Exhibit 10.1
[MONTCREST ENERGY, INC. LOGO]
320 Hemphill Street
Fort Worth, TX 76104
817-916-4983
June 8, 2012
Attn: Gregory Rotelli
JOINT DEVELOPMENT AGREEMENT
This binding Joint Development Agreement (the "Agreement") is made and
Effective this 8th day of June, 2012, (the "Effective Date") by and between
MONTCREST ENERGY PROPERTIES, INC., MONTCREST ENERGY, INC., a Texas corporation,
BLACK STRATA, LLC, on the one hand (hereinafter jointly referred to as
"MontCrest") and INDEPENDENCE ENERGY CORPORATION, (collectively as the
"Parties")
I. DEFINITIONS
As used in this Agreement, the following terms used herein are defined as
follows:
1.0 "Joint Operating Agreement" or "JOA" shall mean and refer to that
certain Joint Operating Agreement attached hereto as Exhibit A, and incorporated
herein as though fully set forth at length, including any JOA Exhibits attached
thereto.
1.1 "Lease or Lease(s)s" shall mean and refer to those certain Lease(s) set
forth in "Exhibit B, JOA," attached hereto to the JOA and incorporated herein as
though fully set forth at length, including any JOA Exhibits attached hereto,
1.2 "Well or Wells" shall mean and refer to any oil, gas, and/or injection
Well drilled, re-entered, or recompleted on any Lease(s) within the Area of
Mutual Interest ("AMI") and includes without limitation any and all geological
formations on, in or under the foregoing Leases, any "Well" or "Well(s)," and
any "Personal Property and Incidental Rights," in, on or under the Leases as of
the Effective Date.
1.3 "Areas of Mutual Interest" ("AMI") shall mean and refer to mineral the
Coleman County South Lease(s) consisting of 2,420.92 +/- acres, located in
Coleman County, Texas. SEE, "Exhibit A," Legal Description of Properties", and
"Exhibit B JOA," attached hereto and incorporated herein as though fully set
forth at length.
1.4 "Personal Property and Incidental Rights" shall mean all rights, titles
and interests of MONTCREST in and to or derived from the following, insofar as
the same are attributable to, appurtenant to, incidental to, or used for the
operation of any Wells with the AMI including:
(a) all easements, rights-of-way, permits, licenses, servitudes or other
interests;
(b) all equipment, personal property, inventory, spare parts, fixtures,
pipelines, tank batteries, appurtenances, and improvements situated upon the
Lease(s) and used or held for use in connection with the development or
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operation of any Wells located on the Lease(s) or the production, treatment,
storage, compression, processing or transportation of oil and gas from such
Wells;
(c) all contracts, agreements, and title instruments to the extent
attributable to and affecting the AMI, any Lease(s) and any Personal Property
and Incidental Rights in existence pertaining to the AMI;
d) all intellectual property, in any way related to geological formations
under AMI including but not limited to seismic data, surveys, logs, reports, and
geological data and information, in the possession of MONTCREST, subject to its
control, or available upon MONTCREST'S request.
1.5 "MONTCREST'S AMI Interest" shall mean and refer to MONTCREST'S mineral
estate ownership, and/or authority over at least seventy-five percent (75%) of
the Net Revenue Interest of the Lease(s) within the AMI and one hundred percent
(100%) of the Working Interest in the Lease(s) within the AMI.
1.6 "Working Interest" shall mean a percentage of ownership in an oil and
gas Well granting its owner the right to explore, drill and produce oil and gas
from a tract of property. After royalties are paid, the working interest also
entitles its owner to share in production revenues with other working interest
owners, based on the percentage of working interest owned.
II. REPRESENTATIONS AND WARRANTIES AND COVENANTS
2.1 MONTCREST represents, warrants and covenants to INDEPENDENCE that as of
the Effective Date of this Agreement, that:
(a) MONTCREST has full rights and authority over the mineral lease(s)
rights, titles and interests of at least an undivided seventy-five percent (75%)
Net Revenue Interest equaling a one hundred percent (100%) working interest in
the AMI, without the joinder of any other person or entity.
(b) MONTCREST has not sold or attempted to sell, or pledged, hypothecated,
or encumbered, or attempted to pledge, hypothecate, or encumber, MONTCREST'S
interests in the AMI, and MONTCREST has the full right to execute this
Agreement, free and clear of all liens and claims, and without the consent of
any third party.
(c) MONTCREST represents that it is the owner of, or has the authority over
all right, title and interest in and to the mineral estate acres which are
identified in the Lease(s) set forth in "Exhibit B, JOA."
III. ENGAGEMENT
Independence Energy desires to develop hydrocarbons in, on or under certain
of MontCrest's and Black Strata's interests in Coleman within the AMI identified
by the Leases in the State of Texas and in consideration of the foregoing and
respective representations, warranties, provisions and agreements set forth here
within, Parties hereto enter into this Agreement and covenant and agree as
follows:
3.1 JOINT DEVELOPMENT.
(a) INDEPENDENCE will pay to MONTCREST at closing, Ninety Thousand Seven
Hundred Eighty Four Dollars and Fifty Cents ($90,784.50) and in consideration
thereof MONTCREST will assign to INDEPENDENCE, MONTCREST'S AMI Interest save and
except Eighty Seven Point Five Percent (87.5%) of the Working Interests in the
Lease(s) within the AMI (hereinafter "MONTCREST'S Retained Interests").
MontCrest will offer the right of first refusal for sixty days to Independence
for an additional Twelve Point Five percent (12.5%).
(b) In consideration of MONTCREST'S Retained Interests, MONTCREST will
serve as Manager of the AMI under the JOA to develop hydrocarbons in, on or
under the AMI in accordance with Texas' reasonable and prudent operator
standard.
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(c) MONTCREST will be responsible for obtaining and engaging geological
engineering for AMI to explore and develop hydrocarbons in, on or under the AMI;
however, INDEPENDENCE shall each bear the burden of the costs of all geological
engineering of the AMI.
3.2 TERM.
This Agreement shall have the same term as the JOA.
3.3. CONFIDENTIALITY.
The parties to this Agreement acknowledge and agree to be bound by a duty
of confidentiality. Except as and to the extent required by law, each Party (as
applicable, the "Recipient Party") agrees that it will not disclose or use, and
will direct its representatives and affiliates not to disclose or use to the
detriment of the other Party (as applicable, the "Disclosing Party"), any
Confidential Information (as defined below) furnished, or to be furnished by the
Disclosing Party or its representatives to the Recipient Party or its
representatives and affiliates at any time or in any manner other than in
connection with its evaluation of the transaction proposed in this Agreement For
purposes of this Section "Confidential Information" means any confidential and
proprietary business information relating to the Disclosing Party or its
businesses (including, without limitation, ideas, technical information
including seismic data and/or geological information, procedures, processes,
business and financial models and projections, marketing and business materials,
price lists, sales catalogs, advertising literature, samples, customer lists,
customer information, and trade secrets owned and/or controlled by the
Disclosing Party), unless (i) such information is already known to the Recipient
Party or its representatives or to others not bound by a duty of confidentiality
or such information becomes publicly available through no fault of the Recipient
Party or its representatives, (ii) the use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the Joint Operating Agreement, or (iii) the furnishing
or use of such information is required by or necessary or appropriate in
connection with legal proceedings and public filings. Upon the written request
of the Disclosing Party, the Recipient Party will promptly return to the
Disclosing Party or destroy any Confidential Information in the Recipient
Party's possession and certify in writing to the Disclosing Party that the
Recipient Party has done so.
(a) The Confidential Information, is not in any manner, without the prior
written consent of Disclosing Party, be disclosed by Recipient Party.
(b) Each Recipient Party shall safeguard the Confidential Information,
whether provided in written, electronic, oral or any other form, as
strictly confidential and proprietary, and shall not disclose the
Confidential Information to any Person except as expressly permitted in
this Agreement. In addition, each Recipient Party shall comply with all
laws protecting the Confidential Information from unauthorized disclosure.
Recipient Party shall take no action which would cause any portion of the
Confidential Information which is privileged to lose such protection.
Recipient Party shall implement all systems and controls necessary to
ensure that it complies with this Agreement. This Section shall continue in
full force and effect after termination of this Agreement for any reason.
(c) Recipient Party will not utilize the Confidential Information in any
way directly or indirectly detrimental to Disclosing Party, including
without limitation making any effort to directly or indirectly lease or
attempt to lease, or otherwise acquire any mineral interest acreage within
a fifty mile (50) mile radius of MontCrest Project(s).
(d) Disclosing Party may request return of the Confidential Information and
upon receipt of such request the Recipient Party shall promptly retrieve
all Confidential Information disseminated to any person and return to the
Disclosing Party all of the Confidential Information disclosed hereunder,
including all copies thereof and all written transcriptions of orally
transmitted data related hereto.
(e) Recipient Party guarantees the full performance of this Agreement and
agrees to be responsible and liable for any breach of this Agreement by any
of Recipient Party as defined in this Agreement.
(f) In the event that Recipient Party becomes legally compelled to disclose
any of the Confidential Information, Recipient Party agrees that Recipient
Party will provide Disclosing Party with prompt notice so that Disclosing
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Party may seek a protective order or other appropriate remedy and/or waive
compliance with the provisions of this Agreement. In the event that such
protective order or other remedy is not obtained, Recipient Party will
furnish only that portion of the Confidential Information which it is
advised by counsel is legally required and will exercise its best efforts
to obtain reliable assurance that confidential treatment will be accorded
to the Confidential Information.
3.4 MUTUAL NON-CIRCUMVENTION.
The Parties to this Agreement shall not perform any act in violation of
this Agreement through any other person or entity, or through any plan, scheme,
design, or subterfuge calculated to circumvent the requirements or spirit of
this Agreement by technical means or otherwise. Shall any parties to this
Agreement, affiliated person, related entity, direct, indirect party, agent or
secondary party to this Agreement circumvent this Agreement in any matter, the
responsible parties thereto shall be held liable for any damages, contingent
damages, fees, income, allocation of funds or equity due under this Agreement.
Any legal fees or expenses related to any litigation due to circumvention or
other issues under this Agreement shall be paid by the party or related entities
responsible thereof.
No Recipient Party shall attempt to circumvent Disclosing Party in order to
acquire rights to, or interests relating to the Opportunities and Corporate
Events, the employees, the agents, the contractors or the key personnel of the
Disclosing Party. Recipient Party therefore agrees that the Recipient Party will
not directly or indirectly solicit the employees, agents, contractors or key
personnel of the Disclosing Party.
3.5 NO PARTNERSHIP.
This Agreement is not intended to create, and shall not be construed to
create or constitute any relationship of partnership, limited partnership,
association for profit, agency (except as otherwise expressly provided for
herein), fiduciary (except as otherwise expressly provided herein), joint
venture, mining partnership, mutual agency, or other relationship constituting
or creating joint and/or collective liability. The relationship between the
parties hereto are that of contractor and independent contractor and neither are
employees, servants, agents, partners or joint venturers of the other parties..
Neither party shall be responsible for withholding, and shall not withhold, FICA
or taxes of any kind from any compensation due to the other party, except as
provided in the JOA. Neither MONTCREST and INDEPENDENCE nor their affiliates,
employees, subcontractors, or agents shall be entitled to receive any benefits
which employees of MONTCREST and INDEPENDENCE are entitled to receive and shall
not be entitled to workers' compensation, unemployment compensation, medical
insurance, life insurance, paid vacations, paid holidays, pension, profit
sharing, or Social Security on account of their work.
3.6 INDEMNITY. INDEPENDENCE shall indemnify and hold MONTCREST, their
respective managers, members, agents and employees, harmless from any and all
claims, causes of action, losses, damage, liabilities, costs and expenses,
including attorney fees, arising from or related to INDEPENDENCE' investors,
shareholders, officers, directors and employees in connection with INDEPENDENCE'
engagement in this Joint Development Agreement and involvement in the AMI.
INDEPENDENCE shall be responsible for and assume all liability for and hereby
agrees to defend, this Agreement, indemnify and hold harmless MONTCREST and
BLACK STRATA from and against Claims by any Third Party to the extent such Claim
is caused or related to INDEPENDENCE' investors, shareholders, officers,
directors and employees in connection with INDEPENDENCE' engagement in this
Joint Development Agreement and involvement in the AMI.
MONTCREST will defend title to the AMI against all claims made in
connection with AMI, and agrees to defend and indemnify INDEPENDENCE, its
successors and assigns, from any claim of any person of any interest of
pertaining to title to the Lease(s) within the AMI arising by, through or under
MONTCREST, or in any way related to MONTCREST'S ownership, possession or use of
the AMI, and agrees to defend and hold INDEPENDENCE harmless, and INDEPENDENCE'S
successors and assigns, from any costs, expenses (including attorney's fees and
all costs of prosecuting or defending any title claim in connection with the
AMI, including any claim brought by or against INDEPENDENCE, for losses and
damages, arising out of or related in any manner to any such title claim.
MONTCREST further agrees to indemnify INDEPENDENCE set forth herein-below:
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(a) Indemnity Definitions -:
1) "Claim" or "Claims" means, unless specifically provided otherwise,
all claims (including but not limited to, those for property damage,
pollution [including, without limitation, response costs, remediation
costs, and damages to natural resources], bodily injury, personal
injury, illness, disease, maintenance, cure, loss of parental or
spousal consortium, wrongful death, loss of support, death, and
wrongful termination of employment), damages, liabilities, losses,
demands, liens, encumbrances, fines, penalties, causes of action of
any kind (including actions in REM or in PERSONAM), obligations,
costs, judgments, interest and awards (including payment of attorney's
fees and costs of litigation and investigation costs) or amounts, of
any kind or character (except punitive or exemplary damages), whether
under judicial proceedings, administrative proceedings or otherwise,
or conditions in the premises of or attributable to any person or
persons or any party or parties, breach of representation or warranty
(expressed or implied), under any theory of tort, contract, breach of
contract, (including any Claims which arise by reason of
indemnification or assumption of liability contained in other
contracts entered into by Company Indemnities or Contractor
Indemnities), arising in connection with this Agreement or the
operations under this Agreement, including , but not limited to,
Claims which arise out of or are directly or indirectly connected with
equipment and/or the ownership, possession, management, manning,
maintenance, supply, or operation (including, but not limited to,
ingress, egress, loading and unloading operations).
2). "INDEPENDENCE Indemnities" means INDEPENDENCE ENERGY and its
officers, directors, and insurers and INDEPENDENCE and Invitees and
Personnel.
3). "MONTCREST Indemnities" means MONTCREST and BLACK STRATA, its
co-venturers, if any, and its and their officers, directors, insurers
and MONTCREST'S and BLACK STRATA'S Invitees and Personnel.
4). THE TERM "REGARDLESS OF FAULT" MEANS WITHOUT REGARD TO THE CAUSE
OR CAUSES OF ANY CLAIM, INCLUDING WITHOUT LIMITATION, A CLAIM CAUSED
IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT,
CONCURRENT, COMPARATIVE, CONTRIBUTORY, ACTIVE, PASSIVE, GROSS, OR
OTHERWISE), WILLFUL MISCONDUCT, STRICT LIABILITY, OR OTHER FAULT OF
ANY MEMBER OF INDEPENDENCE INDEMNITEES, MONTCREST AND BLACK STRATA ,
MONTCREST AND BLACK STRATA INVITEES AND/OR THIRD PARTIES, AND WHETHER
OR NOT CAUSED BY A PRE-EXISTING CONDITION OR BY ANY EQUIPMENT, OWNED,
OR PROVIDED BY MONTCREST AND BLACK STRATA OR MONTCREST AND BLACK
STRATA INVITEES.
(b) General - The parties agree that:
1). The indemnity obligations contained in these Agreement include
indemnification for punitive or exemplary damage under any law or
otherwise;
2). The Indemnity obligations under this Agreement are effective to
the maximum extent permitted by law. If a law is applied in a
jurisdiction which prohibits or limits a Party's ability to indemnify
the other, then that Party's liability shall exist to the full extent
allowed by the law of the relevant jurisdiction;
3). In support of the indemnity obligations contained in Sub-sections
below, MONTCREST shall provide, each for the benefit of INDEPENDENCE
and INDEPENDENCE Indemnities, coverage and amounts of liability
insurance which in no event shall be less than the minimum set out in
Sub-sections below;
4.) In the event MONTCREST fails to furnish a defense and indemnity as
provided for herein, INDEPENDENCE shall be entitled to receive from
MONTCREST, in addition to its attorneys' fees, costs, expenses and any
amounts paid in judgment or settlement, all costs, expenses, and
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attorneys' fees incurred in the enforcement of this Agreement.
Furthermore, the prevailing Party in any litigation relating to this
Agreement, other than that involving defense and indemnity which is
addressed above, shall be entitled to recover its reasonable and
necessary attorneys; fees and costs of litigation from the other
Party; and
5.) INDEPENDENCE will promptly notify MONTCREST after receipt of any
Claim for which it may seek indemnification. Each Party also shall
immediately notify the other of any occurrence in which physical
injury occurs and to complete and provide the other Party with an
accident report for each such occurrence.
(c) Bodily Injury, Death, and Damage to Property of INDEPENDENCE and
INDEPENDENCE Personnel:
MONTCREST AND BLACK STRATA AGREE TO BE RESPONSIBLE FOR AND ASSUME ALL
LIABILITY FOR AND HEREBY AGREES TO DEFEND, THIS AGREEMENT, INDEMNIFY,
AND HOLD HARMLESS INDEPENDENCE AND INDEPENDENCE INDEMNITEES AGAINST
CLAIMS ARISING IN CONNECTION WITH:
1). BODILY INJURY TO AND/OR DEATH OF MONTCREST AND BLACK STRATA
PERSONNEL AND MONTCREST AND BLACK STRATA INVITEES;
2). MONTCREST AND BLACK STRATA'S DAMAGE TO PROPERTY OF G& F AND
CHESS'S PERSONNEL, AND THEIR INVITEES; ARISING IN CONNECTION WITH THIS
AGREEMENT, REGARDLESS OF FAULT.
(d) Pollution and Hazardous Materials and Substances:
1). MONTCREST Responsibilities -MONTCREST AND BLACK STRATA AGREE TO BE
RESPONSIBLE FOR AND ASSUME ALL LIABILITY FOR AND HEREBY AGREES, TO
DEFEND, THIS AGREEMENT, INDEMNIFY AND HOLD HARMLESS INDEPENDENCE
INDMNITEES AGAINST CLAIMS FOR LOSSS OF OR DAMAGE TO PROPERTY ON
ACCOUNT OF AN UNAUTHORIZED LEASE OR DISCHARGE (INCLUDING BUT NOT
LIMITED TO ANY SPILLING, LEAKING, PUMPING, POURING, EMITTING,
EMPTYING, INJECTING, ESCAPING, LEACHING, DUMPING, OR DISPOSING INTO
THE ENVIRONMENT) OF ANY SUBSTANCE, MATERIAL, SEWERAGE, COMPOUND,
MIXTURE, POLLUTANT, OR CONTAMINANT, WHICH ORIGINATES FROM OPERATIONS
OF MONTCREST OR BLACK STRATA , MONTCREST AND BLACK STRATA INVITEES
AND/OR THIRD PARTIES, REGARDLESS OF FAULT. MONTCREST AND BLACK STRATA
AGREES TO BE RESPONSIBLE FOR AND ASSUME ALL LIABILITY FOR AND HEREBY
AGREES TO DEFEND, THIS TEMPORARY WORK SPACE AGREEMENT, INDEMNIFY AND
HOLD HARMLESS INDEPENDENCE INDEMNITEES AGAINST CLAIMS FOR LOSS OF OR
DAMAGE TO PROPERTY ON ACCOUNT OF AN UNAUTHORIZED THIS TEMPORARY WORK
SPACE AGREEMENT OR DISCHARGE (INCLUDING BUT NOT LIMITED TO ANY
SPILLING, LEAKING, PUMPING, POURING, EMITTING, EMPTYING, INJECTING,
ESCAPING, LEACHING, DUMPING, OR DISPOSING INTO THE ENVIRONMENT) OF ANY
SUBSTANCE, MATERIAL, SEWERAGE, COMPOUND, MIXTURE, POLLUTANT, OR
CONTAMINANT, WHICH ORIGINATES FROM THE AMI ON THE WORK SITE,
REGARDLESS OF FAULT.
(e) Debris and Wreck Removal -MONTCREST AND BLACK STRATA AGREE TO BE
RESPONSIBLE FOR AND ASSUME ALL LIABILITY FOR AND HEREBY AGREES TO
DEFEND, THIS AGREEMENT, INDEMNIFY AND HOLD HARMLESS INDEPENDENCE
INDEMNITEES FOR THE COSTS OF REMOVAL OF SUCH PROPERTY AND FROM AND
AGAINST CLAIMS ARISING IN CONNECTION WITH MONTCREST OR BLACK STRATA'S
OBLIGATION TO REMOVE SUCH DEBRIS OR WRECKAGE, REGARDLESS OF FAULT.
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(f) Liability to Third Parties - MONTCREST and BLACK STRATA agree to be
responsible for and assume all liability for and hereby agrees to
defend, this Agreement, indemnify and hold harmless INDEPENDENCE and
INDEPENDENCE Indemnitees, and MONTCREST and BLACK STRATA agree to be
responsible for and assume all liability for and hereby agrees to
defend, this Agreement, indemnify and hold harmless INDEPENDENCE
ENERGY and INDEPENDENCE indemnitees from and against Claims by or in
favor of or incurred by or sustained by any Third Party to the extent
such Claim is caused by MONTCREST and BLACK STRATA, MONTCREST and
BLACK STRATA invitees and/or MONTCREST and BLACK STRATA personnel.
(g) Liability for Non-Compliance with Applicable Laws - MONTCREST and
BLACK STRATA agree to be responsible for and assume all liability for
and hereby agrees to defend, this Agreement, indemnify and hold
harmless INDEPENDENCE ENERGY Indemnitees from and against Claims
arising in connection with MONTCREST and BLACK STRATA and MONTCREST
and BLACK STRATA invitees and/or MONTCREST and BLACK STRATA
personnel's violation of Applicable Laws.
(h) Insurance - As to all operations provided for in this Agreement,
MONTCREST and BLACK STRATA represent, covenant and warrant that they
shall carry and maintain the following minimum insurance coverage for
one year from the Effective Date of this Agreement, with policy
territory sufficient to cover the operations.
1). General Liability Insurance with limits of $1,000,000 combined
single limit per occurrence, including, but not limited to, coverage
for public liability including bodily injury and property damage
liability, personal/advertising injury, contractual liability for
those liabilities assumed by the Party herein, cross liability and
severability of interest, liability for removal of wreck/debris,
liability for pollution and cleanup on a sudden and accidental basis,
products and completed operations, protective liability/independent
contractors/work sublet, and with the "care, custody, and control
exclusion" deleted.
2). Property Insurance covering MONTCREST and BLACK STRATA and
MONTCREST and BLACK STRATA invitees and/or MONTCREST and BLACK STRATA
personnel's machinery and equipment for its replacement value and
including removal of wreck/debris coverage.
3). Umbrella Excess Liability Insurance with limits of $3,000,000 per
accident/occurrence in excess of the primary liability coverage and
limits above.
IV. MISCELLANEOUS
(a) Costs. Except as otherwise provided herein, each Party will be
responsible for and bear all of its own costs and expenses (including any
broker's or finder's fees and the expenses of its representatives) incurred at
any time in connection with this Agreement and pursuing or consummating the
transactions contemplated herein.
(b) Enforceability. To the extent any provision or portion of this
Agreement shall be held, found or deemed to be unreasonable, unlawful or
unenforceable, then the parties hereto expressly covenant and agree that any
such provision or portion thereof shall be modified to the extent necessary in
order that any such provision or portion thereof shall be legally enforceable to
the fullest extent permitted by applicable law and that any court of competent
jurisdiction shall, and the parties hereto do hereby expressly authorize any
court of competent jurisdiction to, enforce any such provision or portion
thereof or to modify any such provision or portion thereof in order that any
such provision or portion thereof shall be enforced by such court to the fullest
extent permitted by applicable law.
(c) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF CONFLICTS OF LAW
PRINCIPLES) AND WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR.
PERFORMANCE IN TARRANT COUNTY, TEXAS.
(d) Third Parties. Except as expressly set forth or referred to in this
Agreement, nothing in this Agreement is intended or will be construed to confer
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upon or give to any party other than the Parties to this Agreement and their
successors and permitted assigns, if any, any rights or remedies under or by
reason of this Agreement.
(e) Assignment. Neither this Agreement nor any rights or obligations under
this Agreement may be assigned or delegated without the written consent of the
other Party. Any attempted assignment or delegation in violation of the
immediately preceding sentence will be void.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
(g) No Liability. No past or future action, course of conduct, or failure
to act relating to the negotiation of the terms of this Agreement, will give
rise to or serve as a basis for any obligation or other liability on the part of
the Parties. Under the terms of this Agreement, MONTCREST and BLACK STRATA on
the one hand and INDEPENDENCE ENERGY on the other hand shall assume no
liabilities or contingent liabilities for any matters related to this Agreement
and shall be held harmless for any Acts of God, environmental, performance or
other types of issues by the other parties.
