and regulations.
1.28 "Recompletion Costs" means the actual charges to all working
interest owners in connection with the recompletion of a Project
Well; provided, however, that no portion of Recompletion Costs
shall ever duplicate amounts that have been included in the
Production Costs for that same well.
1.29 "Representative" means a director, officer, supervisor, employee,
partner, technical consultant, attorney, accountant, lender,
financial advisor, marketing representative or other consultant
or agent of a Party.
1.30 "Risked Services" means those Services, or that portion of
Services, that a Service Party provides in exchange for Deferred
Payments in accordance with the terms of this Agreement.
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1.31 "Service Party's Expenditures" means (i) as to Schlumberger,
Nabors, Pool and M-I, the cumulative value of the Risked Services
provided by such Service Party on a given Bundle, as evidenced by
invoices issued by each Service Party for their respective Risked
Services and (ii) as to Red Oak, the cumulative total of funds
provided by Red Oak on a given Bundle.
1.32 "Services" means those products, goods and services supplied by
the Service Parties to Pannonian as set out in Article 4.1.
1.33 "Third Party" means a Person who is not a Party or an Affiliate
of a Party.
1.34 "Total Well Construction and Completion Costs" means the actual
charges to Pannonian, in its capacity as a working interest owner
in connection with the drilling and completing of a Project Well;
provided, however, that no portion of Total Well Construction and
Completion Costs shall ever duplicate amounts that have been
included in the Production Costs or Recompletion Costs for that
same well.
1.35 "Unrisked Services" means, as to each Service Party, the Services
or that portion of Services that are not Risked Services and for
which that Service Party will receive or has elected to receive
payments under the terms of the applicable Master Service
Agreement, rather than Deferred Payments.
2. THE PROJECT WELLS
2.1 Overview. Pannonian and the Service Parties will work together,
using the project governance principles set forth in Article 3,
to develop the oil and gas resources contained in that portion of
the Contract Area in which Pannonian may conduct oil and gas
operations, whether through ownership of oil and gas leasehold
interests or through communitization, pooling or unitization
agreements.
2.2 Field Development Plan. The Technical Committee will, not later
than January 23, 2004, propose to the Executive Committee an
initial field development plan, identifying prospective drilling
locations in the Contract Area, the sequence of drilling and
anticipated drilling and completion protocols and will from time
to time thereafter propose to the Executive Committee appropriate
amendments and additions to such plan. The plan actually adopted
by the Executive Committee, as subsequently amended by the
Executive Committee, shall be the "Field Development Plan." The
Executive Committee shall provide to each Service Party a copy of
the Field Development Plan and shall thereafter timely inform
each Service Party of all amendments and additions to the Field
Development Plan. All Project Wells will be drilled and completed
in accordance with the Field Development Plan then in effect.
3. PROJECT GOVERNANCE
3.1 Principles. The Parties will work together in a spirit of
openness and cooperation in an effort to achieve efficient
Hydrocarbon Production from the Project Wells. A graphic
illustration of the Parties' anticipated responsibilities appears
in the attached Exhibit B.
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3.2 Pannonian as Operator. Based upon existing joint operating
agreements and leasehold ownership, the Parties anticipate that
Pannonian will be and remain the operator of all of the Project
Wells. Nothing in this Agreement shall have the effect of
modifying or superseding Pannonian's position as operator. It is
the stated policy of Schlumberger not to take any equity interest
in the leases in the Contract Area, the production or reserves
associated therewith or other property of Pannonian in
consideration for providing the Risked Services. The Parties
acknowledge that the sole compensation to the Service Parties for
providing Risked Services shall be the Deferred Payments.
3.3 Schlumberger as Project Well Coordinator.
3.3.1Schlumberger, acting under the direction of Pannonian in its
capacity as operator, shall serve as Project Well
Coordinator, facilitating the effective collaboration of
Pannonian, the Service Parties and any Third Party service
providers in the supply of proposed products and services
for the Project Wells. In such capacity and subject to the
provisions of Article 3.3.2, Schlumberger shall communicate
with the Service Parties concerning their elections to
provide both Unrisked Services and Risked Services for each
Project Well and, in conjunction with the Technical
Committee, shall ensure that all Risked Services proposed
for that Project Well are in compliance with the limitations
set forth in Articles 4.2 and 4.3 below. When Schlumberger
has satisfactory commitments from each of the Service
Parties as to the Unrisked Services and Risked Services to
be provided for a particular Project Well, it shall notify
the Technical Committee of such commitments, indicating the
availability and proposed timing for the provision of these
Services. The Parties anticipate that Schlumberger will
provide such notification within fourteen (14) days after
the concerned Project Well has been included in the Field
Development Plan. In consideration of its performance of
these coordination services, Schlumberger will earn a fee
determined by the Executive Committee and included in the
approved AFE for each Project Well, the full amount of which
shall be included as part of Schlumberger's Service Party
Expenditures for that Project Well.
3.3.2The Executive Committee shall present to the Service
Parties, other than Red Oak, (for purposes of this Article
3.3.2, referred to as the "Oilfield Service Parties") each
proposed Bundle approved by the Executive Committee. Should
the Oilfield Service Parties collectively elect not to offer
one hundred percent (100%) of their Services on each
proposed Project Well in such Bundle as Risked Services,
Schlumberger shall identify to the Executive Committee that
well or wells within the proposed Bundle on which the
Oilfield Service Parties chose not to provide one hundred
percent (100%) of their Services as Risked Services. The
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Executive Committee shall then substitute proposed wells for
inclusion in the proposed Bundle until the Oilfield Service
Parties agree to offer one hundred percent (100%) of their
Services on all wells in the proposed Bundle as Risked
Services. The Executive Committee and Oilfield Service
Parties may mutually agree at any time during the drilling
of the wells within a proposed Bundle to substitute a well
for any proposed Project Well within such proposed Bundle.
Should any reduction in the percentage of Risked Services be
required pursuant to Pannonian's election to provide funds
as set out in Article 4.2.1 below, Schlumberger shall
coordinate proportional reductions with the Oilfield Service
Parties in accordance with Article 4.2.4.
3.4 Executive Committee. Promptly following the execution of this
Agreement, Pannonian and Schlumberger shall establish an
Executive Committee consisting of four (4) members, two (2) of
which shall be appointed by Pannonian from its management and two
(2) of which shall be appointed by Schlumberger from its or its
Affiliate's management. The Executive Committee shall meet at
least once each calendar quarter in Denver, Colorado or as
otherwise set out herein. Within seven (7) days after the
execution of this Agreement, the Parties will exchange a list of
their respective appointments, as well as any designated
alternates.
Pannonian shall designate one (1) of its two (2) members as the
Chairman of the Executive Committee (the "Chairman"). The
Chairman shall schedule meetings of the Executive Committee,
arrange for the preparation and distribution of notices as well
as an agenda of the meetings and preside and keep minutes.