(h) Attorney's Fees. Except as otherwise provided herein, each Party shall
be entitled to recover all of its reasonable attorneys' fees, costs and expenses
incurred as a result of any breach of this Agreement by the other Party or
incurred, by such Party in enforcing this Agreement.
(i) Access to Books and Records All books and records of each Party and its
affiliates that are relevant to the subject matter of this Agreement shall be
made available to the other Party, during normal business hours at such Party's
request, for examination or audit without charge to the other Party.
(j) Notices: Parties executing this Agreement agree that facsimile
transmission and/or electronic mail may be utilized for execution thereof. In
the event notices are required to be served to any of the undersigned parties,
the address below shall prevail.
Notice to MontCrest and Black Strata will be sufficient if made or
addressed to MONTCREST ENERGY, INC., Craig M. Crockett, 320 Hemphill
Street, Fort Worth, Texas 76104.
Notice to Independence Energy Corporation., Greg Rotelli, 3020 Old
Ranch Parkway Suite 300 Seal Beach, California 90740.
Each Party may change the address and Facsimile number for notice to
it, by giving notice of that change in accordance with the provisions
of this paragraph.
Any notices necessary or appropriate under this Agreement shall be
deemed delivered on the date of actual receipt for notice by
facsimile, courier or overnight mail, or three (3) business days after
being deposited with the U. S. Postal Service, properly addressed and
with proper postage affixed, for delivery by registered or certified
mail, return receipt requested.
(k.) Binding Agreement: This Agreement shall be binding upon, and inure to
the benefit of INDEPENDENCE ENERGY on the one hand and MONTCREST and BLACK
STRATA on the other hand, and their respective representatives, successors and
assigns. This Agreement shall be binding on the parties, their subsidiaries,
agents, brokers, divisions, associates, employees, heirs, affiliated companies,
assigns or designees.
(l.) Cumulative Remedies: Each and all of the several rights and remedies
provided for in this Agreement shall be cumulative. No one right or remedy shall
be exclusive of the others or of any right or remedy allowed in law or in
equity. No waiver or indulgence by either Party of any failure of either Party
to keep or perform any promise or condition of this Agreement shall be a waiver
of any preceding or succeeding breach of the same or any other promise or
condition. No waiver by either Party of any right shall be construed as a waiver
of any other right. Neither Party shall be required to give notice to enforce
strict adherence to all terms of this Agreement. This Agreement is not intended
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to limit any rights that either Party may have under any other agreement or at
law with respect to inventions, original works or authorship, trade secrets or
other proprietary rights.
(m.) Entire Agreement: This Agreement constitutes the full, entire,
integrated, and complete agreement of the parties respecting the subject matter
addressed herein. No force or effect shall be given to representations,
promises, agreements, or understandings, written or oral, not herein contained.
This Agreement may not subsequently be amended or modified except by a writing
signed by both parties hereto. Except as otherwise provided herein, no change or
modification hereof shall be valid or binding unless the same is in writing and
signed by the parties hereto.
(n.) Headings: The headings and other captions in this Agreement are for
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Agreement.
(o.) DISPUTE RESOLUTION.
1). Mediation. Except as otherwise provided under Section 11(c) below, no
Party shall institute a proceeding in any court or administrative agency to
resolve any dispute arising under this Agreement or the agreements,
instruments and documents contemplated hereby between the Parties (a
"Dispute") before that Party has sought to resolve the Dispute through
direct negotiation with the other Party. If the Dispute is not resolved
within seven (7) days after a demand for direct negotiation the Parties
shall attempt to resolve the Dispute through a private, informal,
non-binding dispute resolution process in which a neutral third person, the
mediator, helps disputing parties to reach an agreement "Mediation"). If
the Parties do not promptly agree on a mediator, either Party may request
the American Arbitration Association to appoint a mediator. Upon the
selection of a mediator, the mediator and the Parties shall have thirty
(30) days to convene and attempt to resolve the Dispute. If the mediator is
unable to facilitate a resolution of the Dispute within ten (10) days of
such meeting, the mediator shall issue a written statement to the Parties
to that effect and the aggrieved Party may then seek relief by arbitration
as provided under Section 11 (b) below. Either Party may, by summary
proceedings (e.g., a plea in or motion to stay further proceedings), bring
any action in court to compel the mediation of any Dispute. All costs and
expenses of the mediator shall be equally borne by each of the Parties.
With regard to any other costs or expenses incurred as a result of the
Mediation, the respective Party so incurring such costs and expenses shall
be solely liable for such costs and expenses.
2). Arbitration. Except as otherwise provided below, the Parties agree that
any Dispute which the Parties are not able to resolve by Mediation will be
resolved by binding arbitration to be conducted in Fort Worth, Texas
pursuant to the Rules for Arbitration of Commercial Disputes of the
American Arbitration Association.
3). Injunctive Relief. Sections 11 (a) and K (b) above relating to
Mediation and Arbitration shall not apply to any claim for injunctive
relief; including, without limitation, claims for specific performance, a
preliminary injunction, or a temporary restraining order. Such claims shall
be submitted to a court of competent jurisdiction, and neither Party shall
be required to post any bond or other security. If a Party chooses to
pursue injunctive relief, such conduct shall not constitute a waiver of, or
be deemed inconsistent with, the Mediation and Arbitration provisions set
forth in this Section, 11 (c). Once the claims for injunctive relief are
finally decided, any and all remaining claims shall be submitted to
Mediation or Arbitration, as applicable, pursuant to this Section 11 (c)
and the arbitrator shall be bound by the findings and rulings of the court
on the claims for injunctive relief. Claims for injunctive relief under
this Section, 11 (c) shall be heard exclusively in the federal or state
courts located in Tarrant County, Texas, and the Parties expressly waive
the right to any other jurisdiction that they may have as a result of their
present or future domiciles or any other cause.
IV. JOINT REPRESENTATIONS AND WARRANTIES
Each Party to this Agreement represents, warrants and covenants to the
other Party that the Party:
(a) that each of them have obtained any required consents or approvals to the
terms of this Agreement from their respective partners, officers, directors, and
members, and that each of them has the full right to execute this Agreement and
any assignments to effectuate the terms of this Agreement, without the consent
of any other party.
9
(b) that each of them has full power and authority to execute and deliver to
this Agreement and to perform all of their obligations under this Agreement. All
of these actions have been duly authorized and are not in conflict with any
provision of law or the terms of any of the Undersigned Parties' constituent
documents or any agreement or undertaking to which any of the Undersigned
Parties or entities is a party or by which it is bound. Upon execution and
delivery, this Agreement and the other documents, and each of them, will be the
valid and binding obligations of the Undersigned Parties, enforceable according
to their terms.
(c) that each of them has read this Agreement is completely informed of the
facts relating to the subject matter of this Agreement and of the rights and
obligations of both Parties;
(d) that each of them enters into this Agreement voluntarily after
receiving or having the opportunity to receive the advice of independent
attorneys, accountants, advisors, and other counsel;
(e) that each of them have given careful and mature thought to the making
of this Agreement;
(f) that each of them has carefully read each and every provision of this
Agreement;
(g) that each of them completely understands the provisions of this
Agreement, concerning both the subject matter and the legal effect; and
(h) states that this Agreement was signed without any coercion, any duress,
or any Agreement other than those specifically set forth in this Agreement.
(i) that if any provision of this Agreement is for any reason found to be
unenforceable, all other provisions will nevertheless remain enforceable.
(j) that the waiver of any breach of any provision of this Agreement will
not waive any other breach of that or any other provision.
(k) that this Agreement, except as it otherwise expressly provides may be
amended or modified only by a written instrument signed by both Parties.
(l) that this Agreement, except as it otherwise expressly provides, will
bind and inure to the benefit of the respective legatees, devisees, heirs,
executors, administrators, assigns, and successors in interest of the Parties.
(m) that neither Party to this Agreement may claim any construction
presumption with respect to the drafting of this Agreement, nor any portion
thereof, and this Agreement shall not be construed against or in favor of any
Party.
(n) that a scanned image or copy of this Agreement may be used to prove-up
this Agreement and each Party waives the production of the original Agreement.
(o) that this Agreement shall require approval of all parties for any
future nullification or cancellation thereof.
10
Effective, acknowledged, accepted, and agreed to this the 8th day of June, 2012:
MontCrest Energy, Inc. Independence Energy Corporation
By: /s/ Douglas E. Forrest By: /s/ Gregory Rotelli
----------------------------------- --------------------------------
Name: Douglas E. Forrest Name: Gregory Rotelli
Title: President Title: President, and CEO
Date: June 8, 2012 Date: June 8, 2012
Black Strata, LLC
By: /s/ Douglas E. Forrest
-----------------------------------
Name: Douglas E. Forrest
Title: President
Date: June 8, 2012
11
EXHIBIT "A"
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
656, Document 00000420, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Hubert Rutherford & Gerri
Rutherford PO Box 174 Novice Texas 79538, Lessor and Black Strata, LLC, Lessee,
covering the LEASED PREMISIS, to wit: 106.15 acres in the T&NO R.R. Co. Survey
13, A-654 Coleman CAD property ID R13161.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Riley Joe Goates 765 River Road
Waco, Texas 76705, Lessor and Black Strata LLC, Lessee, covering the LEASED
PREMISIS, to wit: being the Eastern 113.15 acres more or less of a 228.30 acre
tract of land in Coleman County, Texas being 228.3 acres out of the East Line &
Red River R.R. Company Survey No. 3 Abstract No. 851 and 1.0 acres out of the
M.M. Givens Survey No. 10, Abstract No. 1640, also being out of the D.M. Hankins
1435.25 acre tract and said 228.30 acre tract.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of June 2009 between Hubert A. Rutherford & Gerri J.
Rutherford of P.O. Box 174 in Novice Texas 79538, Lessor, and Black Strata LLC,
Lessee, covering the LEASED PREMISIS,to wit: being 160.00 acres more or less in
the NW 1/4 of WE Ashley Survey, Section 14 A-1410, aka NW 1/4 Sec 14, S.P. RY
Co., and being more fully described by metes and bounds in Warranty Deed Volume
720, Page 498, dated 9/24/2003 in the Deed Records of Coleman County, Texas.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the effective the 1st day of February 2009 between William Fowler 2706
Hedgeway Arlington, Texas 76016, Lessor and Black Strata LLC, Lessee, covering
the LEASED PREMISIS, to wit: 124.45 acres in the EL & RR Co. Survey 3, A-851,
Coleman CAD property ID R14011.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between William Fowler 2706 Hedgeway
Arlington, Texas 76016 Lessor and Black Strata LLC, Lessee, covering the LEASED
PREMISIS, to wit: 113.16 acres in the EL & RR Co. Survey 3, A-851, Coleman CAD
property ID R51416.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
363, Document 00000354, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Elda Fae Atchley aka Elda Fae
McDaniel Atchley PO Box 68 Novice, Texas 79538, Lessor, and Black Strata LLC,
Lessee, covering the LEASED PREMISIS, to wit: 106.4 acres in the T&NO R.R. Co.
Survey 13, A-654, Coleman CAD property ID R13159.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
368, Document 00000355, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Gary D. Holt and Stella T. Holt,
1819 FM 3114 Chifton, Texas 76634, Lessor, and Black Strata, LLC, Lessee,
covering the LEASED PREMISIS, to wit: 320 acres in the EL&RR Co. Survey 3,
A-851, Coleman CAD property ID.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
373, Document 00000356, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between William Fowler 2706 Hedgeway,
Arlington, Texas 76016, Lessor, and Black Strata LLC, Lessee, covering the
LEASED PREMISIS, to wit: 124.45 acres in the EL&RR Co. Survey 3, A-851, Coleman
CAD property ID R14011, Being a 131.24 acre tract of land in Coleman County,
Texas, being 125.45 acres out of the East Line & Red River R.R. Company Survey
No.3, Abstract No. 851 and 5.89 acres out of the M.M. Givens Survey No.10,
Abstract No. 1640, also being out of the D.M. Hankins 1435.25 acre tract and
said 131.24 acre tract.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
379, Document 00000357, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009, between William Fowler, Joanie Fowler,
Delain Herzog, Jannie Herzog 2706 Hedgeway Arlington Texas 76016, Lessor(s), and
12
Black Strata LLC, Lessee, covering the LEASED PREMISIS, to wit: 106.4 acres in
the T&NO R.R. Co. Survey 13, A-654, Coleman CAD property ID R13163.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
388, Document 00000359, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009, between Kelley C. Fowler 550 HCR 3350 N.
Hubbard, Texas 76648, Lessor and Black Strata, Lessee, covering the LEASED
PREMISIS, to wit: 113.15 acres in the EL & RR Co. Survey 3, A-851, Coleman CAD
property ID R14009.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
388, Document 00000359, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of April 2009 between HUBERT RUTHERFORD etux GERRI
RUTHERFORD, Rt. 1, Box 40, Tuscola, Texas 79562 Lessor and Black Strata, LLC,
Lessee, covering the LEASED PREMISIS, to wit: Being a 273.80 acre tract of land
in Coleman County, Texas, being 167.65 acres out of the M.M. Givens Survey No.
10, Abstract No. 1640 and 106.15 acres Out of the Block 1 of the Subdivision of
the R.M. Wellborn Subdivision of Section No. 13, of the T.&N.O.R.R. Co. Survey,
Abstract No. 654, also being out of the D.M. Hankins 1435.25 acre tract and said
273.80 acre tract No. 4 of land, SAVE and EXCEPT the 106.15 acre tract out of
the T.&N.O.RR.Co. Survey 13, Abstract 654 described more fully in Deed Volume 82
Page 596 Deed Records, Coleman County, Texas.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
282, Document 00000811, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of April 2009 between William G. Fowler, Lessor, and Black
Strata LLC, Lessee, covering the LEASED PREMISIS, to wit: Being a 5.89 acre
tract out of a 131.24 acre tract of land in Coleman County, Texas being 125.45
acres out of the East Line & Red River R.R. Company Survey No.3, Abstract No.
851 and 5.89 acres out of the M.M. Givens Survey No. 10, Abstract No. 1640, also
being out of the D.M. Hankins 1435.25 acre tract and said 131.24 acre tract;
SAVE AND EXCEPT a 125.45 acre tract out of the East Line & Red River R.R.
Company Survey N. 10, Abstract No. 851.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
282, Document 00000811, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of June 2009 between Gerri J. Rutherford of P.O. Box 174
in Novice Texas, 79538, Lessor and Black Strata, LLC, Lessee, covering the
LEASED PREMISIS, to wit: being 109.72 acres more or less in the SE 1/4 of
Section 25, Block 2 of the T&N.O.R.R. CO. survey and being more fully described
by metes and bounds in Deed Volume 450, Page 582, dated 11/24/1971 & Volume 623,
Page 556 in the Deed Records of Coleman County, Texas.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
282, Document 00000811, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of June 2009 between Martha Smart Bennett 6866 W. Remuda
Arizona 83583, Lessor and Black Strata LLC, covering the LEASED PREMISIS, to
wit: 160 total acres Abstract A-865 T.H. Lydston Survey 119 Coleman County,
Texas. This LEASED PREMISIS is further described by metes and bounds as follows:
That certain "Oil, Gas And Mineral Lease" recorded at Book at Book OR, Volume 6,
Page 288, Document 00000812, in the Deed Records of Coleman County, Texas, made
and effective the 1st day of April 2009 between William G. Fowler, Kelly Fowler,
and Danny Fowler, Lessor(s) and Black Strata, LLC, Lessee, covering the LEASED
PREMISIS,to wit: being a 139.21 acre tract of land in Coleman County, Texas,
being out of the M.M. Givens Survey No. 10, Abstract No. 1640, also being out of
the D.M. Hankins 1435.25 acre tract, and said 139.21 acre tract.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
301, Document 00000814, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of April 2009 between Kelly Fowler and William G. Fowler
of 1202 West Arkansas Lane Arlington, Texas, Lessor, and Black Strata LLC,
Lessee, covering the LEASED PREMISIS, to wit: Being a 103.49 acre tract out of
the M.M. Givens survey No. 10 Abstract No. 1640 and out of the D.M. Hankins
1435.25 acre tract Coleman County, Texas, further described by metes and bounds
in the Deed Record from Green river Land and Cattle Company to Anthony Patrick
Lange Jr. recorded in Volume 556. Page 949 of the Deed Records Coleman County,
Texas incorporated herein by reference.
13
JOINT OPERATING AGREEMENT
WHEREAS, MontCrest Energy, Inc. is an interest owner of certain that
certain Oil and Gas Lease and/or Oil and Gas Interests in the Area of Mutual
Interest and the parties, hereto have reached an agreement to explore and
develop the Area of Mutual Interest for the commercial production of Oil and Gas
to the extent and as hereinafter provided,
NOW THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "Area of Mutual Interest" or "AMI" shall mean Coleman South
Leases Two Thousand Four Hundred Twenty net mineral acres, more or less,
(2,420.92 +/-), in Coleman County, Texas, located within T.&N.O.R.R Survey
Block, Abstract 1640, Abstract 654, Abstract 851,and Abstract 865, more
particularly described on Exhibit "A" attached hereto and incorporated herein.
B. The term "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be incurred
in conducting an operation hereunder.
C. The term "Completion" or "Complete" shall mean a single operation
intended to complete a well as a producer of Oil and Gas in one or more Zones,
including, but not limited to, the setting of production casing, perforating,
well stimulation and production testing conducted in such operation.
D. The term "Contract Operator" shall mean Black Strata, LLC or other
designated oil and gas operator whose role is to conduct operations necessary
for proper development, operation, protection and maintenance of the AMI and the
Joint Property.
E. The term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.
F. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
G. The term "Drilling Unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Area of
Mutual Interest unless fixed by express agreement of the Drilling Parties.
H. The term "Drill site" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.
I. The term "Initial Well" shall mean the well required to be drilled by
the parties hereto as provided in Article VI.A.
J. The term "Manager of the AMI" shall mean reciprocally, MontCrest Energy,
Inc., a Non-Operator, who shall oversee supervision and management of the Area
of Mutual necessary for development, operation, protection and maintenance of
the Area of Mutual Interest.
14
K. The term "Manager of Operations" shall mean Black Strata, LLC engaged by
MontCrest Energy, Inc. for the purpose of overall supervision and management of
the oil and/or gas well(s) for development, operation, protection and
maintenance of the oil and/or gas well(s).
L. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.
M. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.
N. The term "Non-Operators" shall mean the Parties to this agreement other
than the Contract Operator and Manger of Operations and includes, without
limitation MontCrest Energy, Inc., and any working interest holder in the Area
of Mutual Interest.
O. The term "Oil and Gas" shall mean oil, gas, casing head gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
P. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee
and mineral interests in Oil and Gas in tracts of land lying within the Area of
Mutual Interest which are owned by parties to this agreement.
Q. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the
oil and gas leases or interests therein covering tracts of land lying within the
Area of Mutual Interest which are owned by the parties to this agreement.
R. The term "Party" or "Parties" shall mean the parties subject to this
agreement, including Contract Operator, Manger of Operations and Non-Operators.
S. The term "Plug Back" shall mean a single operation whereby a deeper
Zone is abandoned in order to attempt a Completion in a shallower Zone.
T. The term "Recompletion" or "Recomplete" shall mean an operation whereby
a Completion in one Zone is abandoned in order to attempt a Completion in a
different Zone within the existing wellbore.
U. The term "Rework" shall mean an operation conducted in the wellbore of a
well after it is completed to secure, restore, or improve production in a Zone
which is currently open to production in the wellbore. Such operations include,
but are not limited to, well stimulation operations but exclude any routine
repair or maintenance work or drilling, Sidetracking, Deepening, Completing,
Re-completing, or Plugging Back of a well.
V. The term "Sidetrack" shall mean the directional control and intentional
deviation of a well from vertical so as to change the bottom hole location
unless done to straighten the hole or drill around junk in the hole to overcome
other mechanical difficulties.
W. The term "well" shall mean and refer to certain oil and/or gas well(s)
within the Area of Mutual Interest.
X. The term "Zone" shall mean a stratum of earth containing or thought to
contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the word "person" includes natural and artificial persons,
the plural includes the singular, and any gender includes the masculine,
feminine, and neuter.
15
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
A. Exhibit "A," page 42, shall include the following information:
(1) Description of the Area of Mutual Interest subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Parties to agreement with addresses and telephone numbers for notice
purposes,
(4) Percentages or fractional interests of parties to this agreement,
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this
agreement,
(6) Burdens on production.
B. Exhibit "B," page 44, Form of Lease.
C. Exhibit "C," page 47, Accounting Procedure.
D. Exhibit "D," page 59, Insurance.
E. Exhibit "E," page 60 Gas Balancing Agreement.
F. Exhibit "F," page 69 Non-Discrimination and Certification of Non-Segregated
Facilities.
G. Other:
H. Other:
If any provision of any exhibit, except Exhibits "A" "E," "F," and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
A. OIL AND GAS INTERESTS:
If any party owns an Oil and Gas Interest in the Area of Mutual Interest, that
Interest shall be treated as if it were covered by the form of Oil and Gas Lease
attached hereto as Exhibit "B," and the owner thereof shall be deemed to own
both royalty interest in such lease and the interest of the lessee thereunder;
except that such rights arising under "Exhibit B" shall be limited in proportion
to the Area of Mutual Interest.
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
16
materials acquired in operations in the Area of Mutual Interest shall be owned,
by the parties as their interests are set forth in Exhibit "A." In the same
manner, the parties shall also own all production of Oil and Gas from the Area
of Mutual Interest subject, however, to the payment of royalties and other
burdens on production as described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas
Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Area of Mutual Interest up to, but not in excess of, THREE TENTHS
(3/10) and shall indemnify, defend and hold the other parties free from any
liability therefore. Except as otherwise expressly provided in this agreement,
if any party has contributed hereto any Lease or Interest which is burdened with
any royalty, overriding royalty, production payment or other burden on
production in excess of the amounts stipulated above, such party so burdened
shall assume and alone bear all such excess obligations and shall indemnify,
defend and hold the other parties hereto harmless from any and all claims
attributable to such excess burden. However, so long as the Drilling Unit for
the productive Zone(s) is identical with the Area of Mutual Interest, each party
shall pay or deliver, or cause to be paid or delivered, all burdens on
production from the Area of Mutual Interest due under the terms of the Oil and
Gas Lease(s) which such party has contributed to this agreement, and shall
indemnify, defend and hold the other parties free from any liability therefore.
No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's lessor or royalty owner, and if
such other party's lessor or royalty owner should demand and receive settlement
on a higher price basis, the party contributing the affected Lease shall bear
the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. SUBSEQUENTLY CREATED INTERESTS:
If any party has contributed hereto a Lease or Interest that is burdened with an
assignment of production given as security for the payment of money, or if,
after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, assignment of production or other
burden payable out of production attributable to its working interest hereunder,
such burden shall be deemed a "Subsequently Created Interest." Further, if any
party has contributed hereto a Lease or Interest burdened with an overriding
royalty, production payment, net profits interests, or other burden payable out
of production created prior to the date of this agreement, and such burden is
not shown on Exhibit "A," such burden also shall be deemed a Subsequently
Created Interest to the extent such burden causes the burdens on such party's
Lease or Interest to exceed the amount stipulated in Article III.B. above.
The party whose interest is burdened with the Subsequently Created Interest (the
"Burdened Party") shall assume and alone bear, pay and discharge the
Subsequently Created Interest and shall indemnify, defend and hold harmless the
other parties from and against any liability therefore. Further, if the Burdened
Party fails to pay, when due, its share of expenses chargeable hereunder, all
provisions of Article VI1.B. shall be enforceable against the Subsequently
Created Interest in the same manner as they are enforceable against the working
interest of the Burdened Party. If the Burdened Party is required under this
agreement to assign or relinquish to any other party, or parties, all or a
portion of its working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or production free
and clear of said Subsequently Created Interest, and the Burdened Party shall
indemnify, defend and hold harmless said other party, or parties, from any and
all claims and demands for payment asserted by owners of the Subsequently
Created Interest.
17
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the Drill site of any proposed well prior to
commencement of drilling operations and, if a majority in interest of the
Drilling Parties so request or The Manager of Operations so elects, title
examination shall be made on the entire Drilling Unit, or maximum anticipated
Drilling Unit, of the well. The opinion will include the ownership of the
working interest, minerals, royalty, overriding royalty and production payments
under the applicable Leases.
Each party contributing Leases and/or Oil and Gas Interests to be included in
the Drill site or Drilling Unit, if appropriate, shall furnish to the Manager of
Operations all abstracts (including federal lease status reports), title
opinions, title papers and curative material in its possession free of charge.
All such information not in the possession of or made available to the Manager
of Operations by the parties, but necessary for the examination of the title,
shall be obtained by the Manager of Operations. The Manager of Operations shall
cause title to be examined by attorneys on its staff or by outside attorneys.
Copies of all title opinions shall be furnished to each Drilling Party. Costs
incurred by the Manager of Operations in procuring abstracts, fees paid outside
attorneys for title examination (including preliminary, supplemental, shut-in
royalty opinions and division order title opinions) and other direct charges as
provided in Exhibit "C" shall be borne by the Drilling Parties in the proportion
that the interest of each Drilling Party bears to the total interest of all
Drilling Parties as such interests appear in Exhibit "A." The Manager of
Operations shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.
Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. The Manager of Operations shall be
responsible for the preparation and recording of pooling designations or
declarations and communitization agreements as well as the conduct of hearings
before governmental agencies for the securing of spacing or pooling orders or
any other orders necessary or appropriate to the conduct of operations
hereunder. This shall not prevent any party from appearing on its own behalf at
such hearings. Costs incurred by the Manager of Operations, including fees paid
to outside attorneys, which are associated with hearings before governmental
agencies, and which costs are necessary and proper for the activities
contemplated under this agreement, shall be direct charges to the joint account
and shall not be covered by the administrative overhead charges as provided in
Exhibit "C."
The Manager of Operations shall make no charge for services rendered by its
staff attorneys or other personnel in the performance of the above functions.
No well shall be drilled on the Area of Mutual Interest until after (I) the
title to the Drill site or Drilling Unit, if appropriate, has been examined as
above provided, and (2) the title has been approved by the examining attorney or
title has been accepted by all of the Drilling Parties in such well.
B. LOSS OR FAILURE of TITLE:
3. Other Losses: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all parties in proportion
to their interests. This shall include but not be limited to the loss of any
Lease or Interest through failure to develop or because express or implied
covenants have not been performed (other than performance which requires only
the payment of money), and the loss of any Lease by expiration at the end of its
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primary term if it is not renewed or extended. There shall be no readjustment of
interests in the remaining portion of the Area of Mutual Interest on account of
any joint loss.
ARTICLE V.
MANAGER OF OPERATIONS
A. DESIGNATION AND RESPONSIBILITIES OF MANAGER OF OPERATIONS:
MontCrest Energy, Inc., Manager of the AMI, hereby designates as Manger of
Operations, Black Strata, LLC. As the Manger of Operations, Black Strata, LLC
shall supervise all operations in connection with the oil and/or gas well(s)
within the AMI as permitted and required by, and within the limits of this
agreement. In its performance of services hereunder for the Non-Operators,
Manager of Operations and the Contract Operator shall be an independent
contractor not subject to the control or direction of the Non-Operators except
as to the type of operation to be undertaken in accordance with the election
procedures contained in this agreement.
The Manager of Operations shall not be deemed, or hold itself out as, the
agent of either the Non-Operators, including without limitation, the Manager of
the AMI, or hold itself out as having the authority to bind the Non-Operators,
including without limitation, the Manager of the AMI, to any obligation or
liability assumed or incurred by the Manager of Operations as to any third
party. The Manager of Operations shall conduct its activities under this
agreement as a reasonable prudent operator, in a good and workmanlike manner,
with due diligence and dispatch, in accordance with good oilfield practice, and
in compliance with applicable law and regulation, but in no event shall the
Manager of Operations have any liability as to other parties for losses
sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.
The Contract Operator shall not be deemed, or hold itself out as, the agent
of either the Manager of Operations or Non-Operators, including without
limitation, the Manager of the AMI, or hold itself out as having the authority
to bind either the Manager of Operations or Non-Operators, to any obligation or
liability assumed or incurred by the Contract Operator as to any third party.
The Contract Operator shall conduct its activities under this agreement as a
reasonable prudent operator, in a good and workmanlike manner, with due
diligence and dispatch, in accordance with good oilfield practice, and in
compliance with applicable law and regulation, but in no event shall the
Contract Operator have any liability as to other parties for losses sustained or
liabilities incurred except such as may result from gross negligence or willful
misconduct.
B. RESIGNATION OR REMOVAL OF CONTRACT OPERATOR AND SELECTION OF SUCCESSOR:
1. Resignation or Removal of Contract Operator: The Contract Operator may
resign at any time by giving written notice thereof to the Manager of
Operations. If Contract Operator terminates its legal existence, or is no longer
capable of serving as Contract Operator, Contract Operator shall be deemed to
have resigned without any action by the Manager of Operations, except the
selection of a successor. The Contract Operator may be removed only for good
cause by the Manager of Operations which shall not be deemed effective until a
written notice has been delivered to the Contract Operator by the Manger of
Operations detailing the alleged Contract Operator's default and Contract
Operator has failed to cure the default within thirty (30) days from its receipt
of the notice or, if the default concerns an operation then being conducted,
within forty-eight (48) hours of its receipt of the notice. For purposes hereof,
"good cause" shall mean not only gross negligence or willful misconduct but also
the material breach of or inability to meet the standards of operation contained
in Article V.A. or material failure or inability to perform its obligations
under this agreement.
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Subject to Article VII.D.1, such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Contract Operator or action by the Manger of Operations to remove
Contract Operator, unless a successor Contract Operator has been selected and
assumes the duties of Contract Operator at an earlier date. Contract Operator,
after effective date of resignation or removal, shall be bound by the terms
hereof as a Non-Operator. A change of a corporate name or structure of Contract
Operator or transfer of Contract Operator's interest to any single subsidiary,
parent or successor corporation shall not be the basis for removal of Contract
Operator.
2. Selection of Successor Contract Operator: Upon the resignation or
removal of Contract Operator under any provision of this agreement, a successor
to the Contract Operator shall be selected by the Manager of Operations;
provided that the Manager of Operations owns an interest in the Area of Mutual
Interest at the time such successor Contract Operator is selected. The former
Contract Operator shall promptly deliver to the Manager of Operations all
records and data relating to the operations conducted by the former Operator to
the extent such records and data are not already in the possession of the
successor operator. Any cost of obtaining or copying the former Contract
Operator's records and data shall be charged to the joint account.
3. Effect of Bankruptcy: If Contract Operator becomes insolvent, bankrupt
or is placed in receivership, it shall be deemed to have resigned without any
action by the Manager of Operations, except the selection of a successor. If a
petition for relief under the federal bankruptcy laws is filed by or against
Operator, and the removal of Contract Operator is prevented by the federal
bankruptcy court, the Manger of Operations shall assume interim operations and
serve until a Contract Operator has elected to reject or assume this agreement
pursuant to the Bankruptcy Code, and an election to reject this agreement by
Contract Operator as a debtor in possession, or by a trustee in bankruptcy,
shall be deemed a resignation as Contract without any action by the Manager of
Operations, except the selection of a successor. During the period of time the
Manager of Operations controls operations in the event of Contract Operator's
insolvency, bankruptcy, or receivership, all actions shall require the approval
of two (2) or more parties owning a majority interest in the Area of Mutual
Interest. In the event there are only two (2) parties to this agreement, during
the period of time the Manager of Operations controls operations, a third party
acceptable to the Manager of Operations Operator and the federal bankruptcy
court shall be selected as a member of an operating committee, and all actions
shall require the approval of two (2) members of the operating committee without
regard to their interest in the Area of Mutual Interest.
C. EMPLOYEES AND CONTRACTORS:
The number of employees or contractors used by the Manager of Operations or
Contract Operator in conducting operations hereunder, their selection, and the
hours of labor and the compensation for services performed shall be determined
by the Manager of Operations, and all such employees or contractors shall be the
employees or contractors of the Manager of Operations.
D. RIGHTS AND DUTIES OF THE MANAGER OF OPERATIONS OR CONTRACT OPERATOR:
1. Competitive Rates and Use of Affiliates: All wells drilled in the Area
of Mutual Interest shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, the Manager of Operations or
Contract Operator may employ its own tools and equipment in the drilling of
wells, but its charges therefore shall not exceed the prevailing rates in the
area and the rate of such charges shall be agreed upon by the parties in writing
before drilling operations are commenced, and such work shall be performed under
the same terms and conditions as are customary and usual in the area in
contracts of independent contractors who are doing work of a similar nature. All
work performed or materials supplied by affiliates or related parties of the
Manager of Operations and Contract Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.
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2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, the Manager of Operations shall cause to be promptly paid
and discharge expenses incurred in the development and operation of the Area of
Mutual Interest pursuant to this agreement and shall charge each of the parties
hereto with their respective proportionate shares upon the expense basis
provided in Exhibit "C." MontCrest Energy, Inc. shall keep an accurate record of
the joint account hereunder, showing expenses incurred and charges and credits
made and received.
3. Protection from Liens: The Manager of Operations shall cause to be paid,
as and when they become due and payable. All accounts of contractors and
suppliers and wages and salaries for services rendered or performed, and for
materials supplied on, to or in respect of the Area of Mutual Interest or any
operations for the joint account thereof, and shall keep the Area of Mutual
Interest free from liens and encumbrances resulting there from except for those
resulting from a bona fide dispute as to services rendered or materials
supplied.
4. Custody of Funds: MontCrest Energy, Inc. shall hold for the account of
the Non-Operators any funds of the Non-Operators advanced or paid to the Manager
of Operations, either for the conduct of operations hereunder or as a result of
the sale of production from the Area of Mutual Interest, and such funds shall
remain the funds of the Non-Operators on whose account they are advanced or paid
until used for their intended purpose or otherwise delivered to the
Non-Operators or applied toward the payment of debts as provided in Article
VI1.B. Nothing in this paragraph shall be construed to establish a fiduciary
relationship between the Manager of Operations and any Non-Operator for any
purpose other than to account for Non-Operator funds as herein specifically
provided.
5. Access to Area of Mutual Interest and Records: MontCrest Energy, Inc.,
shall except as otherwise provided herein, permit each Non-Operator or its duly
authorized representative, at the Non-Operator's sole risk and cost, full and
free access at all reasonable times to all operations of every kind and
character being conducted for the joint account on the Area of Mutual Interest
and to the records of operations conducted thereon or production there from,
including the MontCrest Energy, Inc.'s books and records relating thereto. Such
access rights shall not be exercised in a manner interfering with MontCrest
Energy, Inc. or the Manager of Operations' conduct of an operation hereunder and
shall not obligate MontCrest Energy, Inc., the Manager of Operations, or
Contract Operator to furnish any geologic or geophysical data of an interpretive
nature unless the cost of preparation of such interpretive data was charged to
the joint account. The Manager of Operations or MontCrest Energy, Inc. will
furnish to each Non-Operator upon request copies of any and all reports and
information obtained by MontCrest Energy, Inc., the Manager of Operations, or
Contract Operator in connection with production and related items, including,
without limitation, meter and chart reports, production purchaser statements,
but excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information. Any
audit of the records relating to amounts expended and the appropriateness of
such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit "C."
6. Filing and Furnishing Governmental Reports: The Manager of Operations or
Contract Operator will file, and furnish copies to each requesting Non-Operator
not in default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal, or Indian agencies
or authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to the Manager of Operations on a timely basis all information
necessary to the Manager of Operations or the Contract Operator, as the case may
be, to make such filings.
7. Drilling and Testing Operations: The following provisions shall apply to
each well drilled hereunder, including but not limited to the Initial Well:
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(a) The Manager of Operations will promptly advise Non-Operators of the
date on which the well is spudded, or the date on which drilling operations are
commenced and the Contract Operator shall promptly advise the Manager of
Operations of the date on which the well is spudded, or the date on which
drilling operations are commenced.
(b) The Manager of Operations will send to Non-Operators such reports,
test results and notices regarding the progress of operations on the well as the
Non-Operators shall reasonably request, including, but not limited to, daily
drilling reports, completion reports, and well logs, and the Contract Operator
shall promptly send to the Manager of Operations such reports, test results and
notices regarding the progress of operations on the well as the Manager of
Operations shall reasonably request, including, but not limited to, daily
drilling reports, completion reports, and well logs.
(c) The Manager of Operations shall adequately test all Zones encountered
which may reasonably be expected to be capable of producing Oil and Gas in
paying quantities as a result of examination of the electric log or any other
logs or cores or tests conducted hereunder and the and the Contract Operator
shall adequately test all Zones encountered which may reasonably be expected to
be capable of producing Oil and Gas in paying quantities as a result of
examination of the electric log or any other logs or cores or tests conducted
hereunder.
8. Cost Estimates: The Manager of Operations shall finish estimates of
current and cumulative costs incurred for the joint account at reasonable
intervals during the conduct of any operation pursuant to this agreement. The
Manager of Operations shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.
9. Insurance: At all times while operations are conducted hereunder,
Contract Operator shall comply with the workers compensation law of the state
where the operations are being conducted. Contract Operator shall also carry or
provide insurance for the benefit of the joint account of the parties as
outlined in Exhibit "D" attached hereto and made a part hereof. Contract
Operator shall require all contractors engaged in work on or for the Area of
Mutual Interest to comply with the workers compensation law of the state where
the operations are being conducted and to maintain such other insurance as the
Manger of Operations may require.
In the event automobile liability insurance is specified in said Exhibit "D," or
subsequently receives the approval of the parties, no direct charge shall be
made by Operator for premiums paid for such insurance for Contract Operator's
automotive equipment.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. WELL:
On or before October, 2012, Contract Operator shall commence the drilling
of those certain oil and/or gas well(s) known as MEI # 120 (hereinafter "the oil
and/or gas well(s) within the AMI" at the location identified in Exhibit "A,"
which also defines the Area of Mutual Interest.
The drilling of the oil and/or gas well(s) within the AMI and the
participation therein by all parties is obligatory, subject to Article V1.C.1.
as to participation in Completion operations and Article V1.F. as to termination
of operations and Article XI as to occurrence of force majeure.
B. SUBSEQUENT OPERATIONS:
1. Proposed Operations: If any party should desire to Rework, Sidetrack,
Deepen, Re-complete or Plug Back a dry hole or the oil and/or gas well(s) within
the AMI are no longer capable of producing in paying quantities in which such
22
party has not otherwise relinquished its interest in the proposed objective Zone
under this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Re-complete or Plug Back the Manager of Operations shall give written notice of
the proposed operation to the parties who have not otherwise relinquished their
interest in such objective Zone under this agreement and to all other parties in
the case of a proposal for Sidetracking or Deepening, specifying the work to be
performed, the location, proposed depth, objective Zone and the estimated cost
of the operation. The parties to whom such a notice is delivered shall have
thirty (30) days after receipt of the notice within which to notify the party
proposing to do the work whether they elect to participate in the cost of the
proposed operation. If a drilling rig is on location, notice of a proposal to
Rework, Sidetrack, Re-complete, Plug Back or Deepen may be given by telephone
and the response period shall be limited to forty-eight (48) hours.
Failure of a party to whom such notice is delivered to reply within the period
above fixed shall constitute an election by that party not to participate in the
cost of the proposed operation. Any proposal by a party to conduct an operation
conflicting with the operation initially proposed shall be delivered to all
parties within the time and in the manner provided in Article VI.B.6.
If all parties to whom such notice is delivered elect to participate in such a
proposed operation, the parties shall be contractually committed to participate
therein provided such operations are commenced within the time period hereafter
set forth, and the Manger of Operations shall, no later than sixty (60) days
after expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be), actually commence the proposed
operation and thereafter complete it with due diligence at the risk and expense
of the parties participating therein; provided, however, said commencement date
may be extended upon written notice of same by the Manger of Operations to the
other parties, for a period of up to thirty (30) additional days if, in the sole
opinion of the Manger of Operations, such additional time is reasonably
necessary to obtain permits from governmental authorities, surface rights
(including rights-of-way) or appropriate drilling equipment, or to complete
title examination or curative matter required for title approval or acceptance.
If the actual operation has not been commenced within the time provided
(including any extension thereof as specifically permitted herein or in the
force majeure provisions of Article XI) and if any party hereto still desires to
conduct said operation, written notice proposing same must be resubmitted to the
other parties in accordance herewith as if no prior proposal had been made.
Those parties that did not participate in the drilling of the oil and/or gas
well(s) within the AMI for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed Deepening
or Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.
2. Operations by Less Than All Parties: See also Article XVI, G, Other
Provisions:
(a) Determination of Participation. If any party to whom such notice is
delivered as provided in Article VI.B.1 or V1.C.1. elects not to participate in
the proposed operation, then, in order to be entitled to the benefits of this
Article, the party or parties giving the notice and such other parties as shall
elect to participate in the operation shall, no later than sixty (60) days after
the expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be) actually commence the proposed
operation and complete it with due diligence. The Manger of Operations shall
cause Contract Operator to perform all work for the account of the
Consenting-Parties; provided, however, if no drilling rig or other equipment is
on location, the Consenting Parties shall either:
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(i) Request the Manger of Operations to cause Contract Operator to perform
the work required by such proposed operation for the account of the
Consenting Parties, or
(ii) Designate the Manger of Operations to perform such work, or
(iii)In the event that the MontCrest Energy, Inc. is a Non-Consenting
Party, designate one of the Consenting Parties as Operator to perform
such work. The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the
party designated as Operator for an operation in which the original
Operator is a Non-Consenting Party. Consenting Parties, when
conducting operations in the Area of Mutual Interest pursuant to this
Article VI.B.2., shall comply with all terms and conditions of this
agreement.
If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the applicable notice period, shall advise
all Parties of the total interest of the parties approving such operation and
its recommendation as to whether the Consenting Parties should proceed with the
operation as proposed. Each Consenting Party, within forty-eight (48) hours
after delivery of such notice, shall advise the proposing party of its desire to
(i) limit participation to such party's interest as shown on Exhibit "A"
or
(ii) Carry only its proportionate part (determined by dividing such party's
interest in the Area of Mutual Interest by the interests of all
Consenting Parties in the Area of Mutual Interest) of Non-Consenting
Parties' interests, or
(iii)Carry its proportionate part (determined as provided in (ii)) of
Non-Consenting Parties' interests together with all or a portion of
its proportionate part of any Non-Consenting Parties' interests that
any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall
be deemed to be carried by the party proposing the operation if such
party does not withdraw its proposal. Failure to advise the proposing
party within the time required shall be deemed an election under (i).
In the event a drilling rig is on location, notice may be given by
telephone, and the time permitted for such a response shall not exceed
a total of forty-eight (48) hours. The proposing party, at its
election, may withdraw such proposal if there is less than 100%
participation and shall notify all parties of such decision within ten
(10) days, or within twenty-four (24) hours if a drilling rig is on
location, following expiration of the applicable response period. If
100% subscription to the proposed operation is obtained, the proposing
party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as
Operator shall commence such operation within the period provided in
Article V1.B.l., subject to the same extension right as provided
therein.
(b) Relinquishment of Interest for Non-Participation. The entire cost and
risk of conducting such operations shall be borne by the Consenting Parties in
the proportions they have elected to bear same under the terms of the preceding
paragraph. Consenting Parties shall keep the leasehold estates involved in such
operations free and clear of all liens and encumbrances of every kind created by
or arising from the operations of the Consenting Parties. If such an operation
results in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the
Consenting Parties shall plug and abandon the oil and/or gas well(s) within the
AMI and restore the surface location at their sole cost, risk and expense;
provided, however, that those Non-Consenting Parties that participated in the
drilling, Deepening or Sidetracking of the well shall remain liable for, and
shall pay, their proportionate shares of the cost of plugging and abandoning the
oil and/or gas well(s) within the AMI and restoring the surface location insofar
only as those costs were not increased by the subsequent operations of the
Consenting Parties. If the oil and/or gas well(s) within the AMI are drilled,
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Reworked, Sidetracked, Deepened, Re-completed or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the oil
and/or gas well(s) within the AMI to produce at their sole cost and risk, and
the oil and/or gas well(s) within the AMI are shall then be turned over to the
Manger of Operations (if MontCrest Energy, Inc. did not conduct the operation)
and shall be operated by the Manger of Operations at the expense and for the
account of the Consenting Parties. Upon commencement of operations for
Re-drilling, Reworking, Sidetracking, Re-completing, Deepening or Plugging Back
of the oil and/or gas well(s) within the AMI by Consenting Parties in accordance
with the provisions of this Article, each Non-Consenting Party shall be deemed
to have relinquished to Consenting Parties, and the Consenting Parties shall own
and be entitled to receive, in proportion to their respective interests, all of
such Non-Consenting Party's interest in the oil and/or gas well(s) within the
AMI and share of production there from.
Neither consenting nor non-consenting parties will have any rights, title, or
interest in acreage held by production by the oil and/or gas well(s) within the
AMI, provided however, that consenting parties to proposed operation will have
rights, title, or interest in the oil and/or gas well(s) within the AMI in the
case of a Reworking, Sidetracking, Deepening, Re-completing or Plugging Back, or
a Completion under the provisions of this Article including each Non-Consenting
Party's relinquishment of each Non-Consenting Party's to Consenting Parties, and
the Consenting Parties shall own and be entitled to receive, in proportion to
their respective interests, all of such Non-Consenting Party's interest in the
oil and/or gas well(s) within the AMI and share of production there from.
(c) Reworking, Re-completing or Plugging Back. An election not to
participate in the drilling, Sidetracking or Deepening of a well shall be deemed
an election not to participate in any Reworking or Plugging Back operation
proposed in such a well, or portion thereof.
(d) Recoupment Matters. During the period of time Consenting Parties are
entitled to receive Non-Consenting Party's share of production, or the proceeds
there from, Consenting Parties shall be responsible for the payment of all ad
valorem, production, severance, excise, gathering and other taxes, and all
royalty, overriding royalty and other burdens applicable to Non-Consenting
Party's share of production not excepted by Article III.C.
(e) In the case of any Reworking. Sidetracking, Plugging Back,
Re-completing or Deepening operation, the Consenting Parties shall be permitted
to use, free of cost, all casing, tubing and other equipment in the well, but
the ownership of all such equipment shall remain unchanged; and upon abandonment
of a well after such Reworking, Sidetracking, Plugging Back, Re-completing or
Deepening, the Consenting Parties shall account for all such equipment to the
owners thereof, with each party receiving its proportionate part in kind or in
value, less cost of salvage.
3. Stand-By Costs: In the event that the oil and/or gas well(s) within the
AMI have been drilled or Deepened and has reached its authorized depth and all
tests have been completed and the results thereof furnished to the parties, or
when operations on the oil and/or gas well(s) within the AMI have been otherwise
terminated pursuant to Article VI.F., stand-by costs incurred pending response
to a party's notice proposing a Reworking, Sidetracking, Deepening,
Re-completing, Plugging Back or Completing operation in the oil and/or gas
well(s) within the AMI including the period required under Article VI.B.6. to
resolve competing proposals) shall be charged and borne as part of the drilling
or Deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest.
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In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive up
to five (5) additional days after expiration of the forty-eight hour response
period specified in Article VI.B. 1. within which to respond by paying for all
stand-by costs and other costs incurred during such extended response period:
Operator may require such party to pay the estimated stand-by time in advance as
a condition to extending the response period. If more than one party elects to
take such additional time to respond to the notice, standby costs shall be
allocated between the parties taking additional time to respond on a day-to-day
basis in the proportion each electing party's interest.
4. Sidetracking: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore at
the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:
(a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the Sidetracking operation is
initiated.
(b) If the proposal is for Sidetracking a well which has previously
produced, reimbursement shall be on the basis of such party's proportionate
share of drilling and equipping costs incurred in the initial drilling of the
well down to the depth at which the Sidetracking operation is conducted, such
party's proportionate share of the cost of the well's salvable materials and
equipment down to the depth at which the Sidetracking operation is initiated
shall be determined in accordance with the provisions of Exhibit "C."
5. Order of Preference of Operations: Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, from delivery of the initial proposal, if a drilling rig is on location
for the well on which such operation is to be conducted, to deliver to all
parties entitled to participate in the proposed operation such party's
alternative proposal, such alternate proposal to contain the same information
required to be included in the initial proposal. Each party receiving such
proposals shall elect by delivery of notice to Operator within five (5) days
after expiration of the proposal period, or within twenty-four (24) hours if a
drilling rig is on location for the well that is the subject of the proposals,
to participate in one of the competing proposals. Any party not electing within
the time required shall be deemed not to have voted. The proposal receiving the
vote of parties owning the largest aggregate percentage interest of the parties
voting shall have priority over all other competing proposals; in the case of a
tie vote, the initial proposal shall prevail. Operator shall deliver notice of
such result to all parties entitled to participate in the operation within five
(5) days after expiration of the election period (or within twenty-four (24)
hours, if a drilling rig is on location). Each party shall then have two (2)
days (or twenty-four (24) hours if a rig is on location) from receipt of such
notice to elect by delivery of notice to the Manger of Operations to participate
in such operation or to relinquish interest in the affected well pursuant to the
provisions of Article VI.B.2.; failure by a party to deliver notice to the
Manger of Operations within such period shall be deemed an election not to
participate in the prevailing proposal. SEE, ALSO, ARTICLE XVI.