Special meetings shall be held upon the request of any two (2)
members of the Executive Committee under this Agreement. The
Chairman shall transmit written notices of all meetings to each
member at least seven (7) days in advance of the meeting. A
quorum for the conduct of Executive Committee business shall
consist of three (3) members, and such quorum may be by person,
by proxy, or by telephone.
The Executive Committee shall generally oversee all hydrocarbon
development and production activities occurring pursuant to this
Agreement. Without limiting the generality of the foregoing, the
Executive Committee shall have the authority and responsibility
to:
a. Appoint a committee composed of Pannonian and Schlumberger
technical personnel ("Technical Committee"), the
responsibilities of which shall include, but not be limited
to, the preparation of the suggested field development plan
and appropriate subsequent amendments and modifications.
Both Pannonian and Schlumberger shall earn a fee determined
by the Executive Committee for their work on the Technical
Committee (including any start-up costs) and included
(without duplication in subsequent AFEs) in the approved AFE
for the next Project Well actually drilled. Schlumberger's
share of such fee shall be included as part of
Schlumberger's Service Party's Expenditures for that Project
Well and Pannonian's share shall be a line item on the AFE
for the applicable Project Well;
b. Adopt the Field Development Plan within fourteen (14) days
of the Effective Date of this Agreement, and thereafter
adopt appropriate amendments and modifications to such plan;
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c. Approve or disapprove an AFE for each single operation
(whether drilling, completing, deepening, plugging back,
recompleting, sidetracking or reworking) anticipated to cost
more than Fifty Thousand Dollars ($50,000) in connection
with a Project Well, with the understanding that such
operation will not be undertaken unless there is an approved
AFE;
d. Attempt to resolve conflicts between the Parties concerning
this Agreement and the activities contemplated hereby;
e. Recommend appropriate actions to optimize the performance of
each Project Well in accordance with good production
practices;
f. Provide Pannonian and Schlumberger quarterly reports on the
activities conducted pursuant to this Agreement, the Service
Parties' Expenditures in respect of each Bundle, and a
computation of each Service Party's Percentage in respect of
each Bundle; and
g. Determine the Percentage of each Service Party in each
Bundle on a provisional basis as each Project Well in that
Bundle is drilled and completed and on a final basis not
sooner than sixty (60) days nor later than ninety (90) days
after the completion and equipping of the last well in that
Bundle.
Matters requiring Executive Committee action shall be decided by
unanimous vote of the Executive Committee members present at a meeting
and voting in person, by proxy or by telephone. All proxies shall be
in writing. Any action permitted to be taken by the Executive
Committee may also be taken without a meeting by means of a written
consent to the action signed by all members of the Executive
Committee.
4. THE SERVICES
4.1 Service Party Exclusivity. Pannonian hereby grants each Service
Party the exclusive right to provide the following Services in
the Contract Area, so long as such Service Party can deliver its
Services as reasonably requested by the Executive Committee:
(a) Schlumberger. Schlumberger shall have the right to provide
the following goods and services at mutually agreed upon
market prices and in accordance with its Master Service
Agreement included in Exhibit C hereto:
i. coordination of field services
ii. well cementing products and services
iii. formation evaluation logging products and services
iv. well completion products and services
v. data management and consulting services
vi. well perforating products and services
vii. well testing and evaluation products and services
viii.directional drilling and measurement products and
services
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ix. well stimulation, fracturing and acidizing products and
services
x. coiled tubing products and services
xi. downhole pumps
xii. slickline products and services
xiii.well/field monitoring and measurement products and
services
(b) Nabors and Pool. Nabors and Pool shall have the right to
provide drilling, reworking and related services in
accordance with their Master Service Agreements, forms of
which are included in Exhibit C.
(c) M-I. M-I shall have the right to provide drilling and
completion fluids, production chemicals, pressure control,
drilling waste management services and solids control and in
accordance with its Master Service Agreement included in
Exhibit C hereto.
(d) Red Oak. Red Oak shall have the right to provide funding in
accordance with the terms of its Engagement Letter attached
as Exhibit D.
Rates to be charged by Nabors and Pool for their Services shall be
determined in accordance with the applicable Master Service Agreement.
Rates to be charged by Schlumberger and M-I for their Services shall be
determined in accordance with their respective then current price
lists, which shall not be modified more frequently than once every six
(6) months.
Pannonian shall not enter into any agreement that conflicts with the
exclusivity granted to the Service Parties herein, although Pannonian
does reserve the right freely to contract with Third Parties for such
Services as the Service Parties may be unable to provide as reasonably
requested by the Executive Committee
4.2 Parties' Expenditures
4.2.1General. As indicated in Article 4.2.2 below,
Pannonian will have the right to provide funding for a
percentage of the Total Well and Construction Costs for
each Project Well. The aggregate value of all Risked
Services provided by all Service Parties in a Project
Well may never exceed the difference between the Total
Well Construction and Completion Costs for that well
less the portion being provided by Pannonian.
4.2.2Pannonian Expenditures. In connection with the Project
Wells in the first through third Bundles, Pannonian may
elect to provide up to twenty percent (20%) of the
Total Well Construction and Completion Costs, although
it must provide (i) at least five percent (5%) of the
Total Well Construction and Completion Costs of each
well in the first Bundle and (ii) at least the same
percentage in the Project Wells in the second Bundle
and (iii) at least the same percentage in the third
Bundle as it funded in the second Bundle. In connection
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with the Project Wells in the fourth and fifth Bundles,
Pannonian may elect to provide up to thirty percent
(30%) of the Total Well Construction and Completion
Costs, although it must provide (i) at least the same
percentage in each of the Project Wells in the fourth
Bundle as it funded in the third Bundle and (ii) at
least the same percentage in each of the Project Wells
in the fifth Bundle as it funded in the fourth Bundle.
Pannonian shall notify the Executive Committee as to
its election in connection with each Bundle no later
than seven (7) days after the first Project Well in
each Bundle is identified in the Field Development
Plan.
4.2.3Red Oak Expenditures. If Red Oak delivers its
Investment Election within one hundred twenty (120)
days after December 8, 2003, as provided in the
Engagement Letter attached hereto as Exhibit D, Red Oak
shall provide Pannonian cash funding in accordance with
the terms of its Investment Election equal to
thirty-five percent (35%), subject to any adjustment
made pursuant to Article 4.2.6, of the anticipated
completed well cost shown in the AFE for each Project
Well.
4.2.4Expenditures of Other Service Parties. Because the
percentage of Pannonian's funding will not vary as to
the Project Wells in a particular Bundle except as
provided by Article 4.2.6, and because the percentage
of funding provided by Red Oak likewise will not vary
as to any of the Project Wells, except as provided by
Article 4.2.6, the Technical Committee may find it
necessary to adjust the amount of Risked Services
furnished by the remaining Service Parties. If the
Technical Committee determines that the Risked Services
proposed by all Service Parties will exceed the
completed well cost shown in the AFE, after deduction
of the amounts to be paid by Pannonian and Red Oak,
then it will direct Schlumberger to coordinate
appropriate proportional reductions of the Risked
Services to be provided by the other Service Parties,
so that the Pannonian funding and the Risked Services
will exactly satisfy the Total Well Construction and
Completion Costs. In no event shall Schlumberger,
Nabors, Pool or M-I be required to provide anything
other than the value of their respective Services as
Risked Services.