6. Conformity to Spacing Pattern: Notwithstanding the provisions of this
Article VI.B.2, it is agreed that no wells shall be proposed to be drilled to or
Completed in or produced from a Zone from which a well located elsewhere on the
Area of Mutual Interest is producing, unless such well conforms to the
then-existing well spacing pattern for such Zone.
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7. Paying Wells: No party shall conduct any Reworking, Deepening, Plugging
Back, Completion, Re-completion, or Sidetracking operation under this agreement
with respect to any well then capable of producing in paying quantities except
with the consent of all parties that have not relinquished interests in the well
at the time of such operation. See also Article XVI.J. Provisions.
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
1. Completion: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.B.2. of this
agreement. Consent to the drilling, Deepening or Sidetracking shall
include all necessary expenditures for the drilling, Deepening or
Sidetracking, testing, Completing and equipping of the well, including
necessary tankage and/or surface facilities.
D. OTHER OPERATIONS
Neither the Manager of Operations nor the Contract Operator shall undertake any
single project reasonably estimated to require an expenditure in excess of
THIRTY THOUSAND Dollars ($30,000.00) except in connection with the drilling,
Sidetracking, Reworking, Deepening, Completing, Re-completing or Plugging Back
of a well that has been previously authorized by or pursuant to this agreement;
provided, however, that, in case of explosion, fire, flood or other sudden
emergency, whether of the same or different nature, Operator may take such steps
and incur such expenses as in its opinion are required to deal with the
emergency to safeguard life and property, but the Manager of Operations, or the
Contract Operator, as the case may be, shall report, as promptly as possible,
the emergency to the other parties. MontCrest Energy, Inc. shall, with the use
of cost data provided by the Manager of Operations, prepare an AFE for its own
use, and MontCrest Energy, Inc. shall furnish any Non-Operator an information
copy thereof for any single project costing in excess of THIRTY THOUSAND Dollars
($30,000). Any party who has not relinquished its interest in a well shall have
the right to propose that the Manager of Operations direct Contract Operator to
perform repair work or undertake the installation of artificial lift equipment
or ancillary production facilities such as salt water disposal wells or to
conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties)reasonably estimated to
require expenditure in excess of the amount first set forth above in this
Article V1.D. (except in connection with an operation required to be proposed
under Articles V1.B.1. or V1.C.1. Option No. 2, which shall be governed
exclusively by those Articles). The Manager of Operations shall deliver such
proposal to all parties entitled to participate therein. If within thirty (30)
days thereof the Manager of Operations secures the written consent of any two or
more parties owning at least 50% of the interests of the parties entitled to
participate in such operation, each party having the right to participate in
such project shall be bound by the terms of such proposal and shall be obligated
to pay its proportionate share of the costs of the proposed project as if it had
consented to such project pursuant to the terms of the proposal.
E. ABANDONMENT OF WELLS:
1. Abandonment of Dry Holes: Except for a well drilled or Deepened pursuant
to Article VI.B.2., a well which has been drilled or Deepened under the terms of
this agreement and is proposed to be completed as a dry hole shall not be
plugged and abandoned without the consent of all parties. Should the Manager of
Operations, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours after delivery of notice of
the proposal to plug and abandon such well, such party shall be deemed to have
consented to the proposed abandonment. Such well shall be plugged and abandoned
in accordance with applicable regulations and at the cost, risk and expense of
the parties who participated in the cost of drilling or Deepening such well. Any
party who objects to, plugging and abandoning such well by notice delivered to
27
the Manager of Operations within forty-eight (48) hours after delivery of notice
of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party
to provide proof reasonably satisfactory to the Manager of Operations of its
financial capability to conduct such operations or to take over the well within
such period or thereafter to conduct operations on such well or plug and abandon
such well shall entitle the Manager of Operations to retain or take possession
of the well and plug and abandon the well. The party taking over the well shall
indemnify MontCrest Energy, Inc. (if the MontCrest Energy, Inc. is an abandoning
party) and the other abandoning parties against liability for any further
operations conducted on such well except for the costs of plugging and
abandoning the well and restoring the surface, for which the abandoning parties
shall remain proportionately liable.
2. Abandonment of Wells That Have Produced: Except for any well in which a
Non-Consent operation has been conducted, any well which has been completed as a
producer shall not be plugged and abandoned without the consent of all parties.
If all parties consent to such abandonment, the well shall be plugged and
abandoned in accordance with applicable regulations and at the cost, risk and
expense of all the parties hereto. Failure of a party to reply within sixty (60)
days of delivery of notice of proposed abandonment shall be deemed an election
to consent to the proposal.
If, within sixty (60) days after delivery of notice of the proposed abandonment
of any well, all parties do not agree to the abandonment of such well, those
wishing to continue its operation shall be obligated to take over the well as of
the expiration of the applicable notice period and shall indemnify MontCrest
Energy, Inc. (if the MontCrest Energy, Inc. is an abandoning party) and the
other abandoning parties against liability for any further operations on the
well conducted by such parties. Failure of such party or parties to provide
proof reasonably satisfactory to the Manager of Operations of their financial
capability to conduct such operations or to take over the well within the
required period or thereafter to conduct operations on such well shall entitle
the Manager of Operations to retain or take possession of such well and plug and
abandon the well.
Parties taking over a well as provided herein shall tender to each of the other
parties its proportionate share of the value of the well's salvable material and
equipment, determined in accordance with the provisions of Exhibit "C," less the
estimated cost of salvaging and the estimated cost of plugging and abandoning
and restoring the surface; provided, however, that in the event the estimated
plugging and abandoning and surface restoration costs and the estimated cost of
salvaging are higher than the value of the well's salvable material and
equipment, each of the abandoning parties shall tender to the parties continuing
operations their proportionate shares of the estimated excess cost. Each
abandoning party shall assign to the non-abandoning parties, without warranty,
express or implied, as to title or as to quantity, or fitness for use of the
equipment and material, all of its interest in the wellbore of the well and
related equipment, together with its interest in the Leasehold insofar and only
insofar as such Leasehold covers the right to obtain production from that
wellbore. If the interest of the abandoning party is or includes and Oil and Gas
Interest, such party shall execute and deliver to the non-abandoning party or
parties an oil and gas lease, limited to the wellbore for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced. Such lease to be on the
form attached as Exhibit "B." The assignments or leases so limited shall
encompass the Drilling Unit upon which the well is located. The payments by, and
the assignments or leases to, the assignees shall be in a ratio based upon the
relationship of their respective percentage of participation in the Area of
Mutual Interest to the aggregate of the percentages of participation in the Area
of Mutual Interest of all assignees. There shall be no readjustment of interests
in the remaining portions of the Area of Mutual Interest.
Thereafter, abandoning parties shall have no further responsibility, liability,
or interest in the operation of or production from the well in the Area of
Mutual Interest. Upon request, the Manager of Operations shall continue to
28
operate the assigned well for the account of the non-abandoning parties at the
rates and charges contemplated by this agreement.
3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1
or VI.E.2. above shall be applicable as between Consenting Parties in the event
of the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E.; and
provided further, that Non-Consenting Parties who own an interest in a portion
of the well shall pay their proportionate shares of abandonment and surface
restoration cost for such well as provided in Article VI.B.2.(b). SEE ALSO
ARTICLE XVI.F. OTHER PROVISIONS.
F. TERMINATION OF OPERATIONS:
The Manager of the AMI, at its sole and exclusive discretion, shall make all
determinations with respect to whether and when to commence an operation for the
Drilling, Reworking, Sidetracking, Plugging Back, Deepening, Testing, Completion
or plugging of a well, without regard to consent of any other party; provided,
however, that in the event granite or other practically impenetrable substance
or condition in the hole is encountered which renders further operations
impractical, the Manager of Operations may, in its sole discretion elect to
discontinue operations and give notice of such condition in the manner provided
in Article VI.B.I., and the provisions of Article V.I.B. or VI.E. shall
thereafter apply to such operation, as appropriate.
G. TAKING PRODUCTION IN KIND - GAS BALANCING AGREEMENT ATTACHED:
Each party shall take in kind or separately dispose of its proportionate share
of all Oil and Gas produced from the Area of Mutual Interest, exclusive of
production which may be used in development and producing operations and in
preparing and treating Oil and Gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking in kind or
separate disposition by any party of its proportionate share of the production
shall be borne by such party. Any party taking its share of production in kind
shall be required to pay for only its proportionate share of such part of the
Manager of Operations or Contract Operator's surface facilities which it uses.
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from the Area of Mutual Interest,
and, except as provided in Article VII.B., shall be entitled to receive payment
directly from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate share of the Oil produced from the Area
of Mutual Interest, the Manager of Operations shall have the right, subject to
the revocation at will by the party owning it, but not the obligation, to
purchase such Oil or sell it to others at any time and from time to time, for
the account of the non-taking party. Any such purchase or sale by the Manager of
Operations may be terminated by the Manager of Operations upon at least ten (10)
days written notice to the owner of said production and shall be subject always
to the right of the owner of the production upon at least ten (10) days written
notice to the Manager of Operations to exercise at any time its right to take in
kind, or separately dispose of, its share of all Oil not previously delivered to
a purchaser.
Any purchase or sale by the Manager of Operations of any other party's share of
Oil shall be only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1) year.
Any such sale by the Manager of Operations shall be in a manner commercially
reasonable under the circumstances but Contract Operator shall have no duty to
share any existing market or to obtain a price equal to that received under any
existing market. The sale or delivery of a non-taking party's share of Oil under
29
the terms of any existing contract of the Contract Operator shall not give the
non-taking party any interest in or make the non-taking party a party to said
contract. No purchase shall be made by Contract Operator without Contract
Operator first giving the Manager of Operations and the non-taking party at
least ten (1O) days written notice of such intended purchase and the price to be
paid or the pricing basis to be used.
All parties shall give timely written notice to the Manager of Operations of Gas
marketing arrangements for the following month, excluding price, and shall
contemporaneously notify Contract Operator and the Manager of Operations
immediately in the event of a change in such arrangements.
Contract Operator shall maintain records of al1 marketing arrangements, and of
volumes actually sold or transported, which records shall be made available to
the Manager of Operations and Non-Operators upon reasonable request.
In the event one or more parties' separate disposition of its share of the Gas
causes split-stream deliveries to separate pipelines and/or deliveries which on
a day-to-day basis for any reason are not exactly equal to a party's respective
proportionate share of total Gas sales to be allocated to it, the balancing or
accounting between the parties shall be IN accordance with any Gas balancing
agreement between the parties hereto, whether such an agreement is attached as
Exhibit "E" or is a separate agreement. Contract Operator shall give notice to
the Manager of Operations and Non-Operators of the first sales of Gas from any
well under this agreement.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective. Each
party shall be responsible only for its obligations, and shall be liable only
for its proportionate share of the costs of developing and operating the Area of
Mutual Interest. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-venturers, or
principals. In their relations with each other under this agreement, the parties
shall not be considered fiduciaries or to have established a confidential
relationship but rather shall be free to act on an arms-length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.
B. LIENS AND SECURITY INTERESTS:
Each party grants to the other parties hereto a lien upon any interest it now
owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in
the Area of Mutual Interest, and a security interest and/or purchase money
security interest in any interest it now owns or hereafter acquires in the
personal property and fixtures on or used or obtained for use in connection
therewith, to secure performance of all of its obligations under this agreement
including but not limited to payment of expense, interest and fees, the proper
disbursement of all monies paid hereunder, the assignment or relinquishment of
interest in Oil and Gas Leases as required hereunder, and the proper performance
of operations hereunder. Such lien and security interest granted by each party
hereto shall include such party's leasehold interests, working interests,
operating rights. and royalty and overriding royalty interests in the Area of
Mutual Interest now owned or hereafter acquired and in lands pooled or unitized
therewith or otherwise becoming subject to this agreement, the Oil and Gas when
30
extracted there from and equipment situated thereon or used or obtained for use
in connection therewith (including, without limitation, all wells, tools, and
tubular goods), and accounts (including, without limitation, accounts arising
from gas imbalances or from the sale of Oil and/or Gas at the wellhead),
contract rights, inventory and general intangibles relating thereto or arising
there from, and all proceeds and products of the foregoing.
If any party fails to pay its share of cost within thirty days (30) days after
rendition of a statement therefore by the Manager of Operations, the
non-defaulting parties, including the Manager of Operations, shall upon request
by the Manager of Operations, pay the unpaid amount in the proportion that the
interest of each such party bears to the interest of all such parties. The
amount paid by each party so paying its share of the unpaid amount shall be
secured by the liens and security rights described in Article VII.B., and each
paying party may independently pursue any remedy available hereunder or
otherwise.
If any party does not perform all of its obligations hereunder, and the failure
to perform subjects such party to foreclosure or execution proceedings pursuant
to the provisions of this agreement, to the extent allowed by governing law, the
defaulting party waives any available right of redemption from and after the
date of judgment, any required valuation or appraisement of the mortgaged or
secured property prior to sale, any available right to stay execution or to
require a marshaling of assets and any required bond in the event a receiver is
appointed. In addition, to the extent permitted by applicable law, each party
hereby grants to the other parties a power of sale as to any property that is
subject to the lien and security rights granted hereunder, such power to be
exercised in the manner provided by applicable law or otherwise in a
commercially reasonable manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Area of Mutual Interest is situated to enforce the obligations of each party
hereunder. Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non-Operators agree that the Contract Operator may
invoke or utilize the mechanics' or material men's lien law of the state in
which the Area of Mutual Interest is situated in order to secure the payment to
Contract Operator of any sum due hereunder for services performed or materials
supplied by Contract Operator.
C. ADVANCES:
The Manager of Operations, at its election, shall have the right from time to
time to demand and receive from one or more of the other parties payment in
advance of their respective shares of the estimated amount of the expense to be
incurred in operations hereunder during the next succeeding month, which right
may be exercised only by submission to each such party of an itemized statement
of such estimated expense, together with an invoice for its share thereof. Each
such statement and invoice for the payment in advance of estimated expense shall
be submitted on or before the 20th day of the next preceding month. Each party
shall pay to the Manager of Operations its proportionate share of such estimate
within fifteen (15) days after such estimate and invoice is received. If any
party fails to pay its share of said estimate within said time, the amount due
shall bear interest as provided in Exhibit "C" until paid. Proper adjustment
shall be made monthly between advances and actual expense to the end that each
party shall bear and pay its proportionate share of actual expenses incurred,
and no more.
D. DEFAULTS AND REMEDIES:
If any party fails to discharge any financial obligation under this agreement,
including without limitation the failure to make any advance under the preceding
Article VII.C. or any other provision of this agreement, within the period
required for such payment hereunder, then in addition to the remedies provided
in Article VII.B. or elsewhere in this agreement, the remedies specified below
shall be applicable. For purposes of this Article VII.D., all notices and
elections shall be delivered only by the Manager of Operations, except that the
31
Manager of Operations shall deliver any such notice and election requested by a
non-defaulting Non-Operator, and when the Manager of Operations is the party in
default, the applicable notices and elections can be delivered by any
Non-Operator. Election of any one or more of the following remedies shall not
preclude the subsequent use of any other remedy specified below or otherwise
available to a non-defaulting party.
1. Suspension of Rights: Any party may deliver to the party in default a
Notice of Default, which shall specify the default, specify the action to be
taken to cure the default, and specify that failure to take such action will
result in the exercise of one or more of the remedies provided in this Article.
If the default is not cured within thirty (30) days of the delivery of such
Notice of Default, all of the rights of the defaulting party granted by this
agreement may upon notice be suspended until the default is cured, without
prejudice to the right of the non-defaulting party or parties to continue to
enforce the obligations of the defaulting party previously accrued or thereafter
accruing under this agreement. If the Manager of Operations is the party in
default, the Non-Operators shall have in addition the right, by vote of
Non-Operators owning a majority in interest in the Area of Mutual Interest after
excluding the voting interest of the Manager of Operations, to appoint a new
Operator effective immediately. The rights of a defaulting party that may be
suspended hereunder at the election of the non-defaulting parties shall include,
without limitation, the right to receive information as to any operation
conducted hereunder during the period of such default, the right to elect to
participate in an operation proposed under Article VI.B. of this agreement, the
right to participate in an operation being conducted under this agreement even
if the party has previously elected to participate in such operation, and the
right to receive proceeds of production from any well subject to this agreement.
2. Suit for Damages: Non-defaulting parties or the Manager of Operations
for the benefit of non-defaulting parties may sue (at joint account expense) to
collect the amounts in default, plus interest accruing on the amounts recovered
from the date of default until the date of collection at the rate specified in
Exhibit "C" attached hereto. Nothing herein shall prevent any party from suing
any defaulting party to collect consequential damages accruing to such party as
a result of the default.
3. Deemed Non-Consent: The non-defaulting party may deliver a written Notice
of Non-Consent Election to the defaulting party at any time after the expiration
of the thirty-day cure period following delivery of the Notice of Default, in
which event if the billing is for the drilling a new well or the Plugging Back,
Sidetracking, Reworking or Deepening of a well which is to be or has been
plugged as a dry hole, or for the Completion or Re-completion of any well, the
defaulting party will be conclusively deemed to have elected not to participate
in the operation and to be a Non-Consenting Party with respect thereto under
Article VI.B. or VI.C., as the case may be, to the extent of the costs unpaid by
such party, notwithstanding any election to participate theretofore made. If
election is made to proceed under this provision, then the non-defaulting
parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the defaulting
party, such party shall have the right to cure its default by paying its unpaid
share of costs plus interest at the rate set forth in Exhibit "C," provided,
however, such payment shall not prejudice the rights of the non-defaulting
parties to pursue remedies for damages incurred by the non-defaulting parties as
a result of the default. Any interest relinquished pursuant to this Article
VII.D.3. shall be offered to the non-defaulting parties in proportion to their
interests, and the non-defaulting parties electing to participate in the
ownership of such interest shall be required to contribute their shares of the
defaulted amount upon their election to participate therein.
4. Advance Payment: If a default is not cured within thirty (30) days of
the delivery of a Notice of Default, the Manager of Operations, or
Non-Operators, (if MontCrest Energy, Inc. happens to be the defaulting party),
may thereafter require advance payment from defaulting party of such defaulting
party's anticipated share of any item of expense for which the Manager of
Operations, Contract Operator, or Non-Operators, as the case may be, would be
entitled to reimbursement under any provision of this agreement, whether or not
32
such expense was the subject of the previous default. Such right includes, but
is not limited to, the right to require advance payment for the estimated costs
of drilling, Re-drilling, Reworking, Side-tracking, Re-completing, Deepening,
Plugging Back or Completion of a well as to which an election to participate in
drilling or Completion has been made. If the defaulting party fails to pay the
required advance payment, the non-defaulting parties may pursue any of the
remedies provided in the Article VI.D. or any other default remedy provided
elsewhere in this agreement. Any excess of funds advanced remaining when the
operation is completed and all costs have been paid shall be promptly returned
to the advancing party.
5. Costs and Attorneys' Fees: In the event any party is required to bring
legal proceedings to enforce any financial obligation of a party hereunder, the
prevailing party in such action shall be entitled to recover all court costs,
costs of collection, and a reasonable attorney's fee, which the lien provided
for herein shall also secure.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments and minimum royalties which may be required under
the terms of any lease shall be paid by the party or parties who subjected such
lease to this agreement at its or their expense. In the event two or more
parties own and have contributed interests in the same lease to this agreement,
such parties may designate one of such parties to make said payments for and on
behalf of all such parties. Any party may request, and shall be entitled to
receive, proper evidence of all such payments. In the event of failure to make
proper payment of any rental, shut-in well payment or minimum royalty through
mistake or oversight where such payment is required to continue the lease in
force, any loss which results from such non-payment shall be borne in accordance
with the provisions of Article IV.B.2.
Contract Operator shall notify the Manager of Operations Non-Operators of the
anticipated completion of a shut-in well, or the shutting in or return to
production of a producing well, at least five (5) days prior to taking such
action, or at the earliest opportunity permitted by circumstances, but assumes
no liability for failure to do so. In the event of failure by Contract Operator
to so notify the Manager of Operations and Non-Operators, the loss of any lease
contributed hereto by the Manager of Operations and Non-Operators, as the case
may be, for failure to make timely payments of any shut-in well payment shall be
borne jointly by the parties hereto under the provisions of Article IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof, Contract
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, the Manager of Operations with the reasonable cooperation of
each Non-Operator shall furnish Contract Operator information as to burdens (to
include, but not be limited to, royalties, overriding royalties and production
payments) on Leases and Oil and Gas Interests contributed by such Non-Operator.
If the assessed valuation of any Lease is reduced by reason of its being subject
to outstanding excess royalties, overriding royalties or production payments,
the reduction in ad valorem taxes resulting there from shall inure to the
benefit of the owner or owners of such Lease, and Contract Operator shall adjust
the charge to such owner or owners so as to reflect the benefit of such
reduction. If the ad valorem taxes are based in whole or in part upon separate
valuations of each party's working interest, then notwithstanding anything to
the contrary herein, charges to the joint account shall be made and paid by the
parties hereto in accordance with the tax value generated by each party's
working interest. Contract Operator shall bill the Manager of Operations for the
other parties for their proportionate shares of all tax payments in the manner
provided in Exhibit "C."
If Contract Operator considers any tax assessment improper, Contract Operator
may, with the consent of the Manager of Operations, protest within the time and
manner prescribed by law, and prosecutes the protest to a final determination,
33
unless all parties agree to abandon the protest prior to final determination.
During the pendency of administrative or judicial proceedings, Contract
Operator, with the consent of the Manager of Operations, may elect to pay, under
protest, all such taxes and any interest and penalty. When any such protested
assessment shall have been finally determined, Contract Operator, with the
consent of the Manager of Operations, shall pay the tax for the joint account,
together with any interest and penalty accrued, and the total cost shall then be
assessed against the parties, and be paid by them. as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of Oil and Gas produced under the terms of this
agreement.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. SURRENDER OF LEASES:
The Leases covered by this agreement, insofar as they embrace acreage in the
Area of Mutual Interest, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any Lease or in
any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute consent to the surrender of the Leases described in the notice.
If all parties do not agree or consent thereto, the party desiring to surrender
shall assign, without express or implied warranty of title, all of its interest
in such Lease, or portion thereof, and any well, material and equipment which
may be located thereon and any rights in production thereafter secured, to the
parties not consenting to such surrender. If the interest of the assigning party
is or includes an Oil and Gas Interest, the assigning party shall execute and
deliver to the party or parties not consenting to such surrender an oil and gas
lease covering such Oil and Gas Interest for a term of one (I) year and so long
thereafter as Oil and/or Gas is produced from the land covered thereby, such
lease to be on the form attached hereto as Exhibit "B." Upon such assignment or
lease, the assigning party shall be relieved from all obligations thereafter
accruing, but not theretofore accrued, with respect to the interest assigned or
leased and the operation of any well attributable thereto, and the assigning
party shall have no further interest in the assigned or leased premises and its
equipment and production other than the royalties retained in any lease made
under the terms of this Article. The party assignee or lessee shall pay to the
party assignor or lessor the reasonable salvage value of the latter's interest
in any well's salvable materials and equipment attributable to the assigned or
leased acreage. The value of all salvable materials and equipment shall be
determined in accordance with the provisions of Exhibit "C," less the estimated
cost of salvaging and the estimated cost of plugging and abandoning and
restoring the surface. If such value is less than such costs, then the party
assignor or lessor shall pay to the party assignee or lessee the amount of such
deficit. If the assignment or lease is in favor of more than one party, the
interest shall be shared by such parties in the proportions that the interest of
each bears to the total interest of all such parties.
Any assignment, lease or surrender made under this provision shall not reduce or
change the assignor's, lessor's or surrendering party's interest as it was
immediately before the assignment, lease or surrender in the balance of the Area
of Mutual Interest: and the acreage assigned, leased or surrendered, and
subsequent operations thereon, shall not thereafter be subject to the terms and
provisions of this agreement but shall be deemed subject to an Operating
Agreement in the form of this agreement.
34
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Area of Mutual Interest, by paying to the party who acquired it
their proportionate shares of the acquisition cost allocated to that part of
such Lease within the Area of Mutual Interest, which shall be in proportion to
the interest held at that time by the parties in the Area of Mutual Interest.
Each party who participates in the purchase of a renewal or replacement Lease
shall be given an assignment of its proportionate interest therein by the
acquiring party.
If some, but less than all, of the parties elect to participate in the purchase
of a renewal or replacement Lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Area of Mutual Interest to the aggregate of
the percentages of participation in the Area of Mutual Interest of all parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.