4.2.5AFE Approval. Before commencement of the first Project
Well in each Bundle, the Executive Committee shall, by
unanimous consent, approve one or more AFEs setting
forth the estimated cost of the Services to be provided
by each of the Service Parties and indicating the
percentage of such Services which are to be Risked
Services and which are to be Unrisked Services. All
costs to be borne by Pannonian shall be approved by the
Executive Committee and set forth in the applicable
AFE.
4.2.6Cost Overruns. Pannonian may incur expenditures of up
to one hundred ten percent (110%) of the total amount
anticipated in the AFE for a particular operation
without consultation with the Executive Committee;
provided, however, that the entire amount of the cost
overrun shall be borne by Pannonian. When Pannonian
reasonably anticipates that the one hundred ten percent
(110%) limit set forth in the preceding sentence will
be exceeded, however, Pannonian shall furnish to the
Technical Committee a reasonably detailed estimate of
the anticipated overexpenditure and the reasons
therefor. Schlumberger shall, after consultation with
the other Service Parties, determine whether and to
what extent, if any, the Service Parties wish to
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provide additional Risked Services to satisfy the
overexpenditure and advise the Technical Committee of
the amount of additional Risked Services, if any, to be
provided by each Service Party. The Technical Committee
shall then submit a revised AFE to the Executive
Committee for its approval or modification, with
Pannonian bearing the entire amount of the cost overrun
that is not provided by the Service Parties through the
provision of additional Risked Services.
4.3 Special Limitations on Amount of Risked Services.
4.3.1Service Party Limitations. Notwithstanding the
provisions of Article 4.2, the Service Parties shall be
under no obligation to undertake Risked Services that
are anticipated to produce a Negative Account Balance
as to the Risked Services each Service Party provides
on the Project Wells in a given Bundle in excess of the
following amounts:
(i) as to Schlumberger, Four Million Nine Hundred Thousand
Dollars ($4, 900,000.00);
(ii) as to Nabors and Pool collectively, Two Million Seven
Hundred Fifty Thousand Dollars ($2,750,000.00);
(iii)as to M-I, Seven Hundred Thousand Dollars
($700,000.00); and
(iv) as to Red Oak, Five Million One Hundred Fifty Thousand
Dollars ($5,150,000.00).
Finally, the Service Parties shall have no obligation to
provide any Risked Services in connection with any proposed
Bundle unless each is satisfied in its reasonable discretion
that Pannonian has or will have appropriate means to satisfy
all cash expenditure requirements associated with all
Project Wells in that Bundle. Pannonian agrees to provide to
each Service Party such information as that Service Party
reasonably deems necessary to make such determination.
4.3.2Pannonian Limitations. If Pannonian is not the sole
working interest owner in a Project Well, then in no
event shall the cumulative total of all Service
Parties' Percentages, together with Pannonian's
expenditures for Total Well Construction and Completion
Costs, in that well exceed Pannonian's Working Interest
in such well.
5. SERVICE PARTY COMPENSATION
5.1 Unrisked Services. Any Unrisked Services provided by a Service
Party shall be governed by, and paid for in accordance with, the
applicable Master Service Agreement.
5.2 Risked Services.
5.2.1Schlumberger's Deferred Payments. In consideration for the
performance of Risked Services on a Bundle, Pannonian shall
pay to Schlumberger Deferred Payments equal to the Net
Profits of each Project Well in that Bundle multiplied by
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Schlumberger's Percentage in such well. Schlumberger's right
to Deferred Payments as to such Bundle shall commence in the
month that Hydrocarbon Production is first sold from a
Project Well in that Bundle and shall end one hundred
forty-four (144) months (inclusive of the first month of
Hydrocarbon Production) thereafter.
5.2.2Nabors', Pool's, M-I's and Red Oaks' Net Profit Interest.
In consideration for Nabors', Pool's, M-I's and Red Oak's
Service Party's Expenditures, Pannonian shall grant unto
each such Service Party an interest in the Contract Area
equal to the Net Profits attributable to each Bundle
multiplied by the applicable Service Party's Percentage for
such Bundle for one hundred forty-four (144) months from the
date of first sale of Hydrocarbon Production from the first
well completed or recompleted in a given Bundle (the "Net
Profits Interest").
5.3 Deferred Payment Timing. Pannonian shall pay Deferred Payments by
corporate check mailed to each Service Party's address set out in
Article II no later than the 28th day of each Month beginning not
later than sixty (60) days after the first sale of Hydrocarbon
Production from the first completed and producing Project Well.
5.4 Deferred Payment Account. Pannonian shall maintain an account
(the "Deferred Payment Account") on its books and records for
each Service Party in respect of each Bundle. Each Deferred
Payment Account shall be credited with the aggregate of any Gross
Proceeds received by Pannonian after the Effective Date for each
Project Well in the Bundle, and shall be charged with the
aggregate Production Costs incurred after the Effective Date.
On or before the payment date set forth in Article 5.3 hereof,
Pannonian shall furnish to each Service Party a detailed
statement clearly reflecting the credits and debits against and
the balance of the Deferred Payment Account for each Bundle as of
the close of business on the last day of the preceding Month. Any
Excess Production Costs reflected by any such statement shall be
carried forward to the next and succeeding month or months until
the Excess Production Costs have been liquidated.
5.5 Deed of Trust. As security for the payment and performance of all
of Pannonian's obligations to Schlumberger hereunder, Pannonian
shall, upon request by Schlumberger, execute and acknowledge one
or more Deed of Trust, Assignment of Production and Security
Agreements as to each Bundle in the form of the attached Exhibit
G-1, together with such financing statements and other
instruments as Schlumberger may reasonably request in order
properly to perfect the lien and security interests created by
the Deed of Trust. Schlumberger shall file the Deed of Trust in
all appropriate records to properly perfect the lien and security
interest created thereunder. Pannonian agrees that Schlumberger
may at any time assign, transfer or otherwise convey all or part
of its right to receive Deferred Payments pursuant to this
Agreement to any Person (herein called the "Deferred Payment
Assignee"). Concurrently with any such conveyance to a Deferred
Payment Assignee, (a) Schlumberger's right to receive the
applicable Deferred Payments pursuant to this Agreement shall be
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automatically converted to a net profits interest, (b) Pannonian
shall execute and deliver to such Deferred Payment Assignee an
assignment of net profits interest in form and substance
reasonably satisfactory to Schlumberger and the Deferred Payment
Assignee, (c) Pannonian shall amend the Memorandum of Assignment
of Net Profits Interest described in Section 5.6 below to reflect
the Deferred Payment Assignee's Percentage, and (d) Schlumberger
shall terminate the liens created by the Security Agreement as
they relate to the applicable Deferred Payments and deliver to
Pannonian executed releases, in form and substance reasonably
satisfactory to Pannonian, to evidence such termination.