The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover
only a portion of its area or an interest therein. Any renewal or replacement
base taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of Oil and
Gas Leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a contribution of
cash towards the drilling of a well or any other operation on the Area of Mutual
Interest, such contribution shall be paid to the party who conducted the
drilling or other operation and shall be applied by it against the cost of such
drilling or other operation. If the contribution be in the form of acreage, the
party to whom the contribution is made shall promptly tender an assignment of
the acreage, without warranty of title, to the Drilling Parties in the
proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Area of Mutual Interest and, to the extent
possible, be governed by provisions identical to this agreement. Each party
shall promptly notify all other parties of any acreage or cash contributions it
may obtain in support of any well or any other operation on the Area of Mutual
Interest. The above provisions shall also be applicable to optional rights to
earn acreage outside the Area of Mutual Interest which are in support of well
drilled inside Area of Mutual Interest.
If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder, such consideration shall not be
deemed a contribution as contemplated in this Article VIII.C.
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D. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Area of Mutual Interest waives any and all rights it may have to partition and
have set aside to it in severalty its undivided interest therein.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be constructed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the rights
and liabilities hereunder are several and not joint or collective, or that this
agreement and operations hereunder shall not constitute a partnership, if, for
federal income tax purposes, this agreement and the operation hereunder are
regarded as a partnership, each party hereby affected elects to be exclude from
the application of all of the provisions of sub Chapter "D", Chapter 1. Subtitle
"A", of the Internal Revenue Code of 1954, as permitted and authorized by
Section 761 of the Code and the regulations promulgated there-under. Contract
Operator is authorized and directed to execute on behalf of each party hereby
affected such evidence of this election as may be required by the Secretary of
the Treasure of the United States of the Federal Internal Revenue Service,
including specifically, but not by way of limitation, all of the returns,
statements, and the data required by Federal Regulations 1.761. Should there be
any requirement that each party hereby affected give further evidence of this
election, each such party shall execute such documents and furnish such other
evidence as may be required by the Federal Internal Revenue Service or as may be
necessary to evidence this election. No such party shall give any notices or
take any other action inconsistent with the election made hereby. If any present
or future income tax laws of the United States contain provisions similar to
those in Sub Chapter "D", Chapter 1, Subtitle "A" of the Internal Revenue Code
of 1954, under which an election similar to that provided by Section 761 of the
Code is permitted, each party hereby affected shall make such election as may be
permitted or required by such laws. In making the foregoing election, each such
party states that the income derived by such party from operations hereunder can
be adequately determined without the computation of partnership taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
The Manager of Operations may settle any single uninsured third party damage
claim or suit arising from operations hereunder if the expenditure does not
exceed TEN THOUSAND Dollars ($10,000.00) and if the payment is in complete
settlement of such claim or suit. If the amount required for settlement exceeds
the above amount, the parties hereto shall assume and take over the further
handling of the claim or suit, unless such authority is delegated to the Manager
of Operations. All costs and expenses of handling settling, or otherwise
discharging such claim or suit shall be the joint expense of the parties
participating in the operation from which the claim or suit arises. If a claim
is made against any party or if any party is sued on account of any matter
arising from operations hereunder over which such individual has no control
because of the rights given Contract Operator by this agreement, such party
shall immediately notify all other parties, and the claim or suit shall be
treated as any other claim or suit involving operations hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to carry
out its obligations under this agreement, other than the obligation to indemnify
or make money payments or furnish security, that party shall give to all other
36
parties prompt written notice of the force majeure with reasonably full
particulars concerning it; thereupon, the obligations of the party giving the
notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightening, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the provisions
of this agreement, unless otherwise specifically provided, shall be in writing
and delivered in person or by United States mail, courier service, telegram,
telex, telecopier or any other form of facsimile, postage or charges prepaid,
and addressed to such parties at the addresses listed on Exhibit "A." All
telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
"Receipt" for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex.
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
So long as any of the Oil and Gas Leases subject to this agreement remain or are
continued in force as to any part of the Area of Mutual Interest, whether by
production, extension, renewal or otherwise.
37
The termination of this agreement shall not relieve any party hereto from any
expense, liability or other obligation or any remedy therefore which has accrued
or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all obligations
hereunder, in the event a memorandum of this Operating Agreement has been filed
of record, Contract Operator is authorized to file of record in all necessary
recording offices a notice of termination, and each party hereto agrees to
execute such a notice of termination as to Contract Operator's interest, upon
request of Contract Operator, if Contract Operator has satisfied all its
financial obligations.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the applicable laws of the state in which the
Area of Mutual Interest is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations and
orders.
B. GOVERNING LAW:
THIS AGREEMENT AND ALL MATTERS PERTAINING HERETO, INCLUDING BUT NOT LIMITED TO
MATTERS OF PERFORMANCE, NON-PERFORMANCE, BREACH, REMEDIES, PROCEDURES, RIGHTS,
DUTIES, AND INTERPRETATION OR CONSTRUCTION, SHALL BE GOVERNED AND DETERMINED BY
THE LAW OF THE STATE IN WHICH THE AREA OF MUTUAL INTEREST IS LOCATED. IF THE
AREA OF MUTUAL INTEREST IS IN TWO OR MORE STATES, THE LAW OF THE STATE OF TEXAS
SHALL GOVERN.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Contract
Operator the right or authority to waive or release any rights, privileges, or
obligations which the Manager of Operations and any Non-Operators may have under
federal or state laws or under rules, regulations or orders promulgated under
such laws in reference to oil, gas and mineral operations, including the
location, operation, or production of wells, on tracts offsetting or adjacent to
the Area of Mutual Interest.
With respect to the operations hereunder, Non-Operators agree to release the
Manager of Operations and Contract Operator from any and all losses, damages,
injuries, claims and causes of action arising out of, incident to or resulting
directly or indirectly from the Manager of Operations and Contract Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in
good faith and does not constitute gross negligence. Each Non-Operator further
agrees to reimburse Operator for such Non-Operator's share of production or any
refund, fine, levy or other governmental sanction that the Manager of Operations
or the Contract Operator may be required to pay as a result of such an incorrect
interpretation or application, together with interest and penalties thereon
owing by the Manager of Operations or Contract Operator, as the case may be,
which results from such incorrect interpretation or application.
ARTICLE XV.
MISCELLANEOUS
A. EXECUTION:
This agreement shall be binding upon the Manager of Operations, Contract
Operator and each Non-Operator when this agreement or a counterpart thereof has
been executed by the Manager of Operations, and Contract Operator and any
38
Non-Operator notwithstanding that this agreement is not then or thereafter
executed by all of the parties to which it is tendered or which are listed on
Exhibit "A" as owning an interest in the Area of Mutual Interest or which own,
in fact, an interest in the Area of Mutual Interest. The Manager of Operations
may, however, by written notice to all Non-Operators who have become bound by
this agreement as aforesaid, given at any time prior to the actual spud date of
the oil and/or gas well(s) within the AMI, but in no event later than five days
prior to the date specified in Article VI.A. for commencement of the oil and/or
gas well(s) within the AMI, terminate this agreement if Contract Operator, with
the consent of the Manager of Operations determines that there is insufficient
participation to justify commencement of drilling operations in connection with
the oil and/or gas well(s) within the AMI. In the event of such a termination,
all further obligations of the parties hereunder shall cease as of such
termination. In the event any Non-Operator has advanced or prepaid any share of
drilling or other costs hereunder, all sums so advanced shall be returned to
such Non-Operator without offset. In the event Operator proceeds with drilling
operations for re-entry of the oil and/or gas well(s) within the AMI without the
execution hereof by all persons listed on Exhibit "A" as having a current
working interest in such well, the Manager of Operations shall indemnify
Non-Operators with respect to all costs incurred for the oil and/or gas well(s)
within the AMI which would have been charged to such person under this agreement
if such person had executed the same and the Manager of Operations shall receive
all revenues which would have been received by such person under this agreement
if such person had executed the same.
B. SUCCESSORS AND ASSIGNS:
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Area of Mutual Interest.
C. COUNTERPARTS:
This instrument may be executed in any number of counterparts, each of which
shall be considered an original, for all purposes.
D. SEVERABILITY:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
A. MODIFICATION OF ARTICLE VI.B.2. EACH NON-OPERATOR SHALL PAY TO MONTCREST
ENERGY, INC. OR THE MANAGER OF OPERATIONS ITS PRO RATA PORTION OF THE AFE COST
OF DRILLING OR RE-ENTERING THE OIL AND/OR GAS WELL(S) WITHIN THE AMI ON A
"TURNKEY BASIS." "TURNKEY BASIS" SHALL MEAN THAT ALL COSTS ACCRUED THROUGH THE
INITIAL COMPLETION OF THE OIL AND/OR GAS WELL(S) WITHIN THE AMI IN THE
ELLENBURGER FORMATION ("OBJECTIVE FORMATION") ARE INCLUDED IN EACH NON-OPERATING
PARTY'S WORKING INTEREST PURCHASE PRICE BASED, IN PART, ON THE AFE PROVIDED TO
WORKING INTEREST HOLDERS IN CONNECTION WITH THE OIL AND/OR GAS WELL(S) WITHIN
THE AMI AND THE OBJECTIVE FORMATION, AND THAT ANY COSTS ASSOCIATED WITH
EXPLORATION FOR OIL AND GAS AND/OR COMPLETIONS IN OTHER FORMATIONS OR ZONES,
OTHER THAN THE OBJECTIVE FORMATION, SHALL BE BORNE BY EACH NON-OPERATING PARTY
ON A PRO RATA BASIS IN PROPORTION TO EACH NON-OPERATING PARTY'S WORKING INTEREST
PERCENTAGE. FOR ALL EXPLORATION FOR OIL AND GAS AND/OR COMPLETIONS IN OTHER
FORMATIONS OR ZONES, OTHER THAN THE OBJECTIVE FORMATION, MONTCREST ENERGY, INC.
SHALL PROVIDE EACH NON-OPERATING PARTY WITH AN AFE, AND EACH NON-OPERATING PARTY
WILL BE BILLED FOR ANY COSTS ASSOCIATED WITH EXPLORATION FOR OIL AND GAS AND/OR
40
COMPLETIONS IN OTHER FORMATIONS OR ZONES, OTHER THAN THE OBJECTIVE FORMATION, IN
PROPORTION TO EACH NON-OPERATING PARTY'S WORKING INTEREST. IN THE EVENT A
NON-OPERATOR FAILS OR ELECTS NOT TO PARTICIPATE IN CONNECTION WITH EXPLORATION
FOR OIL AND GAS AND/OR COMPLETIONS IN OTHER FORMATIONS OR ZONES, OTHER THAN THE
OBJECTIVE FORMATION, OR OTHERWISE FAILS TO TENDER TO MONTCREST ENERGY, INC., THE
NON-OPERATOR'S PRO RATA SHARE OF COSTS BASED UPON EACH NON-OPERATOR'S WORKING
INTEREST PERCENTAGE, THE NON-OPERATOR'S INTEREST IN THE SUBJECT OIL AND/OR GAS
WELL(S) WITHIN THE AMI, MAY BE FORFEITED AT THE MONTCREST ENERGY, INC.'S SOLE
DISCRETION. ACCORDINGLY, MONTCREST ENERGY, INC. SHALL NOT BE OBLIGATED, OR
OBLIGATE THE MANAGER OF OPERATIONS OR THE CONTRACT OPERATOR TO COMMENCE
OPERATIONS FOR EXPLORATION OR PRODUCTION OF OIL AND/OR GAS AND/OR COMPLETIONS IN
OTHER FORMATIONS OR ZONES, OTHER THAN THE OBJECTIVE FORMATION, IN THE AREA OF
MUTUAL INTEREST, UNTIL MONTCREST ENERGY, INC. HAS RECEIVED 100% OF SAID
ESTIMATED COSTS.
B. IF ANY PARTY HERETO SHOULD SUBSEQUENTLY CREATE AN OVERRIDING ROYALTY,
PRODUCTION PAYMENT OR OTHER BURDEN AGAINST ITS WORKING INTEREST PRODUCTION AND,
IF ANY OTHER PARTY OR PARTIES SHOULD CONDUCT NON-CONSENT OPERATIONS PURSUANT TO
THIS AGREEMENT, AND AS A RESULT, BECOME ENTITLED TO RECEIVE THE WORKING INTEREST
PRODUCTION OTHERWISE BELONGING TO THE NON-PARTICIPATING PARTY, THE PARTY OR
PARTIES ENTITLED TO RECEIVE THE WORKING INTEREST PRODUCTION OF THE
NON-PARTICIPATING PARTY SHALL RECEIVE SUCH PRODUCTION FREE AND CLEAR OF BURDENS
AGAINST SUCH PRODUCTION WHICH MAY HAVE BEEN CREATED SUBSEQUENT TO THIS AGREEMENT
THE NON-PARTICIPATING PARTY CREATING SUCH SUBSEQUENT BURDEN SHALL HOLD THE
PARTICIPATING PARTY OR PARTIES HARMLESS WITH RESPECT TO THE RECEIPT OF SUCH
WORKING INTEREST PRODUCTION.
C. NO PARTY SHALL DISTRIBUTE ANY INFORMATION OR PHOTOGRAPHS TO THE PRESS
OR OTHER MEDIA WITHOUT THE APPROVAL OF ALL THE CONSENTING PARTIES, EXCEPT AS
REQUIRED BY LAW OR REGULATION. WHEN ALL CONSENTING PARTIES HAVE REVIEWED SUCH
MATERIAL, AND ALL CONSENTING PARTIES HAVE APPROVED THE ISSUANCE OF THE MATERIAL,
THE COMPANY PROPOSING THE RELEASE OF THE INFORMATION SHALL HAVE THE PRINCIPAL
RESPONSIBILITY FOR ITS ISSUANCE. THE ONLY OTHER EXCEPTION TO THE FOREGOING SHALL
BE THAT IN THE EVENT OF AN EMERGENCY INVOLVING EXTENSIVE PROPERTY DAMAGE,
OPERATIONS FAILURE, LOSS OF HUMAN LIFE OR OTHER CLEAR EMERGENCY, THE OPERATOR IS
AUTHORIZED TO FURNISH SUCH MINIMUM STRICTLY FACTUAL INFORMATION AS SHALL BE
NECESSARY TO SATISFY THE LEGITIMATE PUBLIC INTEREST ON THE PART OF THE PRESS AND
DULY CONSTITUTED AUTHORITIES. IF TIME DOES NOT PERMIT THE OBTAINING OF PRIOR
APPROVAL BY THE CONSENTING PARTIES SUCH PARTY SHALL THEREUPON PROMPTLY ADVISE
THE OTHER PARTIES OF THE INFORMATION SO FURNISHED.
D. NOTWITHSTANDING OTHER PROVISIONS OF THIS AGREEMENT, IT IS AGREED THAT
WHERE A WELL WHICH HAS BEEN AUTHORIZED UNDER THE TERMS OF THIS AGREEMENT BY ALL
PARTIES, SHALL HAVE BEEN DRILLED TO THE OBJECTIVE FORMATION, AND THE MANAGER OF
OPERATIONS HAS COMPLETED SUCH TESTS, INCLUDING, WITHOUT LIMITATION, ANY
PRODUCTION TESTS, WHICH THE MANAGER OF OPERATIONS REASONABLY DEEMS NECESSARY FOR
THE PROPER EVALUATION OF THE FORMATION AND HAS FURNISHED SUCH RESULTS TO THE
PARTIES, AND THE PARTIES CANNOT AGREE ON THE SEQUENCE AND TIMING OF FURTHER
OPERATIONS REGARDING SAID WELL, THE FOLLOWING ELECTIONS SHALL CONTROL IN THE
ORDER ENUMERATED HEREAFTER: (1) AN ELECTION TO ATTEMPT TO COMPLETE THE WELL AT
EITHER THE OBJECTIVE FORMATION; (2) AN ELECTION TO DEEPEN SAID WELL; AND (3) AN
ELECTION TO PLUG AND ABANDON SAID WELL.
IF THERE ARE CONFLICTING RECOMMENDATIONS FOR FURTHER OPERATIONS, THE SEQUENCE OF
PRECEDENCE FOR A FURTHER OPERATION ARE LISTED HEREIN IN THIS ARTICLE XVI(D). AT
ANY TIME A WELL IS DEEPENED AS PROVIDED HEREIN, UPON TOTAL DEPTH BEING REACHED
IN SUCH DEEPENING OPERATION AND FOLLOWING TESTING TO SUCH AN EXTENT AS SHALL BE
DEEMED PRUDENT BY OPERATOR, THE PROVISIONS ABOVE PERTAINING TO FURTHER
OPERATIONS SHALL BE APPLICABLE INSOFAR AS SUCH FURTHER OPERATIONS PERTAIN TO
ITEMS (L), (2) AND (3) IN THIS ARTICLE XVI(D). IT IS PROVIDED, HOWEVER, THAT IF
AT THE TIME SAID PARTICIPATING PARTIES ARE CONSIDERING ANY OF THE ABOVE
ELECTIONS THE HOLE IS IN SUCH CONDITION THAT A PRUDENT OPERATOR WOULD NOT
CONDUCT THE OPERATIONS CONTEMPLATED, THEN SUCH ELECTION SHALL BE ELIMINATED FROM
THE PRIORITIES SET FORTH HEREIN.
E. Billing Additional Interest. Notwithstanding the provisions of this
Agreement and the Accounting Procedure attached as Exhibit "C", the parties to
41
this Agreement specifically agree that if a party sells or otherwise disposes
all of its interest as set forth on Exhibit "A", whether to one or several
assignees, Contract Operator shall issue statements and billings to that party
for the interest conveyed and shall contemporaneously provide same to the
Manager of Operations.
The selling party shall promptly furnish to Contract Operator and
contemporaneously provide same to the Manager of Operations, the following:
1. Written notice of the conveyance and copies of the Assignments;
2. The name of the Assignee to be billed in which it consents to receive
statements and billings for a portion of or the entire interest
credited to selling party on Exhibit "A".
F. Consent to Abandonment and Surrender. If the Contract Operator, based
upon prudent operator standard, desires to abandon a well, the Contract Operator
shall notify the Manager of Operations of such desire to abandon a well, and the
Manager of Operations shall notify the other parties hereto of its intention and
if any party receiving such notice shall fail to reply in writing within thirty
(30) days of the date of such notice, such party shall be deemed to have
consented to such abandonment or surrender and the Contract Operator, shall have
the authority to abandon any such well as provided in Article VI.E.2, as if each
party had consented to such abandonment or as the case may be, to surrender such
lease pursuant to the terms of Article VIII, A. hereof as if such party had
consented to such surrender.
G. "In or Out" Non-Consent Election as to Certain Proposed Operations. An
election by any party not to participate in the completion of the first well
drilled in any section of land covered by this Agreement, or an election not to
participate in additional drilling on a Section is an election out of the well
in question and all remaining undeveloped lands in the section. This shall apply
to any and all sections of land shown on Exhibit "A" and to any lands which may
be added to this Agreement by amendment. This penalty shall not apply to any
re-working, re-drilling, plugging back or deepening of a well. Such operations
shall be governed by Article VI.B.2. of this Agreement.
H. Notwithstanding any contrary provision in Article VI, should two or more
working interest owners owning a majority in interest desire to re-complete an
additional interval within a producing formation, or to re-complete an
additional formation not producing at the time of the re-completion attempt but
which can be commingled with an existing producing formation, the parties
desiring to attempt such re-completion shall give the other parties written
notice of the proposed operation, specifying the work to be done, the objective
formation or interval to be re-completed and the estimated cost of the
operation. The parties receiving such notice shall have thirty (30) days after
receipt of such notice within which to notify the party wishing to re-complete
whether they elect to participate in the cost of the proposed operation. Failure
to make an election will constitute an election not to participate in the
proposed operation. Should a party elect not to participate in such operation,
such party shall be treated as a Non-Consenting Party under Article VI of this
Agreement and the consenting parties shall proceed as specified in Article VI.
If any party elects not to participate in such operation and the operation
results in the establishment of production the Contract Operator shall allocate
all production from the well between intervals that were producing prior to the
re-completion and the newly completed interval based on the following formula:
a) Denominator: sum a) daily production from producing interval
immediately prior to the commencement of the re-completion attempt and
42
b) daily production from new producing interval immediately prior to
being commingled with the interval that was producing prior to the
re-completion attempt.
c) Numerator for interval producing prior to the re-completion attempt:
daily production of this interval immediately prior to re-completion
work. decimal interest is = c divided by a (b/a).
The Manger of Operations, Contract Operator, and Non-Operator(s) acknowledge
that each is aware of the tax consequences and risk factors associated with this
transaction. If ANY PARTY invests in this prospect, there is no assurance that
the well drilled will obtain any production or will otherwise permit any return
on investment from production. Because of the speculative nature of oil and gas
exploration and development in general, it is understood that the MontCrest
Energy, Inc., the Manager of Operations, Contract Operator, and their respective
agents, employees, officers, directors, affiliates, or assigns, make no
representation, warranty or guarantee of any kind, express or implied, that any
well will be profitable, and if profitable, the amount of such profits.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
43
IN WITNESS WHEREOF, this agreement shall be Effective as of the 8th day of June,
2012.
MANAGER OF THE AMI
MontCrest Energy, Inc.
/s/ John Forrest
--------------------------------------
By: John Forrest
Title: Secretary
Date: June 8, 2012
Tax ID or SSN: 27-0743683
MANAGER OF OPERATIONS
Black Strata, LLC
/s/ Douglas E. Forrest
--------------------------------------
By: Douglas E. Forrest
Title: President, Co-Manager
Date: June 8, 2012
Tax ID or SSN: 26-4605206
NON OPERATOR
Independence Energy Corporation
/s/ Gregory Rotelli
--------------------------------------
By: Gregory Rotelli
Title: CEO, President IDNG
Date: June 8, 2012
Tax ID or SSN:
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
44
EXHIBIT "A"
ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED JUNE
8th, 2012, BETWEEN MontCrest Energy, Inc., and Black Strata, LLC.
(1) Description of lands subject to this agreement: AREA OF MUTUAL INTEREST
(AMI):
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
656, Document 00000420, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Hubert Rutherford & Gerri
Rutherford PO Box 174 Novice Texas 79538, Lessor and Black Strata, LLC, Lessee,
covering the LEASED PREMISIS, to wit: 106.15 acres in the T&NO R.R. Co. Survey
13, A-654 Coleman CAD property ID R13161.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Riley Joe Goates 765 River Road
Waco, Texas 76705, Lessor and Black Strata LLC, Lessee, covering the LEASED
PREMISIS, to wit: being the Eastern 113.15 acres more or less of a 228.30 acre
tract of land in Coleman County, Texas being 228.3 acres out of the East Line &
Red River R.R. Company Survey No. 3 Abstract No. 851 and 1.0 acres out of the
M.M. Givens Survey No. 10, Abstract No. 1640, also being out of the D.M. Hankins
1435.25 acre tract and said 228.30 acre tract.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of June 2009 between Hubert A. Rutherford & Gerri J.
Rutherford of P.O. Box 174 in Novice Texas 79538, Lessor, and Black Strata LLC,
Lessee, covering the LEASED PREMISIS,to wit: being 160.00 acres more or less in
the NW 1/4 of WE Ashley Survey, Section 14 A-1410, aka NW 1/4 Sec 14, S.P. RY
Co., and being more fully described by metes and bounds in Warranty Deed Volume
720, Page 498, dated 9/24/2003 in the Deed Records of Coleman County, Texas.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the effective the 1st day of February 2009 between William Fowler 2706
Hedgeway Arlington, Texas 76016, Lessor and Black Strata LLC, Lessee, covering
the LEASED PREMISIS, to wit: 124.45 acres in the EL & RR Co. Survey 3, A-851,
Coleman CAD property ID R14011.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
358, Document 00000353, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between William Fowler 2706 Hedgeway
Arlington, Texas 76016 Lessor and Black Strata LLC, Lessee, covering the LEASED
PREMISIS, to wit: 113.16 acres in the EL & RR Co. Survey 3, A-851, Coleman CAD
property ID R51416.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
363, Document 00000354, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Elda Fae Atchley aka Elda Fae
McDaniel Atchley PO Box 68 Novice, Texas 79538, Lessor, and Black Strata LLC,
Lessee, covering the LEASED PREMISIS, to wit: 106.4 acres in the T&NO R.R. Co.
Survey 13, A-654, Coleman CAD property ID R13159.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
368, Document 00000355, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between Gary D. Holt and Stella T. Holt,
1819 FM 3114 Chifton, Texas 76634, Lessor, and Black Strata, LLC, Lessee,
covering the LEASED PREMISIS, to wit: 320 acres in the EL&RR Co. Survey 3,
A-851, Coleman CAD property ID.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
373, Document 00000356, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009 between William Fowler 2706 Hedgeway,
Arlington, Texas 76016, Lessor, and Black Strata LLC, Lessee, covering the
LEASED PREMISIS, to wit: 124.45 acres in the EL&RR Co. Survey 3, A-851, Coleman
CAD property ID R14011, Being a 131.24 acre tract of land in Coleman County,
Texas, being 125.45 acres out of the East Line & Red River R.R. Company Survey
No.3, Abstract No. 851 and 5.89 acres out of the M.M. Givens Survey No.10,
Abstract No. 1640, also being out of the D.M. Hankins 1435.25 acre tract and
said 131.24 acre tract.