5.6 Memorandum of Assignment. Pannonian shall, contemporaneously with
the completion of Services on each Project Well, execute and file
a Memorandum of Assignment of Net Profits Interest substantially
in the form attached as Exhibit G-2. Pannonian shall from time to
time amend such Memorandum of Assignment of Net Profits Interest
to reflect each of Nabors', Pools', M-I's and Red Oak's
Percentage. Final adjustment to the Service Parties' Percentages
and payments to reallocate Deferred Payments made under
inaccurate interim percentages shall be made by the Parties, as
provided in Article 3.4(g) not more than ninety (90) days after
completion of the Services on a given Bundle. In the event
Pannonian fails to execute and file any Memorandum of Assignment
when and as requested, the Parties hereby agree that such failure
will cause potentially irreparable harm to the Service Parties
and that, therefore, the Service Parties will be entitled to
injunctive relief to cure such failure.
5.7 Schlumberger Production Facilities Audit. At any time during
which Schlumberger is entitled to receive Deferred Payments,
Schlumberger shall have the right to enter the Contract Area and
to audit the surface facilities to assess the performance of such
facilities. Schlumberger may provide to the Executive Committee a
recommendation regarding improvements or modifications to the
facilities with a view to improving the flow of Hydrocarbon
Production for eventual sale. The Executive Committee will review
on a timely basis any such recommendations by Schlumberger and,
if approved by the Executive Committee, the Field Development
Plan shall be amended to include such activities.
5.8 Interest on Past Due Payments. Any amount not paid by Pannonian
when due shall bear, and Pannonian will pay, interest at the
interest rate set forth in the applicable Master Service
Agreement for late payments.
6. OPERATION OF THE PROJECT WELLS
6.1 Prudent Operator Standard. Pannonian will conduct and carry on or
cause to be conducted and carried on the exploration,
development, maintenance and operation of the Project Wells in
compliance with applicable federal, state, and local laws, rules,
and regulations and in accordance with the standards of
reasonable and prudent business judgment and sound oil and gas
field practices customarily employed by oil and gas operators in
the Contract Area.
6.2 Emergencies. In any emergency situation posing a threat to life,
property or the environment, Pannonian shall undertake all
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actions that it believes in good faith to be appropriate to
contain and remedy the situation. While approval (whether under
Article 4.2.6 or otherwise) shall not be required in connection
with any such actions, Pannonian shall provide as soon as
practicable a report to the Technical Committee of the situation
and the actions undertaken.
6.3 Production Monitoring and Surveillance. Schlumberger shall
monitor the relevant production and parameters from the
appropriate number of nodes (selected individual wells and field
level gathering points) using its proprietary real time web based
system to provide data in order continually to assist in the
optimization of the Contract Area.
6.4 Partial Disposal of Properties. At any time following July 1,
2005, Pannonian shall have the right in its sole discretion to
dispose of its oil and gas interests in the Contract Area,
whether by farmout, exchange, assignment or otherwise, free and
clear of the terms of this Agreement; provided, however, that
this Article 6.4 shall not permit Pannonian's disposal at any
time of either a Project Well, and or the eight (8) immediately
surrounding 80-acre offset drilling locations of Project Wells
drilled in the first Bundle and alternate drilling locations
provided such locations are identified in the Field Development
Plan.
6.5 Abandonment of Properties. Nothing herein contained shall
obligate Pannonian to drill or complete any well in the Contract
Area, to continue to operate any well in the Contract Area, or to
operate or maintain in force or attempt to maintain in force any
lease when, in Pannonian's reasonable opinion as a prudent
operator, such well or lease is not economical. No Service Party
shall ever have any liability for the plugging, abandonment or
reclamation of any Project Well, although plugging, abandonment
and reclamation costs are included as Production Costs.
6.6 Development of Formations Outside this Agreement. Pannonian shall
have the right in its sole discretion at any time and from time
to time to drill, complete and operate oil and gas wells in the
Contract Area, free and clear of the terms of this Agreement;
provided, however, that this Article 6.6 shall not permit the
drilling by Pannonian of a well within the spacing unit (or the
40-acre quarter-quarter section of the government survey, if no
spacing has been adopted) of either a Project Well or an
anticipated Project Well that has been approved by the Executive
Committee for inclusion in a Bundle, unless Pannonian's well is
drilled solely to test and produce formations that are not
subject to this Agreement and such testing or drilling does not
affect Hydrocarbon Production from any Project Well.
6.7 Delay Rentals, Minimum Royalties, and Shut-in Gas Payments.
Pannonian shall use reasonable commercial efforts to pay or cause
to be paid in a proper and timely manner all delay rentals,
minimum royalties, and shut-in gas payments which may be
necessary to maintain its leases in the Contract Area in full
force and effect, except to the extent that Pannonian has decided
to dispose of or abandon such leases. Notwithstanding anything to
the contrary herein, Pannonian shall not be liable to any Service
Party for failure to pay or for incorrect payment of delay
14
rentals, minimum royalties, shut-in gas payments, or any other
contractual obligations, except where caused by the intentional
or reckless conduct of Pannonian.
6.8 Marketing Hydrocarbon Production. Pannonian shall market
Hydrocarbon Production in accordance with Prudent Practices,
taking into account relevant locations, qualities and other
circumstances. Pannonian shall never market Hydrocarbon
Production to its Affiliates or in any transaction other than an
arms'-length transaction.
6.9 Insurance. Pannonian shall maintain or cause to be maintained,
during the period of time that any of the Service Parties are
entitled to receive Deferred Payments, insurance coverage that is
consistent with the requirements of the joint operating agreement
applicable to the concerned Project Well. In the event there is
no joint operating agreement applicable to a given well,
Pannonian shall maintain insurance in the amounts required by the
Master Service Agreement with Schlumberger.
7. EARLY BUYOUT
Pannonian may buy out the Service Parties' entitlement to future
Deferred Payments at any time after the termination of this Agreement,
although it must first provide at least thirty (30) days advance
written notice to the Service Parties of its intention to do so
("Early Buyout Notice"). Upon exercise of the early buyout, each
Service Party shall release its right to receive future Deferred
Payments and terminate any mortgage or lien it then holds in the
Contract Area securing such Deferred Payments upon payment by
Pannonian to each Service Party of an amount equal to two hundred
fifty percent (250%) of the Service Party's Expenditures for all
Bundles, less any Deferred Payments that have been made to such
Service Party through the date of the early buyout exercise.
8. TERM
8.1 Term. This Agreement shall remain in force and effect for five
(5) years after the Effective Date, unless earlier terminated
pursuant to Article 8.2.