45
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
379, Document 00000357, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009, between William Fowler, Joanie Fowler,
Delain Herzog, Jannie Herzog 2706 Hedgeway Arlington Texas 76016, Lessor(s), and
Black Strata LLC, Lessee, covering the LEASED PREMISIS, to wit: 106.4 acres in
the T&NO R.R. Co. Survey 13, A-654, Coleman CAD property ID R13163.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
388, Document 00000359, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of February 2009, between Kelley C. Fowler 550 HCR 3350 N.
Hubbard, Texas 76648, Lessor and Black Strata, Lessee, covering the LEASED
PREMISIS, to wit: 113.15 acres in the EL & RR Co. Survey 3, A-851, Coleman CAD
property ID R14009.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 3, Page
388, Document 00000359, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of April 2009 between HUBERT RUTHERFORD etux GERRI
RUTHERFORD, Rt. 1, Box 40, Tuscola, Texas 79562 Lessor and Black Strata, LLC,
Lessee, covering the LEASED PREMISIS, to wit: Being a 273.80 acre tract of land
in Coleman County, Texas, being 167.65 acres out of the M.M. Givens Survey No.
10, Abstract No. 1640 and 106.15 acres Out of the Block 1 of the Subdivision of
the R.M. Wellborn Subdivision of Section No. 13, of the T.&N.O.R.R. Co. Survey,
Abstract No. 654, also being out of the D.M. Hankins 1435.25 acre tract and said
273.80 acre tract No. 4 of land, SAVE and EXCEPT the 106.15 acre tract out of
the T.&N.O.RR.Co. Survey 13, Abstract 654 described more fully in Deed Volume 82
Page 596 Deed Records, Coleman County, Texas.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
282, Document 00000811, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of April 2009 between William G. Fowler, Lessor, and Black
Strata LLC, Lessee, covering the LEASED PREMISIS, to wit: Being a 5.89 acre
tract out of a 131.24 acre tract of land in Coleman County, Texas being 125.45
acres out of the East Line & Red River R.R. Company Survey No.3, Abstract No.
851 and 5.89 acres out of the M.M. Givens Survey No. 10, Abstract No. 1640, also
being out of the D.M. Hankins 1435.25 acre tract and said 131.24 acre tract;
SAVE AND EXCEPT a 125.45 acre tract out of the East Line & Red River R.R.
Company Survey N. 10, Abstract No. 851.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
282, Document 00000811, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of June 2009 between Gerri J. Rutherford of P.O. Box 174
in Novice Texas, 79538, Lessor and Black Strata, LLC, Lessee, covering the
LEASED PREMISIS, to wit: being 109.72 acres more or less in the SE 1/4 of
Section 25, Block 2 of the T&N.O.R.R. CO. survey and being more fully described
by metes and bounds in Deed Volume 450, Page 582, dated 11/24/1971 & Volume 623,
Page 556 in the Deed Records of Coleman County, Texas.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
282, Document 00000811, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of June 2009 between Martha Smart Bennett 6866 W. Remuda
Arizona 83583, Lessor and Black Strata LLC, covering the LEASED PREMISIS, to
wit: 160 total acres Abstract A-865 T.H. Lydston Survey 119 Coleman County,
Texas. This LEASED PREMISIS is further described by metes and bounds as follows:
That certain "Oil, Gas And Mineral Lease" recorded at Book at Book OR, Volume 6,
Page 288, Document 00000812, in the Deed Records of Coleman County, Texas, made
and effective the 1st day of April 2009 between William G. Fowler, Kelly Fowler,
and Danny Fowler, Lessor(s) and Black Strata, LLC, Lessee, covering the LEASED
PREMISIS,to wit: being a 139.21 acre tract of land in Coleman County, Texas,
being out of the M.M. Givens Survey No. 10, Abstract No. 1640, also being out of
the D.M. Hankins 1435.25 acre tract, and said 139.21 acre tract.
That certain "Oil, Gas And Mineral Lease" recorded at Book OR, Volume 6, Page
301, Document 00000814, in the Deed Records of Coleman County, Texas, made and
effective the 1st day of April 2009 between Kelly Fowler and William G. Fowler
of 1202 West Arkansas Lane Arlington, Texas, Lessor, and Black Strata LLC,
Lessee, covering the LEASED PREMISIS, to wit: Being a 103.49 acre tract out of
the M.M. Givens survey No. 10 Abstract No. 1640 and out of the D.M. Hankins
1435.25 acre tract Coleman County, Texas, further described by metes and bounds
in the Deed Record from Green river Land and Cattle Company to Anthony Patrick
Lange Jr. recorded in Volume 556. Page 949 of the Deed Records Coleman County,
Texas incorporated herein by reference.
46
EXHIBIT "B"
Form Of Lease
ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED June
8th, 2012, BETWEEN MontCrest Energy, Inc., and Black Strata, LLC.
OIL, GAS AND MINERAL LEASE
THIS AGREEMENT made and effective this ___th day of _________ 20__, between,
_________________________________, Texas Lessor and MontCrest Energy, Inc., 320
Hemphill Street, Lessee.
1. GRANT. Lessor, in consideration of cash payment and other good and
valuable consideration in hand paid, of the royalties herein provided for, of
the agreements of Lessee herein contained, hereby grants, leases and lets
exclusively onto Lessee the land described in paragraph 2 below, hereinafter
referred to as leased premises, for the purposes of investigating, exploring,
prospecting, drilling and mining for and producing oil, gas (the term 'gas' as
used herein includes helium, carbon dioxide and other commercial gases, as well
as hydrocarbons gases), sulphur, fissionable materials, and all other minerals,
conducting exploration, geological and geophysical surveys, core tests, gravity
and magnetic surveys, for introducing or injecting fire, air, gas, steam, water,
salt water, chemicals, and fluids or substances into any subsurface stratum or
strata which is not productive of fresh water for primary, secondary and other
enhanced recovery operations.
2. LEASED PREMISES.
3. TERM. Subject to the other provisions herein contained, this Lease shall
be for a term of FIVE (5) Year from the date hereof (called "primary term") and
as long thereafter as oil, gas, sulphur, fissionable materials or other mineral
Is produced In paying quantities from the leased premises or land pooled
therewith, or this lease is otherwise maintained in force and effect pursuant to
other provisions herein contained.
4. ROYALTY PAYMENT. The royalties to be paid to the Lessor are: (a) On oil,
ONE-FIFTH (1/5) of that produced and saved from said land, the same to be
delivered at the wells or to the Lessor's credit into the pipelines to which the
wells may be connected. Lessee shall have the continuing right to purchase such
production at the wellhead market price then prevailing in the same field (or if
there is no such price then prevailing In the same field, then the nearest field
in which there is such a prevailing price) for production of similar grade and
gravity. Lessee may sell any royalty oil in its possession and pay Lessor the
price received by Lessee for such oil computed at the well, (b) For gas
(including casinghead gas) and all other substances covered hereby (i) if used
off the leased premises or used in the manufacture of gasoline or other
products, the market value at the well of ONE-FIFTH (1/5) of the gas so used, or
(ii) if sold on or off the leased premises, ONE-FIFTH (1/5) of the amount
realized from such sale, provided the amount realized from the sale of gas on or
off the leased premises shall be the price established by the Gas Sales Contract
entered into in good faith by Lessee and gas purchaser, provided that on gas
sold by Lessee the market value shall not exceed the amount received by Lessee
for such gas computed at the mouth of the well. This lease may be maintained in
effect in the event that gas is capable of being produced but because of market
conditions is unable to be produced by the paying of shut-in royalty payments of
$10.00 per acre. The shut-in payments are due at or prior to the expiration of
the primary term and at the first anniversary of that date (shut-in royalty
payments only maintain the lease an additional two years).
5. POOLING. Lessee shall have the right but not the obligation during or
after the primary term while this lease is in effect to pool all or any part of
the leased premises or interest therein with any other lands or interests, as to
any or all depths or horizons, and as to any or all substances covered by this
lease, either before or after the commencement of production, whenever Lessee
deems it necessary or proper to do so in order to prudently develop or operate
the leased premises, or not similar pooling authority exists with respect to
such other lands or interests. The unit formed by such pooling for an oil well
shall not exceed 80 acres plus a maximum acreage tolerance of 10%, and for a gas
well shall not exceed 640 acres plus a maximum acreage tolerance of 10%, except
that larger units may be formed for oil wells or gas wells to conform to any
well spacing or density pattern that may be prescribed or permitted by any
governmental authority having jurisdiction. In exercising its pooling rights
hereunder, Lessee shall file of record a written declaration describing the unit
and stating the effective date of pooling. Production, drilling or reworking
operations anywhere on a unit which includes all or any part of the leased
premises shall be treated as if it were production, drilling or reworking
operations on the leased premises, except that the production on which Lessor's
royalty is calculated shall be that proportion of the total unit production
produced and saved which the net acreage covered by this Lease and included in
the unit bears to the total gross acreage in the unit. Pooling in one or more
instances shall not exhaust Lessee's pooling rights hereunder and Lessee shall
have the recurring right but not the obligation to revise any unit formed
hereunder by expansion or contraction, or both, either before or after the
commencement of production, in order to conform to the well spacing or density
pattern prescribed or permitted by the governmental authority having
jurisdiction, or to conform to any productive acreage determination made by such
governmental authority. In making such a revision, Lessee shall file of record a
written declaration describing the revised unit and stating the effective date
of revision. To the extent any portion of the Leased premises is included in or
excluded from the unit by virtue of such revision, the proportion of unit
production on which royalties are payable hereunder shall thereafter be adjusted
accordingly. In the absence of production from a unit, or upon permanent
cessation thereof, Lessee may terminate the unit by filing of record a written
declaration describing the unit and stating the date of termination.
6. OPERATIONS. If Lessee drills a well which is incapable of producing In
paying quantities (hereinafter called ("dry hole") on the leased Premises or
lands pooled therewith, or If all production (whether or not in paying
quantities) ceases from any cause, Including a revision of unit boundaries
pursuant to the provisions of Paragraph 5 or the action of any governmental
authority, then in the event this lease is not otherwise being maintained in
force it nevertheless remain in force If Lessee commences operations for
reworking an existing well or for drilling an additional well on the leased
premises or pooled therewith within 90 days after completion of operations on
such dry hole or within 90 days after such cessation of all production. This is
a PAID-UP LEASE. In consideration of down cash payment, Lessor agrees that
47
Lessee shall not he obligated to commence or continue any operations during the
primary term. If at the end of the primary term or any time thereafter, oil, gas
or other substances covered hereby are not being produced in paying quantities
from the leased premises or lands pooled therewith, but Lessee is then engaged
in drilling, reworking or any other operations reasonably calculated to obtain
or restore production therefrom, this lease shall remain in force so long as
such operations are prosecuted with no cessation of more than 90 consecutive
days, and if any such operations result in the production of oil or gas or other
substances covered hereby, as long thereafter as there is production in paying
quantities from the leased premises or lands pooled therewith. After completion
of a well capable of producing in paying quantities hereunder, Lessee shall
drill such additional wells on the leased premises or lands pooled therewith as
a reasonably prudent operator would drill under the same or similar
circumstances to (a) develop the leased premises as to formations then capable
of producing in paying quantities on the leased premises or lands pooled
therewith, or (b) protect the leased premises fron uncompensated drainage by any
well or wells located on other lands not pooled therewith. There shall be no
covenant to drill exploratory wells or any additional wells except as expressly
provided herein.
7. LESSER INTEREST. Should Lessor own less than the full mineral estate in
all or any part of the leased premises the royalty and shut-in payments, payable
hereunder for any well on any part of the leased premises or lands pooled
therewith shall be reduced to the proportion that Lessor's mineral interest in
such part of the leased premises bears to the full mineral estate in such part
of the leased premises.
8. ANCILLARY RIGHTS. Lessee may use in its operations, free of cost, any
oil, gas, water and/or other substances produced on the leased premises, except
water from Lessor's wells or ponds. The right of ingress and egress granted
hereby shall apply to the entire leased premises described in Paragraph 2 above,
notwithstanding any partial release or other termination of this lease with
respect thereto. If expressly requested in writing by the surface owner, Lessee
agrees to bury pipelines across cultivated land below ordinary plow depth, as
such depth may be determined at the time of burial. After the pipeline has once
been laid below such depth, Lessee shall not thereafter be required to restore
the ground cover, or to lower, or to remove such pipeline unless the surface
owner first agrees in writing to bear the entire cost thereof, and advances to
Lessee the estimated cost thereof. No well shall be located less than 200 feet
from any house or barn now on the leased premises without Lessor's consent, and
Lessee shall pay for damage caused by its operations to buildings and other
improvements now on the leased premises, and to timber and growing crops
thereon. Lessee shall have the right at any time to remove its fixtures,
equipment and materials, including well casing, from the leased premises during
the term of this lease or within a reasonable time thereafter. Lessee may lay
pipelines, build roads, tanks, power stations, erect telephone and power lines
and construct other facilities deemed necessary by Lessee on and over and across
the leased premises and other lands owned or claimed by Lessor adjacent and
contiguous thereto to produce, save, take care of, treat transport and own
products granted by this lease.
9. OWNERSHIP CHANGES. The interest of either Lessee or Lessee hereunder may
be assigned, devised or otherwise transferred in whole or in part by area and/or
by depth or horizon, and the rights and obligations of the parties hereunder
shall extend to their respective heirs, devisees, executors, administrators,
successors, and assigns. No change in Lessor's ownership shall have the effect
of reducing the rights or enlarging the obligations of Lessee hereunder, and no
change in ownership shall be binding on Lessee until 60 days after Lessee has
been furnished the original or certified or duly authenticated copies of the
documents establishing such change of ownership to the satisfaction of Lessee or
until Lessor has satisfied the notification requirements contained in Lessee's
usual form of division order. In the event the death of any person entitled to
shut-in payments hereunder, Lessee may pay or tender such shut-in payments to
the credit of decedent or decedent's estate in the depository designated above.
If at any time two or more persons are entitled to shut-in payments hereunder,
Lessee may pay or tender such shut-in payments to such persons or to the credit
in the depository, either jointly or separately in proportion to the interest
which each owns. If Lessee transfers its interest hereunder in whole or in part
Lessee shall be relieved of all obligations thereafter arising with respect to
the transferred interest, and failure of the transferee to satisfy such
obligations with respect to the transferred interest shall not affect the rights
of Lessee with respect to any interest not so transferred. If Lessee transfers a
full or undivided interest in all or any portion of the area covered by this
lease, the obligation to pay or tender shut-in payments hereunder shall be
divided between Lessee and the Transferee in proportion to the net acreage
interest in this lease then held by each.
10. BREACH OR DEFAULT. No litigation shall be initiated by Lessor with
respect to any breach or default by Lessee hereunder, for a period of at least
90 days after Lessor has given Lessee written notice fully describing the breach
or default, and then only if Lessee fails to remedy the breach or default within
such period. In the event the matter is litigated and there is a final judicial
determination that a breach or default has occurred, this lease shall not be
forfeited or cancelled in whole or in part unless Lessee is given a reasonable
time after such judicial determination to remedy the breach or default and
Lessee fails to do so.
11. WARRANTY OF TITLE. Lessor hereby warrants and agrees to defend title
conveyed to Lessee hereunder, and agrees that Lessee at Lessee's option nay pay
and discharge any taxes, mortgages or liens existing, levied or assessed on or
against the leased premises. If Lessee exercises such option, Lessee shall be
subrogated to the rights of the party to whom payment is made, and, In addition
to its other rights, may reimburse itself out of any royalties, or shut-in
payments otherwise payable to Lessor hereunder. In the event Lessee is made
aware of any claim inconsistent with Lessor's title, Lessee may suspend the
payment of royalties and shut-in payments hereunder, without interest until
Lessee has been furnished satisfactory evidence that such claim has been
resolved. Lessee shall have the right to accept leases or conveyances from
others owning or claiming to own interests in the leased premises or covered
hereby adverse to the rights of Lessor herein. Should Lessee become involved in
any dispute or litigation arising out of any claim adverse to the title of
Lessor to said leased premises, Lessee may recover from Lessor its reasonable
and necessary expenses and attorney fees incurred in such dispute or litigation,
with the right to apply royalties accruing hereunder toward satisfying said
expenses and attorney fees.
12. REGULATION AND DELAY. Lessee's obligations under this Lease, whether
express or implied, shall be subject to all applicable laws, rules, regulations
and orders of any governmental authority having jurisdiction including
restrictions on the drilling and production of wells, and the price of oil, gas
and other substances covered hereby. When drilling, reworking, production or
other operations are prevented or delayed or interrupted by such laws, rules,
regulations orders, or by inability to obtain necessary permits, equipment,
services, material, water, electricity, fuel access or casements, or by fire,
flood, adverse weather conditions, war, sabotage, rebellion, insurrection, riot,
strike, or labor disputes, or by inability to obtain a satisfactory market for
production or failure of purchasers or carriers to take or transport such
production, or by any other cause not reasonably within Lessee's control, this
lease shall not terminate because of such prevention, delay or interruption, and
shall be maintained in force and effect for so long as such force majeure
continues, and for 60 days thereafter, or so long as this lease is maintained in
force by some other provisions thereof, whichever is the later date. Lessee
shall not be liable for breach of any express of implied covenants of this lease
when drilling, production or other operations are so prevented, delayed or
interrupted.
48
13. EXECUTION. This lease may be signed in any number of counterparts, each
of which shall be binding upon all who execute same, whether or not all parties
named in the caption hereof execute this lease. Should any one or more of the
parties named herein as Lessor fall to execute this lease, it shall nevertheless
be binding on the party or parties who execute the same, and additional parties
may execute this lease as Lessor, and this lease shall be binding on each party
executing the same notwithstanding that such party is named herein as Lessor,
and all of the provisions of this lease shall inure to the benefit of and be
binding on the parties hereto and their respective heirs, legal representatives,
successors and assigns.
IN WITNESS WHEREOF, this LEASE is executed to be effective as of the date
entered into, but upon execution shall be binding on the signatory and the
signatory's heirs, devisees, executors, administrators, successors and assigns.
-------------------------------------
Lessor
ACKNOWLEDGMENT
STATE OF TEXAS
COUNTY OF ___________
The foregoing instrument was acknowledged before me this ___ day of
___________, 20__ by ____________________
--------------------------------
Notary of Public, State of Texas
49
EXHIBIT "C"
ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED JUNE
8th, 2012, BETWEEN MontCrest Energy, Inc., and Black Strata, LLC.
ACCOUNTING PROCEDURE
JOINT OPERATIONS
I. GENERAL PROVISIONS
1. DEFINITIONS:
1.1 The term "Contract Operator" shall mean a designated oil and gas
operator whose role is to conduct operations necessary for proper development,
operation, protection and maintenance of the AMI in the Joint Property as herein
below defined.
1.2 "Joint Property" shall mean the real and personal property relating to
the oil and/or gas well(s) within the AMI that is the subject of this agreement
to which this Accounting Procedure is attached.
1.3 "Joint Operations" shall mean all operations necessary or proper for
the development, operation, protection and maintenance of the Joint Property.
1.4 "Joint Account" shall mean the account showing the charges paid and
credits received in the conduct of the Joint Operations and which are to be
shared by the Parties.
1.5 The term "Manager of the AMI" shall mean reciprocally, MontCrest
Energy, Inc., a Non-Operator, who shall oversee supervision and management of
the Area of Mutual necessary for development, operation, protection and
maintenance of the Area of Mutual Interest.
1.6 The term "Manager of Operations" shall mean Black Strata, LLC engaged
by MontCrest Energy, Inc. for the purpose of overall supervision and management
of the oil and/or gas well(s) within the AMI for development, operation,
protection and maintenance of the oil and/or gas well(s) within the AMI.
1.7 The term "Non-Operators" shall mean the Parties to this agreement other
than the Contract Operator and Manger of Operations and includes, without
limitation MontCrest Energy, Inc., and any working interest holder in the AMI in
the Joint Property.
1.8 "Parties" shall mean the parties to this agreement including Contract
Operator, Manger of Operations and Non-Operators.
1.9 "First Level Supervisors" shall mean those employees whose primary
function in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
1.10 "Technical Employees" shall mean those employees having special and
specific engineering, geological or other professional skills, and whose primary
function in Joint Operations is the handling of specific operating conditions
and problems for the benefit of the Joint Property.
1.11 "Personal Expenses" shall mean travel and other reasonable
reimbursable expenses of Operator's employees.
1.12 "Material" shall mean personal property, equipment or supplies
acquired or held for use on the Joint Property.
50
1.13 "Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently recommended by
the Council or Petroleum Accountants Societies.
2. STATEMENT AND BILLINGS:
The Manager of the AMI shall bill Non-Operators, based upon data timely
provided by the Manger of Operations and Contract Operator, on or before the
last day of each month for their proportionate share of the Joint Account for
the preceding month. Such bills will be accompanied by statements which identify
the authority for expenditure, lease or facility, and all charges and credits
summarized by appropriate classifications of investment and expense except that
items of Controllable Material and unusual charges and credits shall be
separately identified and fully described in detail.
3. ADVANCES AND PAYMENTS BY NON-OPERATORS:
3.1 Unless otherwise provided for in the agreement, Manager of Operations
may require the Non-Operators to advance their share of estimated cash outlay
for the succeeding month's operation within fifteen (15) days after receipt of
the billing or by the first day of the month for which the advance is required,
whichever is later. The Manager of Operations shall adjust each monthly billing
to reflect advances received from the Non-Operators.
3.2 Each Non-Operator shall pay its proportion of all bills within fifteen
(15) days after receipt. If payment is not made within such time, the unpaid
balance shall bear interest monthly at the prime rate in effect at West Side
Bank & Trust, Fort Worth, Texas on the first day of the month in which
delinquency occurs plus 1% or the maximum contract rate permitted by the
applicable usury laws in the state in which the Joint Property is located,
whichever is the lesser, plus attorney's fees, court costs, and other costs in
connection with the collection of unpaid amounts.
4. ADJUSTMENTS:
Payment of any such bills shall not prejudice the right of any Non-Operator
to protest or question the correctness thereof; provided, however, all bills and
statements rendered to Non-Operators by the Manager of Operations during any
calendar year shall conclusively be presumed to be true and correct after
twenty-four (24) months following the end of any such calendar year, unless
within the said twenty-four (24) month period a Non-Operator takes written
exception thereto and makes claim on Operator for adjustment. No adjustment
favorable to Operator shall be made unless it is made within the same prescribed
period. The provisions of this paragraph shall not prevent adjustments resulting
from a physical inventory of Controllable Material as provided for in Section
V.A.
5. AUDITS:
5.1 A Non-Operator, upon notice in writing to the Manager of the AMI, the
Manger of Operations and Contract Operator, shall have the right to audit the
Manager of the AMI' accounts and records relating to the Joint Account for any
calendar year within the twenty-four (24) month period following the end of such
calendar year; provided, however, the making of an audit shall not extend the
time for the taking of written exception to and the adjustments of accounts as
provided for in Paragraph 4 of this Section I. Where there are two or more
Non-Operators, the Non-Operators shall make every reasonable effort to conduct a
joint audit in a manner which will result in a minimum of inconvenience to the
Manager of the AMI. The Manager of the AMI shall bear no portion of the
51
Non-Operators' audit cost incurred under this paragraph unless agreed to by the
Manager of the AMI. The audits shall not be conducted more than once each year
without prior approval of the Manager of the AMI, and shall be made at the
expense of those Non-Operators approving such audit.
5.2 The Manager of the AMI shall reply in writing to an audit report within
180 days after receipt of such report.
6. APPROVAL BY NON-OPERATORS:
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if the
agreement to which this Accounting Procedure is attached contains no contrary
provisions in regard thereto, the Manager of the AMI shall notify all
Non-Operators of Manager of the AMI's proposal, and the agreement or approval of
a majority in interest of the Non-Operators shall be controlling on all
Non-Operators.
II. DIRECT CHARGES
The Manager of the AMI shall charge the Joint Account with the following items:
1. ECOLOGICAL AND ENVIRONMENTAL:
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental considerations
applicable to the Joint Operations. Such costs may include surveys of an
ecological or archaeological nature and pollution control procedures as required
by applicable laws and regulations.
1. RENTALS AND ROYALTIES:
Lease rentals and royalties paid by the Contract Operator for the Joint
Operations.
2. LABOR:
2.1
(a) Salaries and wages of Contract Operator's field employees directly
employed on the Joint Property in the conduct of Joint Operations.
(b) Salaries of First level Supervisors in the field.
(c) Salaries and wages of Technical Employees directly employed on the
Joint Property if such charges are excluded from the overhead rates.
(d) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation or the
Joint Property if such charges are excluded from the overhead rates.
2.2 Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs chargeable to
the Joint Account under Paragraphs 3.1 and 3.2 of this Section II.
2.3 Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraphs 3.1 and 3.2 of this Section 11.
3. MATERIAL
Material purchased or furnished by the Manager of Operations or Contract
Operator for use on the Joint Property as provided under Section IV. Only such
Material shall be purchased for or transferred to the Joint Property as may be
52
required for immediate use and is reasonably practical and consistent with
efficient and economical operations. The accumulation of surplus stocks shall be
avoided.
4. TRANSPORTATION
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
4.1 If Material is moved to the Joint Property from the either the Manager
of Operations or Contract Operator's warehouse or other properties, no charge
shall be made to the Joint Account for a distance greater than the distance from
the nearest reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property unless agreed to by the
Parties.
4.2 If surplus Material is moved to either the Manager of Operations or
Contract Operator's warehouse or other properties, no charge shall be made to
the Joint Account for a distance greater than the distance to the nearest
reliable supply store where like material is normally available, or railway
receiving point nearest the Joint Property unless agreed to by the Parties. No
charge shall be made to the Joint Account for moving Material to other
properties belonging to either the Manager of Operations or Contract Operator
unless agreed to by the Parties.
4.3 In the application of subparagraphs 5.1 and 5.2 above, the option to
equalize or charge actual trucking cost is available when the actual charge is
$700 or less excluding accessorial charges. The $700 will be adjusted to the
amount most recently recommended by the Council of Petroleum Accountants
Societies.
5. SERVICES:
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and Paragraph i,
ii, and iii, of Section 111. The cost of professional consultant services and
contract services of technical personnel directly engaged on the Joint Property
if such charges are excluded from the overhead rates. The cost of professional
consultant services or contract services of technical personnel not directly
engaged on the Joint Property shall not be charged to the Joint Account unless
previously agreed to by the Parties. NO COST OF OUTSIDE PROFESSIONAL CONSULTANT
OR CONTRACT SERVICES ARE COVERED IN THE OVERHEAD RATES.
6. EQUIPMENT AND FACILITIES FURNISHED BY MANAGER OF OPERATIONS OR CONTRACT
OPERATOR:
The Manager of Operations or Contract Operator shall charge the Joint Account
for use of Operator owned equipment and facilities at rates commensurate with
costs of ownership and operation. Such rates shall include costs of maintenance,
repairs, other operating expense, insurance, taxes, depreciation, and interest
on gross investment less accumulated depreciation not to exceed Ten percent
(10%) per annum. Such rates shall not exceed average commercial rates currently
prevailing in the immediate area of the Joint Property.
7. DAMAGES AND LOSSES TO JOINT PROPERTY:
All costs or expenses necessary for the repair or replacement of Joint Property
made necessary because of damages or losses incurred by fire. flood, storm,
theft, accident, or other cause, except those resulting from The Manager of
Operations or Contract Operator's gross negligence or willful misconduct. The
Manager of Operations or Contract Operator shall furnish Non-Operator written
notice of damages or losses incurred as soon as practicable after a report
thereof has been received by The Manager of Operations or Contract Operator.
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8. LEGAL EXPENSE:
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments and amounts paid for settlement of
claims incurred in or resulting from operations under the agreement or necessary
to protect or recover the Joint Property, except that no charge for services of
the Manager of the AMI, the Manager of Operations or Contract Operator's legal
staff or fees or expenses of outside attorneys shall be made unless previously
agreed to by the Parties. All other legal expense is considered to be covered by
the overhead provisions of Section III unless otherwise agreed to by the
Parties, except as provided in Section I, Paragraph 3.
9. TAXES:
All taxes of every kind and nature assessed or levied upon or in connection with
the Joint Property, the operation thereof, or the production there from, and
which taxes have been paid by the Contract Operator for the benefit of the
Parties, If the ad valorem taxes are based in whole or in part upon separate
valuations of each party's working interest, then notwithstanding anything to
the contrary herein, charges to the Joint Account shall be made and paid by the
Parties hereto in accordance with the tax value generated by each party's
working interest.
10. INSURANCE
Net premiums paid for insurance required to be carried for the Joint Operations
for the protection of the Parties. In the event Joint Operations are conducted
in a state in which Contract Operator may act as self-insurer for Worker's
Compensation and/or Employers Liability under the respective state's laws,
Contract Operator may, at its election, include the risk under its
self-insurance program and in that event, Contract Operator shall include a
charge at Contract Operator's cost not to exceed manual rates.
11. ABANDONMENT and RECLAMATION
Costs incurred for abandonment of the Joint Property, including costs required
by governmental or other regulatory authority.
12. COMMUNICATIONS
Cost of acquiring, leasing, installing, operating, repairing and maintaining
communication systems, including radio and microwave facilities directly serving
the Joint Property. In the event communication facilities/systems serving the
Joint Property are The Manager of Operations or Contract Operator owned, charges
to the Joint Account shall be made as provided in Paragraph 8 of this Section
II.
13. OTHER EXPENDITURES
Any other expenditure not covered or dealt with in the foregoing provisions of
this Section II, or in Section III and which is of direct benefit to the Joint
Property and is incurred by the Operator in the necessary and proper conduct of
the Joint Operations.
III. OVERHEAD
1. OVERHEAD - DRILLING AND PRODUCING OPERATIONS
i) As compensation for administrative, supervision, office services and
warehousing costs, the Manager of Operations or Contract Operator
shall charge drilling and producing operations on a Fixed Rate Basis,
Paragraph 1.1, or Unless otherwise agreed to by the Parties, such
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charge shall be in lieu of costs and expenses of all offices and
salaries or wages plus applicable burdens and expenses of all
personnel, except those directly chargeable under Paragraph 3.1,
Section II. The cost and expense of services from outside sources in
connection with matters of taxation, traffic, accounting or matters
before or involving governmental agencies shall be considered as
included in the overhead rates provided for in the above selected
Paragraph of this Section III unless such cost and expense are agreed
to by the Parties as a direct charge to the Joint Account.
ii) The salaries, wages and Personal Expenses of Technical Employees AND
FIRST LEVEL SUPERVISORS and/or the cost of professional consultant
services and contract services of technical personnel directly
employed on the Joint Property shall not be covered by the overhead
rates.
iii) The salaries, wages and Personal Expenses of Technical Employees AND
FIRST LEVEL SUPERVISORS and/or costs of professional consultant
services and contract services of technical personnel either
temporarily or permanently assigned to and directly employed in the
operation of the Joint Property shall not be covered by the overhead
rates.
1.1 Overhead - Fixed Rate Basis
(a) The Manager of Operations or Contract Operator shall charge the Joint
Account at the following rates per well per month:
Drilling Well Rate $10,000.00
(Prorated for less than a full month)
Producing Well Rate $850.00
(b) Application of Overhead - Fixed Rate Basis shall be as follows:
1.2 Drilling Well Rate
(a) Charges for drilling wells shall begin on the date the well is spudded
and terminate on the date the drilling rig, completion rig, or other
units used in completion of the well is released, whichever is later,
except that no charge shall be made during suspension of drilling or
completion operations for fifteen (15) or more consecutive calendar
days.
(b) Charges for wells undergoing any type of workover or recompletion for
a period of five (5) consecutive work days or more shall be made at
the drilling well rate. Such charges shall be applied for the period
from date workover operations, with rig or other units used in
workover, commence through date of rig or other unit release, except
that no charge shall be made during suspension of operations for
fifteen (15) or more consecutive calendar days.
1.3 Producing Well Rates
(a) An active well either produced or injected into for any portion of the
month shall be considered as a one-well charge for the entire month.
55
(b) Each active completion in a multi-completed well in which production
is not commingled down hole shall be considered as a one-well charge
providing each completion is considered a separate well by the
governing regulatory authority.
(c) An inactive gas well shut in because of overproduction or failure of
purchaser to take the production shall be considered as a one-well
charge providing the gas well is directly connected to a permanent
sales outlet.
(d) A one-well charge shall be made for the month in which plugging and
abandonment operations are completed on any well. This one-well charge
shall be made whether or not the well has produced except when
drilling well rate applies.
(e) All other inactive wells (including but not limited to inactive wells
covered by unit allowable, lease allowable, transferred allowable,
etc.) shall not qualify for an overhead charge.
(f) The well rates shall be adjusted as of the first day of April each
year following the effective date of the agreement to which this
Accounting Procedure is attached. The adjustment shall be computed by
multiplying the rate currently in use by the percentage increase or
decrease in the average weekly earnings of Crude Petroleum and Gas
Production Workers for the last calendar year compared to the calendar
year preceding as shown by the index of average weekly earnings of
Crude Petroleum and Gas Production Workers as published by the United
States Department of Labor, Bureau of Labor Statistics, or the
equivalent Canadian index as published by Statistics Canada, as
applicable. The adjusted rates shall be the rates currently in use.
Plus or minus the computed adjustment.
2. OVERHEAD - MAJOR CONSTRUCTION
To compensate The Manager of Operations or Contract Operator for overhead costs
incurred in the construction and installation of fixed assets, the expansion of
fixed assets, and any other project clearly discernible as a fixed asset
required for the development and operation of the Joint Property, The Manager of
Operations or Contract Operator shall either negotiate a rate prior to the
beginning of construction, or shall charge the Joint Account for overhead based
on the following rates for any Major Construction project in excess of $10,000:
A. 5% of first $100,000 or total cost if less, plus
B. 3% of costs in excess of $100,000 but less than $1,000,000, plus
C. 1% of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose of this
paragraph, the component parts of a single project shall not be treated
separately and the cost of drilling and workover wells and artificial lift
equipment shall be excluded.
3. CATASTROPHE OVERHEAD
To compensate the Manager of Operations or Contract Operator for overhead costs
incurred in the event of expenditures resulting from a single occurrence due to
oil spill, blowout, explosion, fire, storm, hurricane, or other catastrophes as
agreed to by the Parties, which are necessary to restore the Joint Property to
56
the equivalent condition that existed prior to the event causing the
expenditures. Operator shall either negotiate a rate prior to charging the Joint
Account or shall charge the Joint Account for overhead based on the following
rates:
A. 5% of total costs through $100,000; plus
B. 3% of total costs in excess of $100,000 but less than $1,000,000; plus
C. 1% of total costs in excess of $l,000,000.
Expenditures subject to the overheads above will not be reduced by insurance
recoveries, and no other overhead provisions of this Section III shall apply.
4. AMENDMENT of RATES:
The overhead rates provided for in this Section III may be amended from time to
time only by mutual agreement between the Parties hereto if, in practice, the
rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND
DISPOSITIONS
The Manager of Operations or Contract Operator is responsible for Joint Account
Material and shall make provide data relating thereto to the Manager of the AMI
for proper and timely charges and credits for all Material movements affecting
the Joint Property. The Manager of Operations or Contract Operator shall provide
all Material for use on the Joint Property; however, at the Manager of the AMI's
option, such Material may be supplied by the Manager of the AMI or a designee of
the Manager of the AMI. The Manager of Operations or Contract Operator shall
make timely disposition of idle and/or surplus Material, such disposal being
made either through sale to the Manager of Operations or Contract Operator or
Non-Operator, division in kind, or sale to outsiders. The Manager of Operations
or Contract Operator may purchase, but shall be under no obligation to purchase,
interest of Non-Operators in surplus condition A or B Material. The disposal of
surplus Controllable Material not purchased by the Manager of Operations or
Contract Operator shall be agreed to by the Parties.
1. PURCHASES:
Material purchased shall be charged at the price paid by the Manager of
Operations or Contract Operator plus 10% after deduction of all discounts
received. In case of Material found to be defective or returned to vendor for
any other reasons, credit shall be passed to the Joint Account when adjustment
has been received by the Manager of Operations or Contract Operator.
2. TRANSFERS AND DISPOSITIONS:
Material furnished to the Joint Property and Material transferred from the Joint
Property or disposed of by the Manager of Operations or Contract Operator,
unless otherwise agreed to by the Parties, shall be priced on the following
basis exclusive of cash discounts:
2.1 New Material(Condition A)Tubular Goods Other than Line Pipe
(a) Tubular goods, sized 2 3/8 inches OD and larger, except line pipe,
shall be priced at Eastern mill published carload base prices
effective as of date of movement plus transportation cost using the
80,000 pound carload weight basis to the railway receiving point
nearest the Joint Property for which published rail rates for tubular
goods exist. If the 80,000 pound rail rate is not offered, the 70,000
57
pound or 90,000 pound rail rate may be used. Freight charges for
tubing will be calculated from Lorain, Ohio and casing from
Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall be
computed at the mill base of that mill plus transportation cost from
that mill to the railway receiving point nearest the Joint Property as
provided above in Paragraph 2.A.(l)(a). For transportation cost from
points other than Eastern mills, the 30,000 pound Oil Field Haulers
Association interstate truck rate shall be used.
(c) Special end finish tubular goods shall be priced at the lowest
published out-of-stock price, f.o.b. Houston, Texas, plus
transportation cost, using Oil Field Haulers Association interstate
30,000 pound truck rate, to the railway receiving point nearest the
Joint Property.
(d) Macaroni tubing (size less than 2 3/8 inch OD) shall be priced at the
lowest published out-of- stock prices f.o.b. the supplier plus
transportation costs, using the Oil Field Haulers Association
interstate truck rate per weight of tubing transferred, to the railway
receiving point nearest the Joint Property.
2.2 Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with walls 3/4
inch and over) 30,000 pounds or more shall be priced under provisions
of tubular goods pricing in Paragraph A.(l)(a) as provided above.
Freight charges shall be calculated from Lorain, Ohio.
(b) Line Pipe movements (except size 24 inch OD) and larger with walls 3/4
inch and over) less than 30,000 pounds shall be priced at Eastern mill
published carload base prices effective as of date of shipment, plus
20 percent, plus transportation costs based on freight rates as set
forth under provisions of tubular goods pricing in Paragraph A.(l)(a)
as provided above. Freight charges shall be calculated from Lorain,
Ohio.
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger shall be
priced f.o.b. the point of manufacture at current new published prices
plus transportation cost to the railway receiving point nearest the
Joint Property.
(d) Line pipe, including fabricated line pipe, drive pipe and conduit not
listed on published price lists shall be priced at quoted prices plus
freight to the railway receiving point nearest the Joint Property or
at prices agreed to by the Parties.
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2.3 Other Material shall be priced at the current new price, in effect at date
of movement, as listed by a reliable supply store nearest the Joint Property, or
point of manufacture, plus transportation costs, if applicable, to the railway
receiving point nearest the Joint Property.
2.4 Unused new Material, except tubular goods, moved from the Joint Property
shall be priced at the current new price, in effect on date of movement, as
listed by a reliable supply store nearest the Joint Property, or point of
manufacture, plus transportation costs, if applicable, to the railway receiving
point nearest the Joint Property. Unused new tubulars will be priced as provided
above in Paragraph 2.A.(1) and (2).
2.5 Good Used Material (Condition B) Material in sound and serviceable condition
and suitable for reuse without reconditioning:
(a) Material moved to the Joint Property At seventy-five percent (75%) of
current new prices determined by Paragraph 1.
(b) Material used on and moved from the Joint Property.
(i) At seventy-five percent (75%) of current new price, as determined
by Paragraph 1, if Material was originally charged to the Joint
Account as new Material or
(ii) At sixty-five percent (65%) of current new price, as determined
by Paragraph A, if Material was originally charged to the Joint
Account as used Material
2.6 Material not used on and moved from the Joint Property At seventy-five
percent (75%) of current new price as determined by Paragraph A. The cost of
reconditioning, if any, shall be absorbed by the transferring property.
3. Other Used Material
3.1 Condition C: Material which is not in sound and serviceable condition and
not suitable for its original function until after reconditioning shall be
priced at fifty percent (50%) of current new price as determined by Paragraph A.
The cost of reconditioning shall be charged to the receiving property, provided
Condition C value plus cost of reconditioning does not exceed Condition B value.
3.2 Condition D: Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a basis
commensurate with its use. The Manager of Operations or Contract Operator may
dispose of Condition D Material under procedures normally used by the Manager of
Operations or Contract Operator without prior approval of Non-Operators.
(a) Casing, tubing, or drill pipe used as line pipe shall be priced as
Grade A and B seamless line pipe of comparable size and weight. Used
casing. tubing or drill pipe utilized as line pipe shall be priced at
used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service lines
than standard line pipe, e.g. power oil lines, shall be priced under
normal pricing procedures for casing, tubing, or drill pipe. Upset
tubular goods shall be priced on a no upset basis.
3.3 Condition E:Junk shall be priced at prevailing prices. The Manager of
Operations or Contract Operator may dispose of Condition E Material under
procedures normally utilized by the Manager of Operations or Contract Operator
without prior approval of Non-Operators.
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3.4 Obsolete Material which is serviceable and usable for its original function
but condition and/or value of such Material is not equivalent to that which
would justify a price as provided above may be specially priced as agreed to by
the Parties. Such price should result in the Joint Account being charged with
the value of the service rendered by such Material.
3.5 Pricing Conditions
(a) Loading or unloading costs may be charged to the Joint Account at the
rate of twenty-five cents (25c) per hundred weight on all tubular
goods movements, in lieu of actual loading or unloading costs
sustained at the stocking point. The above rate shall be adjusted as
of the first day of April each year following January 1, 1985 by the
same percentage increase or decrease used to adjust overhead rates in
Section III, Paragraph l-A.(3). Each year, the rate calculated shall
be rounded to the nearest cent and shall be the rate in effect until
the first day of April next year. Such rate shall be published each
year by the Council of Petroleum Accountants Societies.
(b) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
4. PREMIUM PRICES:
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies. strikes or other unusual causes over which the
Manager of Operations or Contract Operator has no control, the Manager of
Operations or Contract Operator may charge the Joint Account for the required
Material at the Manager of Operations or Contract Operator's actual cost
incurred in providing such Material, in making it suitable for use, and in
moving it to the Joint Property; provided notice in writing is furnished to
Non-Operators of the proposed charge prior to billing Non-Operators for such
Material. Each Non-Operator shall have the right, by so electing and notifying
Non-Operator within ten days after receiving notice from the Manager of
Operations or Contract Operator, to furnish in kind all or part of his share of
such Material suitable for use and acceptable to the Manager of Operations or
Contract Operator.
5. WARRANTY OF MATERIAL FURNISHED BY THE MANAGER OF OPERATIONS OR CONTRACT
OPERATOR:
The Manager of Operations or Contract Operator does not warrant the Material
furnished. In case of defective Material, credit shall not be passed to the
Joint Account until adjustment has been received by the Manager of Operations or
Contract Operator from the manufacturers or their agents.
V. INVENTORIES
The Manager of Operations or Contract Operator shall maintain detailed records
of Controllable Material.
1. PERIODIC INVENTORIES, NOTICE AND REPRESENTATION:
At reasonable intervals, inventories shall be taken by the Manager of the AMI,
the Manager of Operations or Contract Operator of the Joint Account Controllable
Material. Written notice of intention to take inventory shall be given by the
Manager of the AMI, the Manager of Operations or Contract Operator at least
thirty (30) days before any inventory is to begin so that Non-Operators may be
represented when any inventory is taken. Failure of Non-Operators to be
represented at an inventory shall bind Non-Operators to accept the inventory
taken by the Manager of the AMI, the Manager of Operations or Contract Operator.
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2. RECONCILIATION AND ADJUSTMENT OF INVENTORIES
RECONCILIATION OF INVENTORY WITH THE JOINT ACCOUNT SHALL BE MADE, AND A LIST OF
COVERAGES AND SHORTAGES SHALL BE FURNISHED TO THE NON-OPERATORS. INVENTORY
ADJUSTMENTS SHALL BE MADE BY THE MANAGER OF OPERATIONS OR CONTRACT OPERATOR WITH
THE JOINT ACCOUNT FOR SUCH OVERAGES AND SHORTAGES, BUT THE MANAGER OF OPERATIONS
OR CONTRACT OPERATOR SHALL BE HELD ACCOUNTABLE TO NON-OPERATORS ONLY FOR
SHORTAGES DUE TO LACK OF REASONABLE DILIGENCE IN FOLLOWING USUAL OIL FIELD
PRACTICES IN THE AREA.
3. SPECIAL INVENTORIES:
Special inventories may be taken whenever there is any sale, change of interest,
or CHANGE of the Manager of the AMI, the Manager of Operations or Contract
Operator in the Joint Property. It shall be the duty of the party selling to
notify all other Parties as quickly as possible after the transfer of interest
takes place. In such cases, both the seller and the purchaser shall be governed
by such inventory. In cases involving a change of Contract Operator, all Parties
shall be governed by such inventory.
4. EXPENSE OF CONDUCTING INVENTORIES:
4.1 The expense of conducting periodic inventories shall not be charged to the
Joint Account unless agreed to by the Parties.
4.2 The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due to change
of Contract Operator shall be charged to the Joint Account.
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EXHIBIT "D"
ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED JUNE
8th, 2012, BETWEEN MontCrest Energy, Inc., and Black Strata, LLC.
INSURANCE PROVISIONS
Contract Operator shall carry the following minimum amount of insurance with
respect to Unit Operations:
1. Statutory Workmen's Compensation Insurance as may be required in the
state or states where work under this agreement, or activities
relative thereto, will be performed, plus Workmen's Compensation
Insurance as may be required by Federal law, if applicable, plus
Employer's Liability Insurance.
2. Public liability and property damage insurance with limits of
$1,000,000 for each occurrence.
3. Automobile public liability and property damage insurance with limits
of $1,000,000 combined single limit.
All insurance coverage required hereby shall be carried at the joint expense and
for the benefit of the Working Interest Owners. Premiums for automobile public
liability and property damage insurance on Unit Contract Operator's fully owned
equipment shall not be charged directly to the joint account, but will be
covered by the flat rate charged assessed for the use of such equipment. Unit
Contact Operator will not carry fire, windstorm or explosion insurance covering
Unit Operations or Unit Equipment.
Contractors and subcontractors will be required to carry insurance of the same
types as hereinabove specified and in such amount as deemed necessary by Working
Interest Owners.
If the parties hereto or any of them shall insure their respective risks beyond
the specific limits of insurance required hereunder to be carried by the Unit
Contract Operator, the benefits of such insurance shall inure to the parties
procuring and maintaining the same, respectively, and the cost of such insurance
shall be borne by such parties, respectively, without reimbursement one from the
other and without entering into any accounting hereunder.
INSURANCE ON FILE AT BLACK STRATA OFFICE, 320 HEMPHILL ST, FORT WORTH
TEXAS 76104, AND CAN BE REVIEWED AT ANY TIME
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62
EXHIBIT "E"
ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED JUNE
8th, 2012, BETWEEN MontCrest Energy, Inc., and Black Strata, LLC.
GAS BALANCING AGREEMENT ("AGREEMENT")
1. DEFINITIONS: The following definitions shall apply to this Agreement:
1.01 "Arm's Length Agreement" shall mean any gas sales agreement with an
unaffiliated purchaser or any gas sales agreement with an affiliated
purchaser where the sales price and delivery conditions under such
agreement are representative of prices and delivery conditions existing
under other similar agreements in the area between unaffiliated parties at
the same time for natural gas of comparable quality and quantity.
1.02 "Balancing Area" shall mean all the acreage and depths subject to AMI
in this Operating Agreement.
1.03 "Full Share of Current Production" shall mean the Percentage Interest
of each Party in the Gas actually produced from the Balancing Area during
each month.
1.04 "Gas" shall mean all hydrocarbons produced or producible from the
Balancing Area, whether from a well classified as an oil well or gas well
by the regulatory agency having jurisdiction in such matters, which are or
may be made available for sale or separate disposition by the Parties,
excluding oil, condensate and other liquids recovered by field equipment
operated for the joint account. "Gas" does not include gas used in joint
operations, such as for fuel, recycling or reinjection, or which is vented
or lost prior to its sale or delivery from the Balancing Area.
1.05 "Makeup Gas" shall mean any Gas taken by an Under produced Party from
the Balancing Area in excess of its Full Share of Current Production,
whether pursuant to Section 3.3 or Section 4.1 hereof.
1.06 "Mcf" shall mean one thousand cubic feet. A cubic foot of Gas shall
mean the volume of gas contained in one cubic foot of space at a standard
pressure base and at a standard temperature base.
1.07 "MMBtu" shall mean one million British Thermal Units. A British
Thermal Unit shall mean the quantity of heat required to raise one pound
avoirdupois of pure water from 58.5 degrees Fahrenheit to 59.5 degrees
Fahrenheit at a constant pressure of 14.73 pounds per square inch absolute.