8.2 Termination. This Agreement may be terminated by written notice
from the terminating Party to all other Parties in accordance
with the following provisions:
8.2.1Not later than April 16, 2004 by any Party, if Red Oak fails
to deliver its Investment Election within 120 days after
December 8, 2003, as provided in the Engagement Letter
attached hereto as Exhibit D;
8.2.2Immediately by any Party, after the Project Wells in five
(5) Bundles have been completed;
8.2.3Immediately by any Service Party, if, through no fault of
the terminating Service Party, at least ten (10) Project
Wells have not been commenced in a calendar year;
8.2.4Immediately by any Party, without prejudice to its other
rights, if another Party becomes insolvent, makes a general
15
assignment for the benefit of its creditors, applies for or
consents to the appointment of a receiver, trustee or
liquidation of all or substantially all of its assets, has
an involuntary petition in bankruptcy filed against it which
is not dismissed within sixty (60) days or fails to pay its
debts and obligations as they become due, or if the
terminating Party reasonably believes that any of the above
events is likely to occur;
8.2.5Immediately by any Party, without prejudice to its other
rights, if another Party fails to pay any obligation under
this Agreement within ten (10) Business Days after the same
shall become due and payable, or if such other Party fails
to duly observe, perform or comply with any other covenant,
agreement, condition or provision of this Agreement and such
failure remains unremedied for a period of thirty (30) days
after written notice of such failure is given by the
non-breaching Party to the breaching Party;
8.2.6Upon thirty (30) days advance written notice from Pannonian
to the Service Parties if, at any time during the term of
this Agreement, the Parties allow a cessation of drilling
operations (not caused by Pannonian) for a period of greater
than one-hundred (100) consecutive days between the
completion of a Project Well and commencement of drilling
operations on the next Project Well in an approved Bundle.
Pannonian shall withdraw the notice of termination under
this Article 8.2.6 should the Service Parties commence
drilling operations prior to the expiration of the thirty
(30) day notice period; or
8.2.7By mutual agreement of the Parties, on such terms as they
may agree.
8.3 Survival. Notwithstanding any termination of this Agreement in
accordance with Section 8.2, (i) the obligation of Pannonian to
make Deferred Payments under Article 5 in respect of each Bundle
shall continue for the full period provided by Article 5.2 for
that Bundle and (ii) the confidentiality provisions of Article 10
shall continue for a period of eighteen (18) months following the
termination of this Agreement.
8.4 Return of Property. Pannonian shall promptly return all property
of each Service Party that is in Pannonian's possession or under
its control upon termination of this Agreement. Similarly, each
Service Party shall promptly return to Pannonian all property of
Pannonian, and to each Service Party all property belonging to
that Service Party, which is in such Service Party's possession
or under its control upon termination of this Agreement.
9. GENERAL TERMS AND CONDITIONS
9.1 Effect of Master Service Agreement. The Parties agree that the
provision of Services by each Service Party shall be governed by
the terms and conditions contained in that Service Party's Master
Service Agreement. To the extent that any term or condition set
forth in the Master Service Agreement is not addressed in this
Agreement, the term or condition in the Master Service Agreement
shall apply as between the parties to such Master Service
Agreement. To the extent that any indemnity is extended by any
16
Party in the Master Service Agreement, it is agreed that, for the
purposes of this Agreement, such indemnity shall apply to the
extent it is applicable. To the extent that any term or condition
set forth in the Master Service Agreement conflicts with the
provisions of this Agreement, the provisions of this Agreement
shall control. The Master Service Agreements are incorporated
herein by reference thereto for all purposes and are made a part
hereof.
9.2 Other Documents. In the event any Party issues any
acknowledgment, delivery ticket, invoice, purchase order or other
instrument whose terms are inconsistent with any of the terms or
provisions of this Agreement, such terms shall be unenforceable
and the terms of this Agreement shall control.
10. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY
10.1 Confidential Information. "Confidential Information" means
information unavailable from public sources that any of the
Parties considers confidential and proprietary information,
including, but not limited to, the terms of this Agreement,
seismic records and tapes, interpreted well logs, maps,
engineering data, and financial information relating to the
Contract Area, together with nonproprietary seismic data that has
been licensed from Third Parties under terms which restrict the
licensee's use, disclosure, or display of such data.
10.2 Nondisclosure. Each Party agrees that any Confidential
Information obtained by it from any other Party under the terms
of this Agreement will be held in strict confidence and will not
be disclosed by it to any Third Party without written
authorization from the originating Party, unless such information
(i) is in the public domain through no fault of the disclosing
Party or (ii) is required to be publicly disclosed under
applicable securities laws. Each Party agrees to limit access to
such Confidential Information only to those of its Affiliates and
Representatives who have a need under or in furtherance of this
Agreement to review such Confidential Information.
10.3 Other Working Interest Owners. Notwithstanding the foregoing, the
terms of this Agreement and all related financial information may
be disclosed by Pannonian to Third Parties owning working
interests in a Project Well, but only if such working interest
owners have themselves requested such information in the course
of a joint interest billing audit and have agreed to be bound by
the confidentiality provisions of this Agreement.
10.4 Confidential Procedures of Service Parties. Pannonian
acknowledges that the procedures, processes, methods and know-how
used in rendering the Services and the formulas, components,
mixtures, specifications and other descriptions of the oilfield
products are considered confidential and proprietary to each
Service Party and will not be divulged to Pannonian. Pannonian
agrees that it and its Affiliates shall hold the same in
strictest confidence and shall not to attempt to analyze or test
any oilfield products provided by the Service Parties, including
mixtures, to determine their formula or components.
17
10.5 Confidential Procedures of Pannonian. The Service Parties
acknowledge that their personnel will have access to certain
procedures, processes, methods, know-how and practices used by
Pannonian in its business planning and its development of the
Contract Area. Each Service Party agrees that it and its
Affiliates shall treat Pannonian's information provided to such
personnel as confidential and proprietary, and shall not disclose
the same to Third Parties or to any of its or its Affiliates
personnel, other than those of its Representatives who have a
need to review such Confidential Information for the purposes
stated herein.
10.6 Confidential Designs, Drawings, Information and Data. Pannonian
shall treat as secret and confidential, and shall not, except in
connection with this Agreement, make any use whatsoever of any
designs, drawings, information or data furnished to Pannonian by
the Service Parties hereunder. Similarly, the Service Parties
shall treat as secret and confidential, and shall not, except in
connection with this Agreement, make any use whatsoever of any
designs, drawings, information or data furnished by Pannonian
hereunder.
10.7 No Intellectual Property Assignments. Nothing in this Agreement
shall be deemed to constitute or result in an assignment to one
Party of any trademarks owned or used by any other Party or the
Confidential Information, or the creation of any equitable or
other interest therein, or to grant one Party any right to use
the trademarks owned or used by any other Party or the other
Party's Confidential Information. Each Party agrees never to
impugn or challenge, or to assist in any challenge to the
validity of, the trademarks, any registration thereof or any
other Party's ownership thereof.