1.08 "Contract Operator" shall mean the individual or entity designated
under the terms of the Operating Agreement or, in the event this Agreement
is not employed in connection with an operating agreement, the individual
or entity designated as the contract operator of the well(s) located in the
Balancing Area.
1.09 "Overproduced Party" shall mean any Party having taken a greater
quantity of Gas from the Balancing Area than the Percentage interest of
such Party in the cumulative quantity of all Gas produced from the
Balancing Area.
1.10 "Overproduction" shall mean the cumulative quantity of Gas taken by a
Party in excess of its Percentage Interest in the cumulative quantity of
all Gas produced from the Balancing Area.
1.11 "Party" shall mean those individuals or entities subject to this
Agreement, and their respective heirs, successors, transferees and assigns.
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1.12 "Percentage Interest" shall mean the percentage or decimal interest of
each Party in the Gas produced from the Balancing Area pursuant to the
Operating Agreement covering the Balancing Area.
1.13 "Royalty" shall mean payments on production of Gas from the Balancing
Area to all owners of royalties, overriding royalties, production payments
or similar interests.
1.14 "Under Produced Party" shall mean any Party having taken a lesser
quantity of Gas from the Balancing Area than the Percentage Interest of
such Party in the cumulative quantity of all Gas produced from the
Balancing Area.
1.15 "Underproduction" shall mean the deficiency between the cumulative
quantity of Gas taken by a Party and its Percentage Interest in the
cumulative quantity of all Gas produced from the Balancing Area.
2. BALANCING AREA:
2.1 If this Agreement covers more than one Balancing Area, it shall be
applied as if each Balancing Area were covered by separate but identical
agreements. All balancing hereunder shall be on the basis of Gas taken from
the Balancing Area measured in MCF's.
2.2 In the event that all or part of the Gas deliverable from a Balancing
Area is or becomes subject to one or more maximum lawful prices, any Gas
not subject to price controls shall be considered as produced from a single
Balancing Area and Gas subject to each maximum lawful price category shall
be considered produced from a separate Balancing Area.
3. RIGHT OF PARTIES TO TAKE GAS:
3.1 Each Party desiring to take Gas will notify the Operator, or cause the
Operator to be notified, of the volumes nominated, the name of the
transporting pipeline and the pipeline contract number (if available) and
meter station relating to such delivery, sufficiently in advance for the
Operator, acting with reasonable diligence, to meet all nomination and
other requirements. Operator is authorized to deliver the volumes so
nominated and confirmed (if confirmation required) transporting pipeline in
accordance with the terms
3.2 Each Party shall make a reasonable, good faith effort to take its Full
Share of Current Production each month, to the extent that such production
is required to maintain leases in effect, to protect the producing capacity
of a well or reservoir, to preserve correlative rights, or to maintain oil
production.
3.3 When a Party fails for any reason to take its Full Share of Current
Production (as such Share may be reduced by the right Of the other Parties
to make up for Underproduction as provided herein), the other Parties shall
be entitled to take any Gas which such Party fails to take. To the extent
practicable, such Gas shall be made available initially to each under
produced Party in the proportion that it's Percentage Interest in the
Balancing Area bears to the total Percentage Interests of all Under
produced Parties desiring to take such Gas. If all such Gas is not taken by
the Under produced Parties, the portion not taken shall then be made
available to the other Parties in the proportion that their respective
Percentage Interests in the Balancing Area bear to the total Percentage
Interests of such Parties.
3.4 All Gas taken by a Party in accordance with the provisions of this
Agreement, regardless of whether such Party is under produced or
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overproduced, shall be regarded as Gas taken for its own account with title
thereto being in such taking Party.
3.5 Notwithstanding the provisions of Section 3.3 hereof, no Overproduced
Party shall be entitled in any month to take any Gas in excess of three
hundred percent (300%) of its Percentage interest of the Balancing Area's
then-current Maximum Monthly Availability; provided, however, that this
limitation shall not apply to the extent that it would preclude production
that is required to maintain leases in effect, to protect the producing
capacity of a well or reservoir, to preserve correlative rights, or to
maintain oil production. "Maximum Monthly Availability" shall mean the
maximum average monthly rate of production at which Gas can be delivered
from the Balancing Area, as determined by the Operator, considering the
maximum efficient well rate for each well within the Balancing Area, the
maximum allowable(s) set by the appropriate regulatory agency, mode of
operation, production facility capabilities and pipeline pressures.
4. IN-KIND BALANCING:
4.1 Effective the first day of any calendar month following at least thirty
(30) days' prior written notice to the Manager of Operations or Contract
Operator, any Under Produced Party may begin taking, in addition to its
Full Share of Current Production and any Makeup Gas taken pursuant to
Section 3.3 of this Agreement, a share of current production determined by
multiplying twenty-five percent (25%)of the Full Shares of Current
Production of all Overproduced Parties by a fraction, the numerator of
which is the Percentage Interest of such Under Produced Party and the
denominator of which is the total of the Percentage Interests of all Under
Produced Parties desiring to take Makeup Gas. In no event will an
Overproduced Party be required to provide more than twenty-five percent
(25%) of its Full Share of Current Production for Makeup Gas. The Manager
of Operations or Contract Operator will promptly notify all Overproduced
Parties of the election of an Under Produced Party to begin taking Makeup
Gas. See Section 14 for additional provisions.
4.2 Notwithstanding any other provision of this Agreement, at such time and
for so long as Contract Operator, or(insofar as concerns production by the
Contract Operator) any Under Produced Party, determines in good faith that
an Overproduced Party has produced all of its share of the ultimately
recoverable reserves in the Balancing Area, such Overproduced Party may be
required to make available for Makeup Gas, upon the demand of the Contract
Operator or any Under Produced Party, up to one-hundred percent (100%) of
such Overproduced Party's Full Share of Current Production.
5. STATEMENT OF GAS BALANCES:
5.1 The Contract Operator will maintain appropriate accounting on a monthly
and cumulative basis of the volumes of Gas that each Party is entitled to
receive and the volumes of Gas actually taken or sold for each Party's
account. Within five (5) days of receipt Contract Operator shall give said
receipt to the Manager of Operations. Within thirty (30) days after the
month of production, the Contract Operator will furnish a statement for
such month showing (1)each Party's Full Share of Current Production,(2)the
total volume of Gas actually taken or sold for each Party's account, (3)
the difference between the volume taken by each Party and that Party's Full
Share of Current Production,(4)the Overproduction or Underproduction of
each Party, and (5) other data as recommended by the provisions of the
Council of Petroleum Accountants Societies Bulletin No. 24, as amended or
supplemented hereafter. Each Party taking Gas will promptly provide to the
Contract Operator any data required by the Contract Operator for
preparation of the statements required hereunder.
5.2 If any Party fails to provide the data required herein for four (4)
consecutive production months, the Contract Operator, or where the Contract
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Operator has failed to provide data, another Party, may audit the
production and Gas sales and transportation volumes of the non-reporting
Party to provide the required data. Such audit shall be conducted only
after reasonable notice and during normal business hours in the office of
the Party whose records are being audited. All costs associated with such
audit will be charged to the account of the Party failing to provide the
required data.
6. PAYMENTS ON PRODUCTION:
6.1 Each Party taking Gas shall pay or cause to be paid all production and
severance taxes due on all volumes of Gas actually taken by such Party.
6.2 ENTITLEMENTS: Each Party shall pay or cause to be paid all Royalty due
with respect to Royalty owners to whom it is accountable as if such Party
were taking its Full Share of Current Production, and only its Full Share
of Current Production.
6.3 In the event that any governmental authority requires that Royalty
payments be made on any other basis than that provided for in this Section
6, each Party agrees to make such Royalty payments accordingly, commencing
on the effective date required by such governmental authority, and the
method provided for herein shall be thereby superseded.
7. CASH SETTLEMENTS:
7.1 Upon the earlier of the plugging and abandonment of the last producing
interval in the Balancing Area, the termination of the Operating Agreement
or any pooling or unit agreement covering the Balancing Area, or at any
time no Gas is taken from the Balancing Area for a period of twelve (12)
consecutive months, any Party may give written notice calling for cash
settlement of the Gas production imbalances among the Parties. Such notice
shall be given to all Parties in the Balancing Area.
7.2 Within sixty (60) days after the notice calling for cash settlement
under Section 7.1, the Contract Operator will distribute to each Party a
Final Gas Settlement Statement detailing the quantity of Overproduction
owed by each Overproduced Party to each Under Produced Party pursuant to
the methodology set out in Section 7.4.
7.3 (DIRECT PARTY-TO-PARTY SETTLEMENT) Within sixty (60) days after receipt
of the Final Gas Settlement Statement, each Overproduced Party will pay to
each Under Produced Party entitled to settlement the appropriate cash
settlement, accompanied by appropriate accounting detail. At the time of
payment, the Overproduced Party will notify the Contract Operator of the
Gas imbalance settled by the Overproduced Party's payment.
7.4 (MOST RECENT SALES BASIS) The amount of the cash settlement will be
based on the proceeds received by the Overproduced Party under an Arm's
Length Agreement for the volume of Gas that constituted Overproduction by
the Overproduced Party from the Balancing Area. For the purpose of
implementing the cash settlement provision of the Section 7, an
Overproduced Party will not be considered to have produced any of an Under
Produced Party's share of Gas until the Overproduced Party has produced
cumulatively all of its Percentage Interest share of the Gas ultimately
produced from the Balancing Area.
7.5 The values used for calculating the cash settlement under Section 7.4
will include all proceeds received for the sale of the Gas by the
Overproduced Party calculated at the Balancing Area, after deducting any
production or severance taxes paid and any Royalty actually paid by the
Overproduced Party to an Under Produced Party's Royalty owner(s), to the
extent said payments amounted to a discharge of said Under Produced Party's
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Royalty obligation, as well as any reasonable marketing, compression,
treating, gathering or transportation costs incurred directly in connection
with the sale of the Overproduction.
7.5.1 (FOR VALUATION UNDER PERCENTAGE OF PROCEEDS CONTRACTS) For
Overproduction sold under a gas purchase contract providing for payment
based on a percentage of the proceeds obtained by the purchaser upon resale
of residue gas and liquid hydrocarbons extracted at a gas processing plant,
the values used for calculating cash settlement will include proceeds
received by the Overproduced Party for both the liquid hydrocarbons and the
residue gas attributable to the Overproduction.
7.5.2 (VALUATION FOR PROCESSED GAS) For Over production processed for the
account of the Overproduced Party at a gas processing plant for the
extraction of liquid hydrocarbons, the values used for calculating cash
settlement will include the proceeds received by the Overproduced Party for
the sale of the liquid hydrocarbons extracted from the Overproduction, less
the actual reasonable costs incurred by the Overproduced Party to process
the Overproduction and to transport, fractionate and handle the liquid
hydrocarbons extracted there from prior to sale.
7.6 To the extent the Overproduced Party did not sell all Overproduction
under an Arm's Length Agreement, the cash settlement will be based on the
weighted average price received by the Overproduced Party for any gas sold
from the Balancing Area under Arm's Length Agreements during the months to
which such Overproduction is attributed. In the event that no sales under
Arm's Length Agreements were made during any such month, the cash
settlement for such month will be based on the spot sales prices published
for the applicable geographic area during such month in a mutually
acceptable pricing bulletin.
7.7 Interest compounded at the rate of nine percent (9%) per annum or the
maximum lawful rate of interest applicable to the Balancing Area, whichever
is less, will accrue for all amounts due under Section 7.1 beginning the
first day following the date payment is due pursuant to Section 7.3. Such
interest shall be borne by the Contract Operator or any Overproduced Party
in the proportion that their respective delays beyond the deadlines set out
in Sections 7.2 and 7.3 contributed to the accrual of the interest.
7.8 In lieu of the cash settlement required by Section 7.3, an Overproduced
Party may deliver to the Under Produced Party an offer to settle its
Overproduction in-kind and at such rates, quantities, times and sources as
may be agreed upon by the Under Produced Party. If the Parties are unable
to agree upon manner in which such in-kind settlement gas will be furnished
within sixty (60) days after the Overproduced Party's offer to settle in
kind, which period may be extended by agreement of said Parties, the
Overproduced Party shall make a cash settlement as provided in Section 7.3.
The making of an in-kind settlement offer under this Section 7.8 will not
delay the accrual of interest on the cash settlement should the Parties
fail to reach agreement on an in-kind settlement.
7.9 (FOR BALANCING AREAS SUBJECT TO FEDERAL PRICE REGULATION) That portion
of any monies collected by an Overproduced Party for Overproduction which
is subject to refund by orders of the Federal Energy Regulatory Commission
or other governmental authority may be withheld by the Overproduced Party
until such prices are fully approved by such governmental authority, unless
the Under Produced Party furnishes a corporate undertaking, acceptable to
the Overproduced Party, agreeing to hold the Overproduced Party harmless
from financial loss due to refund orders by such governmental authority.
7.10 (INTERIM CASH BALANCING) At any time during the term of this
Agreement, any Overproduced Party may, in its sole discretion, make cash
settlement(s) with the Under Produced Parties covering all or part of its
outstanding Gas imbalance, provided that such settlements must be made with
all Under Produced Parties proportionately based on the relative imbalances
of the Under Produced Parties, and provided further that such settlements
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may not be made more often than once every twenty-four (24) months. Such
settlements will be calculated in the same manner provided above for final
cash settlements. The Overproduced Party will provide Contract Operator a
detailed accounting of any such cash settlement within thirty (30) days
after the settlement is made.
8. TESTING:
Not withstanding any provision of this Agreement to the contrary, any Party
shall have the right, from time to time, to produce and take up to one hundred
percent (100%) of a well's entire Gas stream to meet the reasonable
deliverability test(s) required by such Party's Gas purchaser, and the right to
take any Makeup Gas shall be subordinate to the right of any Party to conduct
such tests; provided, however, that such tests shall be conducted in accordance
with prudent operating practices only after thirty (30) days' prior written
notice to the Manager of Operations or Contract Operator and shall last no
longer than seventy-two (72) hours.
9. OPERATING COSTS:
Nothing in this Agreement shall change or affect any Party's obligation to pay
its proportionate share of all costs and liabilities incurred in operations on
or in connection with the Balancing Area, as its share thereof is set forth in
the Operating Agreement, irrespective of whether any Party is at any time
selling and using Gas or whether such sales or use are in proportion to its
Percentage Interest in the Balancing Area.
10. LIQUIDS:
The Parties shall share proportionately in and own all liquid hydrocarbons
recovered with Gas by field equipment operated for the joint account in
accordance with their Percentage Interests in the Balancing Area.
11. AUDIT RIGHTS:
Not withstanding any provision in this Agreement or any other agreement between
the Parties hereto, and further notwithstanding any termination or cancellation
of this Agreement, for a period of two (2) years from the end of the calendar
year in which any information to be furnished under Section 5 or 7 hereof is
supplied, any Party shall have the right to audit the records of any other Party
regarding quantity, including but not limited to information regarding
Btu-content. Any Under produced Party shall have the right for a period of two
(2) years from the end of the calendar year in which any cash settlement is
received pursuant to Section 7 to audit the records of any Overproduced Party as
to all matters concerning values, including but not limited to information
regarding prices and disposition of Gas from the Balancing Area. Any such audit
shall be conducted at the expense of the Party or Parties desiring such audit,
and shall be conducted, after reasonable notice, during normal business hours in
the office of the Party whose records are being audited. Each Party hereto
agrees to maintain records as to the volumes and prices of Gas sold each month
and the volumes of Gas used in its own operations, along with the Royalty paid
on any such Gas used by a Party in its own operations. The audit rights provided
for in this Section 11 shall be in addition to those provided for in Section 5.2
of this Agreement.
12. MISCELLANEOUS:
12.1 As between the Parties, in the event of any conflict between the
provisions of this Agreement and the provisions of any gas sales contract,
or in the event of any conflict between the provisions of this Agreement
and the provisions of the Operating Agreement, the provisions of this
Agreement shall govern.
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12.2 Each Party agrees to defend, indemnify and hold harmless all other
Parties from and against any and all liability for any claims, which may be
asserted by any third party which now or hereafter stands in a contractual
relationship with such indemnifying Party and which arise out of the
operation of this Agreement or any activities of such indemnifying Party
under the provisions of this Agreement, and does further agree to save the
other Parties harmless from all judgments or damages sustained and costs
incurred in connection therewith.
12.3 Except as otherwise provided in this Agreement, the Manager of
Operations or Contract Operator is authorized to administer the provisions
of this Agreement, but shall have no liability to the other Parties for
losses sustained or liability incurred which arise out of or in connection
with the performance of Contract Operator's duties hereunder, except such
as may result from Contract Operator' gross negligence or willful
misconduct. Contract Operator shall not be liable to any Under Produced
Party for the failure of any Overproduced Party, (other than Contract
Operator) to pay amounts owed pursuant to the terms hereof.
12.4 This Agreement shall remain in full force and effect for as long as
the Operating Agreement shall remain in force and effect as to the
Balancing Area, and thereafter until the Gas accounts between the Parties
are settled in full, and shall inure to the benefit of and be binding upon
the Parties hereto, and their respective heirs, successors, legal
representatives and assigns, if any. The Parties hereto agree to give
notice of the existence of this Agreement to any successor in interest of
any such Party and to provide that any such successor shall be bound by
this Agreement, and shall further make any transfer of any interest subject
to the Operating Agreement, or any part thereof, also subject to the terms
of this Agreement.
12.5 Unless the context clearly indicates otherwise, words used in the
singular include the plural, the plural includes the singular, and the
neuter gender includes the masculine and the feminine.
12.6 In the event that any "Optional" provision of this Agreement is not
adopted by the Parties to this Agreement by a typed printed or handwritten
indication, such provision shall not form a part of this Agreement, and no
inference shall be made concerning the intent of the Parties in such event.
In the event that any "Alternative" provision of this Agreement is not so
adopted by the Parties, Alternative 1 in each such instance shall be deemed
to have been adopted by the Parties as a result of any such omission. In
those cases where it is indicated that an Optional provision may be used
only if a specific Alternative is selected: (i) an election to include said
Optional provision shall not be effective unless the Alternative in
question is selected; and (ii) the election to include said Optional
provision must be expressly indicated hereon, it being understood that the
selection of an Alternative either expressly or by default as provided
herein shall not, in and of itself, constitute an election to include an
associated Optional provision.
12.7 This Agreement shall bind the Parties in accordance with the
provisions hereof, and nothing herein shall be construed or interpreted as
creating any rights in any person or entity not a signatory hereto, or as
being a stipulation in favor of any such person or entity.
12.8 If contemporaneously with this Agreement becoming effective, or
thereafter, any Party requests that any other Party execute an appropriate
memorandum or notice of this Agreement in order to give third parties
notice of record of same and submits same for execution in recordable form,
such memorandum or notice shall be duly executed by the Party to which such
request is made and delivered promptly thereafter to the Party making the
request. Upon receipt, the Party making the request shall cause the
memorandum or notice to be duly recorded in the appropriate real property
or other records affecting the Balancing Area.
12.9 In the event Internal Revenue Service regulations require a uniform
method of computing taxable income by all Parties, each Party agrees to
compute and report income to the Internal Revenue Service (select one) [ ]
69
as if such Party were taking its Full Share of Current Production during
each relevant tax period in accordance with such regulations, insofar as
same relate to entitlement method tax computations; or |X| based on the
quantity of Gas taken for its account in accordance with such regulations,
insofar as some relate to sales method tax computations.
13. ASSIGNMENT AND RIGHTS UPON ASSIGNMENT:
13.1 Subject to the provisions of Sections 13.2 (if elected) and 13.3
hereof, and notwithstanding anything in this Agreement or in the Operating
Agreement to the contrary, if any Party assigns (including any sale,
exchange or other transfer) any of its working interest in the Balancing
Area when such Party is an Under produced or Overproduced Party, the
assignment or other act of transfer shall, insofar as the Parties hereto
are concerned, include all interest of the assigning or transferring Party
in the Gas, all rights to receive or obligations to provide or take Makeup
Gas and all rights to receive or obligations to make any monetary payment
which may ultimately be due hereunder, as applicable. The Manager of
Operations or Contract Operator and each of the other Parties hereto shall
thereafter treat the assignment accordingly, and the assigning or
transferring Party shall look solely to its assignee or other transferee
for any interest in the Gas or monetary payment that such Party may have or
to which it may be entitled, and shall cause its assignee or other
transferee to assume its obligations hereunder.
13.2 (CASH SETTLEMENT UPON ASSIGNMENT) Notwithstanding anything in this
Agreement (including but not limited to the provisions of Section 13.1
hereof) or in the Operating Agreement to the contrary, and subject to the
provisions of Section 13.3 hereof, in the event an Overproduced Party
intends to sell, assign, exchange or otherwise transfer any of its interest
in a Balancing Area, such Overproduced Party shall notify in writing the
other working interest owners who are Parties hereto in such Balancing Area
of such fact at least thirty (30) days prior to closing the transaction.
Thereafter, any Under Produced Party may demand from such Overproduced
Party in writing, within fifteen (15) days after receipt of the
Overproduced Party's notice, a cash settlement of its Underproduction from
the Balancing Area. The Contract Operator shall be notified of any such
demand and of any cash settlement pursuant to this Section 13, and the
Overproduction and Underproduction of each Party shall be adjusted
accordingly. Any cash settlement pursuant to this Section 13 shall be paid
by the Overproduced Party on or before the earlier to occur (i) of sixty
(60) days after receipt of the Under Produced Party's demand or (ii) at the
closing of the transaction in which the Overproduced Party sells, assigns,
exchanges or otherwise transfers its interest in a Balancing Area on the
same basis as otherwise set forth in Sections 7.3 through 7.6 hereof, and
shall bear interest at the rate set forth in Section 7.7 hereof, beginning
sixty (60)days after the Overproduced Party's sale, assignment, exchange or
transfer of its interest in the Balancing Area for any amounts not paid.
Provided, however, if any Under Produced Party does not so demand such cash
settlement of its Underproduction from the Balancing Area, such Under
Produced Party shall look exclusively to the assignee or other successor in
interest of the Overproduced Party giving notice hereunder for the
satisfaction of such Under Produced Party's Under production in accordance
with the provisions of Section 13.1 hereof.
13.3 The provisions of this Section 13 shall not be applicable in the event
any Party mortgages its interest or disposes of its interest by merger,
reorganization, consolidation or sale of substantially all of its assets to
a subsidiary or parent company, or to any company in which any parent or
subsidiary of such Party owns a majority of the stock of such company.
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14. OTHER PROVISIONS:
14.1 The election of an under produced party to commence taking makeup gas
under the provisions of Article 4, hereof, shall remain in effect until
such under-produced party gives Contract Operator thirty (30) days notice
of its election to cease taking makeup gas, or until such party's
underproduction is eliminated, whichever first occurs. In the event an
under-produced party provides notice to the Contract Operator of its intent
to cease taking makeup gas, such under-produced party shall not thereafter
be allowed to request makeup gas again until one (1) year from last day of
the month in which they last took makeup gas. This section does not apply
to permanent overproduction situations. Please see section 4.3 regarding
situations where an Overproduced Party has produced all of its share of the
ultimately recoverable reserves in the Balancing Area.
15. COUNTERPARTS
This Agreement may be executed in counterparts, each of which when taken with
all other counterparts shall constitute a binding agreement between the Parties
hereto; provided, however, that if a Party or Parties owning a Percentage
Interest in the Balancing Area equal to or greater than a _____________________
percent (_____%) therein fail(s) to execute this Agreement on or before
____________________, this Agreement shall not be binding upon any Party and
shall be of no further force and effect.
IN WITNESS WHEREOF, this agreement shall be Effective as of the 8th day of JUNE,
2012.
MANAGER OF THE AMI
MontCrest Energy, Inc.
/s/ John Forrest
---------------------------------
By: John Forrest
Title: Secretary
Date: JUNE 8, 2012
Tax ID or SSN: 27-0743683
MANAGER OF OPERATIONS
Black Strata, LLC
/s/ Douglas E. Forrest
-----------------------------------
By: Douglas E. Forrest
Title: President, Co-Manager
Date: JUNE 8, 2012
Tax ID or SSN: 26-4605206
NON OPERATOR
Independence Energy Corporation
/s/ Gregory Rotelli
-----------------------------------
By: Gregory Rotelli
Title: CEO, President IDNG
Date: June 8, 2012
Tax ID or SSN:
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EXHIBIT "F"
ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED JUNE
8th, 2012, BETWEEN MontCrest Energy, Inc., and Black Strata, LLC.
NON-DISCRIMINATION AND CERTIFICATION OF SEGREGATED FACILITIES
In the performance of its duties under this Agreement, the Operator shall be
bound by and comply with all the terms and provisions of Section 202 of
Executive Order 11246 of September 24, 1965, to the extent it is applicable, all
of which are incorporated herein by reference to the same extent as if fully set
forth herein, and shall be bound by and comply with the rules, regulations and
relevant orders adopted pursuant to such Executive Order.
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