10.8 New Copyrights and Patents. Schlumberger shall have the right to
obtain copyrights or patents on any method, material or equipment
originating in whole or in part from Schlumberger arising in the
course of or out of this Agreement.
10.9 Copyright and Patent Cooperation and Use. Pannonian, Nabors, Pool
and M-I (for purposes of this Article 10.9, each a "User Party")
shall provide reasonable cooperation in all efforts by
Schlumberger to obtain such patents and copyrights, and will be
reimbursed a reasonable amount for the time and expense required
in providing such cooperation. If requested by any User Party,
Schlumberger shall grant to such User Party an irrevocable,
royalty-free license to use any patent developed out of this
Agreement exclusively for the User Party's use in the normal
course of its business, although any such license shall not be
sold, licensed, sublicensed or otherwise transferred to a Third
Party without the approval of Schlumberger. If requested by any
User Party, Schlumberger shall grant to such User Party an
irrevocable license, free from royalty, for the User Party's
internal use only of any copyrighted documents developed
hereunder. It is understood and agreed that each User Party shall
have no right to grant any sublicense to Third Parties for such
copyrights.
10.10Proceedings to Compel Disclosure. If a Party hereto, or its
Representative, is required by any court or legislative or
administrative body to disclose any Confidential Information
belonging to any other Party, the Party required to make such
18
disclosure shall provide the disclosing Party with prompt notice
of such requirement in order to afford the disclosing Party the
opportunity to seek an appropriate protective order. If, however,
the Party seeking to prevent the disclosure does not seek or is
unable to obtain such protective order, then the Party required
to compel such Confidential Information may disclose such
Confidential Information, without liability to the other Party,
if such disclosure is, in the opinion of counsel, required under
pain of liability for contempt or other penalty.
10.11Injunctive Relief. In the event of breach or threatened breach
by one Party or its Representatives of the provisions of this
Article 10, the disclosing Party shall be entitled to an
injunction or judicial order equivalent thereto restraining that
Party or its Representatives from using or disclosing, in whole
or in part, such Confidential Information. Nothing herein shall
be construed as prohibiting any Party from pursuing any other
remedies available to it for such breach or threatened breach,
including recovery of damages from the other Party.
10.12Non-Confidentiality for Tax Purposes. Notwithstanding anything
to the contrary contained herein, each Party to this Agreement
(and each employee, representative, or other agent of such Party)
may disclose to any person as required or allowed by applicable
law, rule or regulation, the tax treatment and tax structure of
the transaction contemplated by this Agreement (the
"Transaction") and all materials of any kind (including opinions
or other tax analyses) that are provided to such Party relating
to such tax treatment and tax structure. Nothing in this
Agreement, or any other agreement between the Parties hereto,
whether express or implied, shall be construed as limiting in any
way the ability of any Party to consult with any tax advisor
independent from all other entities involved in the Transaction
regarding the treatment, tax structure or tax consequences of the
Transaction.
11. NOTICES
Any notice required under the terms of this Agreement shall be in
writing, addressed to the Party to whom sent, and transmitted prepaid
by air courier, telecopy or other facsimile transmission with signed
original to follow by air courier. All such notices in compliance with
this provision shall be deemed given when actually delivered to the
recipient's address. For purposes of this Agreement, the addresses of
the Parties are as follows until changed by written notice from the
Party desiring to change its address to the other Parties:
If to Schlumberger: Schlumberger Technology Corporation
6501 South Fiddler's Green Circle,
Greenwood Village, Colorado 80111,
Telephone: 303-486-3246
Facsimile: 303-486-3249
Attention: James Stewart
cc: NAM General Counsel
300 Schlumberger Drive
Sugar Land, Texas 77478
19
If to Pannonian: Pannonian Energy
14 Inverness Drive East
Building H, Suite 236
Englewood, Colorado 80112
Telephone: 303-483-0044
Facsimile: 303-483-0011
Attention: Mark Erickson
If to Nabors: Nabors Drilling USA, LP
515 W. Greens Rd., Suite 1000
Houston, Texas 77067
Telephone: 281-775-8527
Facsimile: 281-775-8414
Attention: J. R. Smith
If to Pool: Pool Well Services Co.
515 W. Greens Rd., Suite 1000
Houston, Texas 77067
Telephone: 281-775-8527
Facsimile: 281-775-8414
Attention: J. R. Smith
If to M-I: M-I, LLC
5950 North Course Drive
Houston, Texas 77025
Telephone: 832-295-2774
Facsimile: 832-295-2501
Attention: Contracts Administrator
cc: Joe P. Bacho
If to Red Oak: Red Oak Capital Management, LLC
11757 Katy Freeway, Suite 300
Houston, Texas 77079
Telephone: 281-493-4450
Facsimile: 281-493-4490
Attention: James Whipkey
12. MISCELLANEOUS PROVISIONS
12.1 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado.
12.2 Dispute Resolution. Any dispute or controversy between the
Parties arising out of or related to this Agreement or the
provision of Services contemplated hereunder shall be finally
settled by binding arbitration between the Parties pursuant to
the commercial arbitration rules of the American Arbitration
Association. The arbitration shall be conducted in Denver,
Colorado, before a single arbitrator. In the event the disputing
Parties are unable to agree upon an arbitrator within fifteen
(15) days of the notice of arbitration, the American Arbitration
Association shall select an arbitrator for the Parties. The
20
arbitration award may be enforced by application to any court of
competent jurisdiction. Except as may otherwise be awarded by the
arbitrator, the prevailing party in any such proceeding shall be
entitled to recover, in addition to other damages to which it may
be entitled to recover, its reasonable attorney's fees incurred
in connection with such proceeding.
12.3 Compliance with Laws. Each Service Party agrees to comply in
material respects with all laws, statutes, codes, rules, and
regulations, which are now or may become applicable to its
Services or arising out of the performance of its Services.
12.4 Amendment; Entire Agreement; No Waiver. No modification of this
Agreement shall be of any force or effect unless in writing and
signed by an authorized signatory of all Parties. This Agreement,
together with any service orders, service requests and the
Exhibits attached hereto, constitutes the entire understanding
between the Parties with respect to the subject matter hereof and
supersedes all prior agreements, negotiations and discussions of
the Parties in relation to its contents. Failure to enforce any
or all of the terms and conditions of this Agreement in a
particular instance or instances shall not constitute a waiver
thereof or preclude subsequent enforcement thereof.
12.5 Assignment. Pannonian may not assign its rights or obligations
under this Agreement without the prior written consent of the
Service Parties, which shall not be unreasonably withheld. Each
Service Party shall have the right to assign all rights and
obligations under this Agreement to an Affiliate, without prior
consent of Pannonian. No Service Party will transfer or assign
its respective rights and obligations under this Agreement,
except its right to receive payments hereunder, to a
Non-Affiliate without the prior written consent of Pannonian.
12.6 Rules of Construction. All references in this Agreement to
articles, sections, subsections and other subdivisions refer to
corresponding articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided
otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute
part of such subdivisions and shall be disregarded in construing
the language contained in such subdivisions. The words "this
Agreement", "this instrument", "herein", "hereof", "hereunder"'
and words of similar import refer to this Agreement as a whole
and not to any particular subdivision unless expressly so
limited. Unless the context otherwise requires: "including" and
its grammatical variations mean "including without limitation";
"or" is not exclusive; words in the singular form shall be
construed to include the plural and vice versa; words in any
gender include all other genders; references herein to any
instrument or agreement refer to such instrument or agreement as
it may be from time to time amended or supplemented; and
references herein to any Person include such Person's successors
and assigns. All references in this Agreement to exhibits and
schedules refer to exhibits and schedules to this Agreement
unless expressly provided otherwise, and all such exhibits and
schedules are hereby incorporated herein by reference and made a
part hereof for all purposes.
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13. SEVERABILITY; SAVINGS CLAUSE
Any provision or term of this Agreement that is or may be void or
unenforceable shall, to the extent of such invalidity or
unenforceability, be deemed severable and shall not affect any other
provision of this Agreement. All Parties agree that the exculpatory,
indemnification and hold harmless provisions herein, or in the Master
Service Agreements which are incorporated herein by reference, shall
be modified or altered only insofar as required by a jurisdiction
purporting to limit such provisions, it being the intention of all
Parties to enforce to the fullest extent all terms and conditions
herein agreed to.
14. WARRANTIES/DISCLAIMERS
14.1 Service Party Disclaimer. In preparing technical recommendations,
each Service Party shall provide Pannonian the benefit of its
best judgment based on its experience. All such technical
recommendations are opinions only, and it may not be possible for
the Service Parties to obtain first-hand knowledge of the many
variable conditions that could affect the outcome of the
services. NO WARRANTY IS GIVEN AS TO THE EFFECTIVENESS OR RESULTS
OF THE SERVICES THAT WILL BE RENDERED HEREUNDER, NOR AS TO THE
OUTCOME OF IMPLEMENTATION OF ANY TECHNICAL RECOMMENDATION. NO
SERVICE PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, WITH
RESPECT TO THE SERVICES, EXCEPT TO THE EXTENT, IF ANY, SET FORTH
IN ITS MASTER SERVICE AGREEMENT. MOREOVER, SCHLUMBERGER MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, COMPLETENESS OR
MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO ANY
OTHER PARTY IN CONNECTION WITH THIS AGREEMENT.
14.2 Pannonian Title Warranty. Pannonian represents and warrants to
the Service Parties that it will be the owner (or have
appropriate operational rights under a farmout or earning
agreement from the owner) of the leasehold interests constituting
the drill site of a Project Well, but only to extent indicated in
the drilling opinion furnished by Pannonian to the Service
Parties with the AFE for such Project Well. Pannonian will take
appropriate steps to maintain such interest in good standing and
free and clear of all liens, charges, encumbrances and claims
whatsoever. To the best of Pannonian's knowledge, there is no
claim, action or administrative proceeding pending which may
jeopardize title to any interest Pannonian holds on the Effective
Date. Pannonian shall provide such documentation to the Service
Parties as they may reasonably require to satisfy themselves that
Pannonian owns such interests.
15. FORCE MAJEURE
If, as a result of an event of Force Majeure, any Party is rendered
unable, wholly or in part, to carry out its obligations under this
Agreement, other than the obligation to pay any amounts due or to
furnish security, then the obligations of that Party, so far as and to
the extent that the obligations are affected by such event of Force
Majeure, shall be suspended during the continuance of any inability so
caused, but for no longer period. The Party claiming Force Majeure
shall notify the other Parties of the Force Majeure situation within a
reasonable time after the occurrence of the cause relied on and shall
keep the other Parties timely informed of all significant
22
developments. Such notice shall give reasonably full particulars of
said event of Force Majeure, and also estimate the period of time that
said Party likely will require to remedy the Force Majeure. The
affected Party shall use all reasonable diligence to remove or
overcome the Force Majeure situation as quickly as possible in an
economic manner, but shall not be obligated to settle any labor
dispute except on terms acceptable to it and all such disputes shall
be handled within the sole discretion of the affected Party.
For the purposes of this Agreement, "Force Majeure" shall mean
circumstances that were irresistible or reasonably beyond the control
of the Party concerned.
16. RELATIONSHIP OF THE PARTIES
This Agreement is not intended to create, nor shall it be construed as
creating, any joint venture, association, partnership, trust or
fiduciary relationship nor shall it give rise to the imposition of a
fiduciary obligation or liability with regard to any one or more of
the Parties. In this Agreement, the Parties agree that where decisions
are to be taken hereunder by unanimous agreement, agreement thereto
shall not be unreasonably withheld.
17. CAPACITY OF PANNONIAN
The Service Parties agree to look only to Pannonian for the due
performance of this Agreement and nothing herein contained shall
impose any liability upon, or entitle the Service Parties to commence
any proceedings against any party having an interest in the Contract
Area other than Pannonian. Furthermore, only Pannonian shall be
entitled to enforce this Agreement on behalf of all interest holders
in the Contract Area as well as for itself and, for this purpose only,
Pannonian may commence proceedings in its own name to enforce all
obligations and liabilities of the Service Parties and to make any
claim which any of the said interest owners may have against the
Service Parties in relation to or arising out of this Agreement.
18. REASONABLENESS
Each of the Parties undertakes to do all things reasonably within its
power that are necessary to give effect to the spirit and intent of
this Agreement. None of the Parties shall act unreasonably or without
giving due regard to the representations of the other Party when
reaching any decision as to the giving or withholding of consent or
approval or when exercising any other discretion pursuant to this
Agreement.
19. CONFLICTS OF INTEREST
Conflicts of interest relating to this Agreement are strictly
prohibited. Except as otherwise expressly provided herein, no Service
Party and no director, employee or agent of a Service Party or its
subcontractors shall give to or receive from any director, employee or
agent of Pannonian any gift, entertainment or other favor of
significant value, or any commission, fee or rebate. Likewise, no
Service Party and no director, employee or agent of a Service Party or
its subcontractors shall, without prior written notification thereof
to Pannonian, enter into any business relationship with any director,
employee, or agent of Pannonian or any of its Affiliates, unless such
person is acting for and on behalf of Pannonian. Each Service Party
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undertakes promptly to notify Pannonian of any violation of this
Article, with the understanding that any consideration received as a
result of such violation shall be paid over or credited to Pannonian.
Additionally, in the event of any violation of this Article, including
any violation occurring prior to the date of this Agreement, resulting
directly or indirectly in Pannonian's consent to enter into this
Agreement, Pannonian may, at Pannonian's sole option, terminate this
Agreement at any time and notwithstanding any other provision of this
Agreement, pay each Service Party only for that part of the services
provided prior to the date of termination. Any representatives
authorized by a Party hereto may audit any and all records of the
other Party, as well as applicable subcontractors, for the sole
purpose of determining whether there has been compliance with this
Article 19.
20. CORPORATE POWER AND AUTHORITY
Each of the Parties represents and warrants to the other that it has
full power to enter into and perform its obligations under this
Agreement and that, when executed, this Agreement will constitute such
Party's legal, valid and binding obligations in accordance with its
terms.
21. GOVERNMENT APPROVALS
From and after the execution hereof, each of the Parties hereto,
without further consideration, shall use its best efforts to execute,
deliver, submit, gain approvals of, and record, or cause to be
executed, delivered, submitted, and recorded, good and sufficient
permits, designations of operator forms, other regulatory documents
and instruments, as applicable, and take such other action as may be
reasonably required to carry out the purposes of this Agreement and to
give effect to the covenants, stipulations and obligations of the
Parties hereto.
22. PUBLIC ANNOUNCEMENTS
No Party will issue, or permit any agent or Affiliate to issue, any
press release, announcement or other public statement with respect to
this Agreement and the transactions contemplated hereby, unless (i)
the prior written approval of the other Parties has been obtained or
(ii) any Party believes in good faith that it is required by
applicable government regulations to disclose any information related
to this Agreement, in which event, it shall notify the other Parties
of its belief and shall seek appropriate confidentiality protections
for the information required to be disclosed. The Parties further
agree that approval will not be unreasonably withheld.
23. MODIFICATION OF EXHIBITS
Additional Exhibits or amendments may be necessary to fully address
the financial and operational details of the various activities under
this Agreement. The Parties agree to cooperate to obtain the execution
of any documents necessary to carry out the intention of this Article
23.
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24. NO LIABILITY; INDEMNITY
EXCEPT TO THE EXTENT OF THE SERVICE PARTIES' EXPENDITURES, THE SERVICE
PARTIES SHALL NEVER BE RESPONSIBLE FOR ANY PART OF THE COSTS, EXPENSES
OR LIABILITIES INCURRED IN CONNECTION WITH:
(A) THE EXPLORING, DEVELOPING, OPERATING, OWNING, MAINTAINING,
REWORKING OR RECOMPLETING OF THE EVALUATION WELLS OR ANY PROJECT
WELL, THE PHYSICAL CONDITION OF THE CONTRACT AREA, OR THE
HANDLING, TREATING OR TRANSPORTING OF HYDROCARBONS PRODUCED FROM
THE CONTRACT AREA (INCLUDING ANY COSTS, EXPENSES, LOSSES OR
LIABILITIES RELATED TO VIOLATION OF AN ENVIRONMENTAL LAW OR
OTHERWISE RELATED TO DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT,
WHETHER THE SAME ARISE OUT OF A SERVICE PARTY'S LIEN ON ANY
PROPERTY OR OUT OF THE ACTIONS OF PANNONIAN OR THE SERVICE
PARTIES OR OF THIRD PARTIES OR ARISE OTHERWISE), OR
(B) THE FAILURE BY PANNONIAN TO HAVE GOOD AND DEFENSIBLE TITLE TO THE
PROJECT WELLS, FREE AND CLEAR OF ALL BURDENS, ENCUMBRANCES, LIENS
AND TITLE DEFECTS (INCLUDING ANY COSTS, EXPENSES, LOSSES OR
LIABILITIES SUFFERED BY THE SERVICE PARTIES AS A RESULT OF ANY
CLAIM THAT ANY SERVICE PARTY MUST DELIVER OR PAY OVER TO ANY
PERSON ANY PART OF THE PROCEEDS OF HYDROCARBON PRODUCTION THEREOF
AT ANY TIME PREVIOUSLY RECEIVED OR THEREAFTER TO BE RECEIVED BY
ANY SERVICE PARTY),
AND PANNONIAN AGREES TO INDEMNIFY AND HOLD THE SERVICE PARTIES
HARMLESS FROM AND AGAINST ALL COSTS, EXPENSES, LOSSES AND LIABILITIES
INCURRED BY THE SERVICE PARTIES IN CONNECTION WITH ANY OF THE
FOREGOING INCLUDING THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF AT
ANY TIME ASSOCIATED WITH OR CONTEMPLATED IN ANY OF THE FOREGOING. SUCH
INDEMNITY SHALL ALSO COVER ALL REASONABLE COSTS AND EXPENSES OF THE
SERVICE PARTIES, INCLUDING REASONABLE LEGAL FEES AND EXPENSES, WHICH
ARE INCURRED INCIDENT TO THE MATTERS INDEMNIFIED AGAINST. AS USED IN
THIS ARTICLE 24, "SERVICE PARTY" MEANS EACH SERVICE PARTY AND ITS'
SUCCESSORS AND ASSIGNS, ALL OF THEIR RESPECTIVE AFFILIATES, AND ALL OF
THE OFFICERS, DIRECTORS, AGENTS, BENEFICIARIES, TRUSTEES, ATTORNEYS
AND EMPLOYEES OF THEMSELVES AND THEIR AFFILIATES.
THE FOREGOING INDEMNITY SHALL APPLY WHETHER OR NOT ARISING OUT OF THE
SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF ANY
SERVICE PARTY AND SHALL APPLY, WITHOUT LIMITATION, TO ANY LIABILITY
IMPOSED UPON ANY SERVICE PARTY AS A RESULT OF ANY THEORY OF STRICT
LIABILITY OR ANY OTHER DOCTRINE OF LAW, PROVIDED THAT THE FOREGOING
INDEMNITY SHALL NOT APPLY TO ANY COSTS, EXPENSES, LOSSES OR
LIABILITIES INCURRED BY ANY SERVICE PARTY TO THE EXTENT PROXIMATELY
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CAUSED SOLELY BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH
SERVICE PARTY. THE FOREGOING INDEMNITY SHALL SURVIVE THE TERMINATION
OF THIS AGREEMENT AND THE OTHER DOCUMENTS RELATED HERETO.
25. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which taken together
shall constitute one agreement.
IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written, but is effective as of the Effective Date.
Pannonian Energy Inc. Schlumberger Technology Corporation
By: /s/ Michael Decker By: /s/ Gary Kolstad
------------------------------- --------------------------------
Name: Michael Decker Name: Gary Kolstad
----------------------------- ------------------------------
Title:Executive Vice President/COO Title: Vice President
----------------------------- -----------------------------
Nabors Drilling USA, LP M-I, LLC
By: /s/ Randall D. Clark By: /s/ Bryan L. Dudman
------------------------------- -------------------------------
Name: Randall D. Clark Name: Bryan L. Dudman
------------------------------ -------------------------------
Title: Vice Pres Business Development Title:Senior VP Western Hemisphere
----------------------------------- ------------------------------
Pool Well Services Co. Red Oak Capital Management, LLC
By: /s/ Nickolas Petronio By: /s/ James M. Whipkey
------------------------------------- --------------------------------
Name: Nickolas Petronio Name: James M. Whipkey
------------------------------------- -------------------------------
Title: President Title: Managing Director
------------------------------------- -------------------------------
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